The BRRRR strategy is one of the best ways to build wealth in real estate investing. What is it and how does it work you ask? Read this and find out.
BRRRR is an acronym that stands for Buy-Rehab-Rent-Refinance-Repeat. As the last R suggests, real estate investors often implement this strategy multiple times over their career. It is a unique framework that represents a hybrid between active and passive income. When done right, you can build a rental property portfolio without using up all your money or running out of cash!
Essentially, you buy an investment property below market value and fix it up. The rehabbed property is then rented out to tenants to generate rental income that enables you to pay the mortgage, earn profits, and build up equity over time. Once a sizable amount of equity in the property is built up, you refinance it to buy a second investment property, and so on. If done right, you can pull most (or even all) of your original capital back out for the next deal.
As you can see, the point of the BRRRR strategy is to help real estate investors acquire and build a portfolio of passive income rental properties without having to save up for a down payment for each investment property. No, it’s not a get-rich-quick scheme, but it’s a great way to get started in real estate investing and buy multiple properties when you do not have cash available.
Let’s go through each letter of the BRRRR strategy and break down how it works.
B Stands for Buy
The first step of the BRRRR strategy is to find and buy a property that is undervalued and has some upside potential. When searching for an investment property for sale, remember that the goal isn’t to flip it. Instead, you want to hold onto the property by turning it into a rental. So, make sure the property you buy represents a sound investment deal and can perform well as a rental property. Good investments can be difficult to recognize, but that’s why you should know how to analyze properties and work with real estate numbers.
Analyzing properties for the BRRRR strategy includes calculating the cost of rehabbing, estimating monthly rental expenses, and ensuring that the rental income will provide a sufficient profit margin. Many real estate investors use the 70% rule which estimates the cost of repairs and the after repair value. This helps you determine the maximum offer to make and ensures that a profit margin will remain after renovating the investment property.
It doesn’t really matter how you buy the property. Whether you pay cash, take out a mortgage or a hard money loan, you can use the BRRRR strategy. However, many recommend using a hard money loan. Banks don’t like risk, and deals that need work are risky. By using cash or hard money, on the other hand, you can buy property that is a bit risky so you can add value. Then, you can refinance with something long term like a mortgage. Just be sure you have enough cash on hand to purchase the investment property plus fund the renovations.
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R Stands for Rehab
The idea is simple – after buying the investment property, fix it up in a way that increases its value and makes it livable. Keep in mind that you don’t have to rehab a BRRRR rental property the same way you’d rehab a fix-and-flip. Instead, because you’re looking to make cash flow from the BRRRR strategy, focus on necessary renovations that add to the amount of rent you can charge. Also, avoid investing in renovations that will cost you more than what can be produced through rental income. Some examples of good home improvements that’ll increase your property’s value include fixing the kitchen with reasonably priced additions, changing the carpet, and painting.
Rehabbing also needs to be done in a way that doesn’t consume all of your time. Time is money for real estate investors. The longer it takes to rehab the investment property, the longer it’ll take to get your money back and buy another one. A good contractor will help you save time and money so you’ll be able to get the most bang for your buck in terms of a rehab. Once your renovations are finished, you’re ready to move on to the next step of the BRRRR strategy.
R Stands for Rent
In order to refinance a rental property, banks want to see that it’s generating income. So, once the rehab phase is complete, the real estate investor needs to get the investment property rented. There are a few things to consider in this phase in order for the BRRRR strategy to work:
1) Finding Good Tenants
First, you need to find good tenants who will pay market (or higher) rents. How do you find good tenants? Well, there are no guarantees, which is why it’s extremely important to screen tenants diligently and do the following:
- Get social security numbers
- Do a background check
- Ask for contact information for previous 2 or 3 landlords
- Verify the tenant’s job and income
- Have a written lease or tenancy agreement
2) Managing the Rental Property
Should you hire a property manager or manage the property yourself? Of course, this is a personal decision which mainly depends on whether or not you have what it takes to become a landlord. Managing a residential rental property requires finding tenants, collecting rent, and taking care of maintenance and repairs. Most of the time, it might be best to have a property manager do all of this work and, thus, make your rental income passive. But, if you’re still considering managing the investment property yourself to save money, we’ve prepared this guide that’ll teach you all you need to know: Residential Property Management: Here’s How to Do It Yourself.
3) Generating Positive Cash Flow
Finally, you want to make sure that the investment property will generate positive cash flow in order for the BRRRR strategy to work. The more money the rental property makes every month, the more likely the bank will lend to you. This means your rental income needs to cover all of the monthly expenses, including the mortgage payment, insurance, and property taxes. But how do you estimate how much to charge for rent?
There are a number of methods that real estate investors use. For example, there’s the 2% rule which says that for a rental property investment to be good, the monthly rent should be equal to or higher than 2% of the total cost of the investment. Say you’ve purchased an investment property for $60,000 and put $20,000 into rehabbing it, making your total investment $80,000. Following the 2% rule ($80,000 X 2% = $1,600). This is the monthly rental income you need from the property to generate positive cash flow.
An easier way to find if a rental property will make positive cash flow is by running the numbers on an Investment Property Calculator. This real estate investment tool provides a comparable rental income based on real estate comps. In return, this enables you to see if the investment property will give you positive cash flow before even buying it once you plug in your expected rental expenses.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice for the BRRRR strategy, click here.
R Stands for Refinance
The next step to completing the BRRRR strategy is refinancing the property. The goal is to get your money back so you can repeat the process, which makes this step the most crucial. Some banks will offer a cash-out refinance, while others will only offer to pay off outstanding debt. Of these options, you want to select the first. You should also ensure that the bank will provide a loan on the appraised value of the rehabbed property (not on the original value of the property before the rehab).
Moreover, many banks will require a seasoning period which indicates how long the real estate investor must own the investment property before refinancing. A typical seasoning period is at least 6 months or one year of ownership. In addition, a real estate investor can refinance a property for 75% of the appraised value. So, an appraiser will appraise the value of your rental property. After the appraisal is completed, the bank will lend you 75% of that value and will give you cash-out refinance. For example, say you
- Buy the property for $60,000
- Rehab it for $20,000
- Rent it out for $1,600
One year later, if the investment property appraises for $120,000, the bank will let you refinance and take out a $90,000 loan. Usually, it takes about 30 – 45 days for the loan to be processed.
R Stands for Repeat
The last step in the BRRRR strategy is to repeat the process after receiving the cash from the refinancing. Real estate investors can use this cash to buy and rehab another investment property. Your first purchase will be the hardest, but after that, you’ll have the experience and knowledge to tackle your second, third, fourth property, and so on. Just repeat the cycle to grow and build a portfolio of positive cash flow rental properties and multiply your income without tying up cash.
As you can see, the BRRRR strategy is a solid way to build wealth from rental properties. But of course, you have to be smart and plan correctly just like with any other real estate investment strategy. If you’re looking for cheap properties for sale so you can get on the BRRRR strategy, sign up to Mashvisor to use the best real estate investment tools to find and analyze properties in the city and neighborhood of your choice!