So, How Does the BRRRR Method Work?
First, the real estate investor buys a distressed home and then rehabilitates it. The investment property is then rented out for a period of time, during which the owner makes mortgage payments. Once enough equity has been built up in the rental property, the owner can then refinance the first property and buy a second one. And this process is repeated again and again. That is the BRRRR strategy in a nutshell.
Here are some benefits of using the BRRRR method:
- Equity capture – An effective BRRRR method will allow you to continually refinance your renovated rental properties to capture up to 30% in equity per property.
- Potential no money down – The ability to refinance a rental property to buy another means that you will spend little or even nothing on the down payment.
- High return on investment – Since you won’t be spending much money to buy a new investment property, the return on investment will be very high.
- Scalability – The BRRRR method makes it very easy for you to grow your real estate business. You can start small and slowly increase the number of investment properties in your portfolio.
Let us look at each step of the BRRRR method and how it will ultimately allow you to buy multiple rental properties and build your real estate portfolio.
Step #1: Buy
The first step is learning how to find properties for the BRRRR method. One of the best places to find distressed properties for sale is the Mashvisor Property Marketplace. You can narrow your search using filters such as location, budget, type of property, rental strategy, and return on investment (cash on cash return and cap rate). After finding investment properties for sale, use the investment property calculator to analyze the homes based on cap rate, cash on cash return, cash flow, monthly expenses, and occupancy rate.
Besides analyzing the investment potential, you need to figure out the after repair value (ARV) of a prospective property. This refers to the value of a property after it has been renovated. You can figure out the ARV by looking at nearby comparable properties that have been sold recently (real estate comps). The comps should be similar to your property in terms of age, construction style, size, and location.
The ARV formula is as follows:
ARV = Property’s Current Value + Value of Renovations
Once you know the ARV, you will want to apply another rule, the 70% rule. This will help you figure out how much to offer:
70% of the ARV – Repair Cost = Maximum Offer Price
Let’s say an investment property has an ARV of $200,000 and the approximate repair cost is $35,000:
($200,000 x 70%) – $35,000 = $105,000
It is always advisable to start with an offer lower than the maximum offer price. The lower the purchase price, the higher the profit you can make.
Step #2: Rehab
With the BRRRR method, your aim should be to rehab as quickly as possible while keeping your costs low. Rehabbing an investment property could involve the following:
- Giving the rental property a new paint job
- Upgrading the outdated bathrooms or kitchen
- Replacing outdated lighting fixtures
- Trimming grass and pruning bushes
- Repairing drywall damage
- Adding an extra bedroom
Doing the rehab properly will add value to your rental property and ensure a good return on investment.
Step #3: Rent
As soon as the rehab is complete, you will want to have tenants occupying the property. To avoid vacancy, you could start advertising the rental property a few weeks before the renovation is finished.
In addition to marketing the rental property, you will need to know how much to charge for rent. Here are some factors to consider when setting your rental rate:
- Competing rents in the neighborhood – Looking at comparable units in the neighborhood will give you an idea of what other landlords charge. You can get this information by checking online for rental comps or talking to a local real estate agent.
- Amenities – How unique is your rental compared to other units in the area? Does it have better amenities or more space? If your property has an edge over the competition, be sure to set your price accordingly.
- Timing – Adjust your rent based on the housing demand in your area.
- Your costs – Your monthly costs will include mortgage, property taxes, insurance, property management, and repairs. The rent should be high enough to cover your costs and leave you with positive cash flow.
Step #4: Refinance
After you have successfully rented out the property for several months or years, you can then begin the process of refinancing. The key to success at this stage is to get a high appraisal value for your home.
Here are some requirements you will need to fulfill for refinancing:
- A good credit score
- Sufficient income
- Sufficient equity in your current rental property
- A good debt-to-income ratio
- Adequate finances on hand
- Homeowners insurance verification
- Title insurance
When comparing lenders, look at their closing costs, interest rates, and the length of their seasoning period. You might have to wait for a few months before your application for refinancing is approved.
Step #5: Repeat
If the whole process from buying to refinancing goes off without a hitch, you can then repeat the process all over again. At this stage, you can reflect on what you learned and find a better way of doing things for the next real estate deal. Finding a more effective approach and fine-tuning the BRRRR method for buying multiple rental properties will help lower your costs and save you lots of time.
The BRRRR method can be a very effective strategy to buy multiple rental properties. However, just like any other real estate investment strategy, it comes with its own pitfalls. For example, renovations might cost more than expected, or the property might not appraise high enough after rehabbing. Such risks can be mitigated through due diligence and proper research. The BRRRR method is ideal for real estate investors that are willing to take on the challenge in order to build a strong portfolio.