The BRRRR strategy is an increasingly well-known method of real estate investing in which you pull capital out of one property so you can invest in another. BRRRR is an acronym for Buy, Rehab, Rent, Refinance, Repeat. For investors just getting started in real estate, the BRRRR strategy may seem like an almost guaranteed way to make money. Since it’s presented as a formula, it’s commonly believed that you can’t lose as long as you follow the formula. However, there are no guarantees with anything, including BRRRR. Before you get into this particular real estate investing method, here’s what you need to know about the pros and cons of the BRRRR strategy.
The Pros of the BRRRR Strategy
The BRRRR strategy is popular because it can be very effective. While it’s enjoying increased popularity now, it’s actually been used by savvy real estate investors for decades. When it works as planned, it’s a powerful leverage tool that enables investors to quickly and inexpensively build up a nice portfolio of real estate holdings.
Infinite Return on Investment
There’s no better ROI than when your initial investment is zero, right? This is possible with the BRRRR strategy since you’ll be using the money you pull out of your first investment property to put down on the next property, the next one after that, and so on. Once you pull it out, you’ll have little to no cash left in your deals. Which means that your returns for that property are now infinity.
It’s relatively easy to scale your real estate business using BRRRR. You can start with very little and incrementally build both the number of investments in your portfolio as well as the overall value of your portfolio.
When the BRRRR strategy works correctly, you can continually refinance your rehabbed properties to capture between 20% and 30% in equity per property. That’s impressive, considering the relatively short time span in which your equity capture will take place.
Personal satisfaction is less cited but just as much a benefit of the BRRRR strategy as others on this list. As a real estate investor who’s implemented the BRRRR strategy dozens of times, I can tell you that there’s something profoundly satisfying about taking a property that others have overlooked and making a handsome profit from it. Even if you don’t do the rehab work yourself, that kind of personal satisfaction is very fulfilling.
The Formula Itself
Being able to follow a formula to build a portfolio is a pro in and of itself. There are few formulas for achieving success in life, but the BRRRR is a well-vetted formula that does work – when everything goes according to plan. It is comforting to know that if you follow the strategy and take the right steps, your odds of success are high.
The Cons of the BRRRR Strategy
Unfortunately, the risks associated with the BRRRR strategy are frequently underestimated. New investors jumping into the game are vulnerable in ways they may be unprepared for. Here some cons of the BRRRR strategy to be aware of.
Rehab Extends Beyond Time Expectations
When you enlist the services of a contractor for your rehab, they’ll give you a general timeline for completion of the rehab. More often than not, timelines get extended for one reason or another. Sometimes there are unforeseen conditions that don’t make themselves known until the rehab is well underway. Other times the contractor turns out to be less than reliable. Still other times there may be property vandalism or thefts that cause setbacks. If you’ve got standard financing, timeline extensions pose a minor risk. But if you’re financing your rehab with hard money with a hefty interest repayment schedule, this risk could spell financial disaster.
Costs Break the Budget
Yet another one of the cons of the BRRRR strategy is the risk of breaking your budget. Time is money, particularly in real estate. Rehab costs can add up very quickly. Here are some common scenarios that occur. One, you don’t keep regular tabs on money that’s being spent. Let’s say someone on your team is authorized to make purchases or buying decisions. They’re out there at Home Depot or wherever buying “stuff.” It’s not coming out of their wallet so they’re not super careful about the prices. The bill comes in 30 days later and by then it’s too late to do anything about it. The other common way that the budget gets busted is through unexpected costs. Those unforeseen conditions that wreck your timeline can also blow your budget. Of course, once your budget is blown the entire BRRRR strategy usually fails.
Arguably the biggest potential con for the BRRRR strategy is getting a bad appraisal. A bad appraisal is a number that comes in that doesn’t match up with your estimated after repair value. Unless your appraisal is very close to what you anticipated, you won’t be able to refinance, and you also might find it challenging to pay back your lender. You could actually end up owing more than the value of the property. Getting bad appraisals is both the biggest risk and presents the worst-case scenario for real estate investors using the BRRRR method.
Problems at the Rent Stage
You need to rent out your property as soon as possible after the rehab is completed. A good property management company should be able to get a paying tenant in within about two weeks. But things happen. For whatever reason maybe that ideal tenant never appears. Now you’ve got an empty property and you’re starting to get desperate. You lower your criteria and take the next applicant that comes along. Only they aren’t the best tenant and now you’re trying to find a way to evict them. This is yet another example of how things can go wrong even when you’re following a proven strategy like BRRRR.
The BRRRR strategy carries risks and benefits at every stage. As long as you understand that there are no guarantees, it’s worth giving this method a try. Just be ready to problem solve so that unexpected surprises don’t ruin your investment outlook.
This article has been contributed by Antoine Martel.