If you’ve been buying rental property long enough, you’ve probably come across the BRRRR strategy. Or, if you are an aspiring real estate investor, maybe you’re wondering how to invest in real estate and start building a real estate portfolio without hundreds of thousands or millions of dollars in cash reserves. If so, the BRRR strategy might be the right one for you.
Saving up to make a down payment on one rental property is daunting enough. How long could it take before buying a second investment property?
That’s where the genius of BRRRR investing comes into play, at least in theory. If you can pull it off, it should allow you to start building a real estate portfolio with very little of your own cash invested.
Before we dive into the details, let’s address the fact that, yes, BRRRR is a legitimate and viable real estate investment strategy for the right person. With the right knowledge and tools, anyone can implement this strategy successfully.
What Is the BRRRR Strategy?
For the uninitiated, one question that we often see being asked is, “What is BRRRR strategy?.” To understand the meaning of BRRRR, let’s start by breaking down the acronym. Each letter represents a crucial step in the process.
As with most real estate investment strategies, the BRRRR strategy requires you to purchase a rental property. To achieve your desired return on investment, you must search for a property that is undervalued and one that offers some upside potential. Make sure that it can turn in a good performance as a rental property. Remember that the goal here is not to flip the property but to hold onto it and generate rental income.
A key component of making the strategy work is to specifically invest in distressed properties for sale. Why? Because you can maximize your profits this way. Looking for distressed properties for sale is an excellent way to find real estate deals. Distressed properties are those listed below their potential market value. It’s the equivalent of getting a major discount.
Related: 4 Ways to Find Homes Under 50K for Investment
After purchasing a distressed property, the next step is to rehab it. The BRRRR real estate investment strategy is similar to flipping a house, except with the intention of making money from the rentals.
The BRRRR strategy requires you to focus on making the necessary renovations that will help you charge a higher rental amount. Some home improvements that you can do include adding a few kitchen fixtures, repainting the interior, or changing the carpet. Just make sure that the total cost of the renovations does not exceed the potential rental income from the property.
After renovating the investment property to market standards, it is rented out to generate positive cash flow. You can now set a rental rate and begin looking for tenants. You can now set a rental rate and begin looking for tenants. Mashvisor’s real estate investment software will help you calculate the potential income from your rental property based on the rental comps in your area.
To find the best tenants, check their employment status, income, credit score, criminal record, and eviction history. However, don’t discriminate against potential clients. A professional property management company makes the entire process easier and less time-consuming if you lack the time and experience to do it yourself.
This is where the BRRRR strategy truly varies from other methods of real estate investing. Many investors choose to renovate distressed properties and rent them. But what makes BRRRR unique is that the third step is refinancing a rental property. Cash-out refinancing allows you to pay off the current loan and use the remaining profit as a down payment for buying a second investment property.
Make sure to check the bank’s requirements to qualify for cash-out refinancing. Most lenders will require you to achieve a minimum credit score and a maximum debt to income ratio level, as well as own a minimum equity in the property. An appraisal will be conducted on a few occasions.
Related: The Pros and Cons of Refinancing a Mortgage
As you can imagine, as long as each investment property is carefully selected and the process goes according to plan, you can repeat these steps indefinitely. This is how to invest in real estate by gradually building a portfolio of properties. Keep notes along the way to avoid making the same mistakes and ensure greater success in your succeeding properties.
Advantages of the BRRRR Strategy
The BRRRR strategy for investing in real estate has many clear advantages for the right person. Some of these advantages include having little to no barrier to entry, such as being able to:
- Invest in many properties with little cash
- Get a loan with less than adequate credit (through getting a hard money loan- this is common among BRRRR investors)
- Scale your portfolio infinitely
- Buy property faster
- Quickly grow your rental income
- Build equity
It is a great strategy for investors who don’t have enough cash to buy many investment properties at once, and for whom saving up down payments for multiple properties would take too long.
It is also a viable option for investors who struggle with their credit history. A popular BRRR strategy example is to use hard money lenders as opposed to traditional mortgages.
Hard money lenders are typically private companies or individuals who lend cash at high interest rates for a short term (usually only one to less than three years). By using a non-traditional financing option, you are often off the hook for bad credit. You can also be approved within just a few days, allowing you to act faster on promising properties.
Disadvantages of the BRRRR Method
As with anything in life, the BRRRR strategy has its disadvantages as well. There is a certain level of risk in all kinds of real estate investment, but BRRRR investing can increase that risk.
- The renovations could take longer or end up being more expensive than anticipated.
- You might not get enough money back out of the investment property in the refinance phase.
The above are some of the common concerns among investors interested in the BRRR strategy real estate. The risk is even greater when using a hard money lender. Hard money loans come with sky-high interest rates and a short loan period. If one of the above situations occurs, it can spell disaster for loan repayment. Failure to repay the loan in time means the company or individual who issued the loan can seize the property. You risk losing your entire investment and not getting something in return for the money and time you’ve spent on the venture.
See Also: Real Estate Investment Strategies: How to Choose the Right One for You
How to Make BRRRR Investing Work for You
While there certainly are risks, the BRRR strategy is still a great way to make money in real estate. However, in order to be successful, you should be armed with the right real estate investment tools and knowledge on how does the BRRRR strategy work.
The 70% Rule and ARV
You might have heard of something called the 70% rule. The rule states that you should not spend more than 70% of the After Repair Value (ARV) on a property. ARV is the property’s current value plus the value of renovations.
The property’s current value should be equivalent to its listing price, or you can determine it through getting an appraisal. On the other hand, understanding the value of renovations takes a few steps. To find the renovation value, follow the steps below:
- Understand the renovations needed (often through an inspection).
- Get estimates from contractors on both labor and materials for renovations.
- Research your real estate market to understand the value of such renovations (usually through rental comps).
The trick is to not go overboard with renovating. If it isn’t expected in your market, don’t spend money on it. Also, make sure that the value of the renovations far exceeds their cost.
The 70% rule is one way to measure great real estate deals, as it gives you a 30% buffer in case of any unexpected misfortunes during renovating or refinancing a rental property. It does not mean, however, that it is a hard and fast rule. There are plenty of great investment properties for sale that do not fall within this rule. Therefore, it should be used as a general guideline only.
Mashvisor: The Real Estate Investment Software You Need
To successfully pull off the BRRRR real estate investment strategy, you need more than vague guidelines and “rules.” This is where Mashvisor’s tools can help you turn what would have been a risky gamble into a clear blueprint for success.
Mashvisor’s real estate investment software can help you:
- Search for the best deals on distressed properties in the Mashvisor Property Marketplace;
- Locate the most profitable neighborhoods to invest in with our real estate heat map:
- Calculate the profitability of any property using our rental property calculator; and
- Automatically access rental comps.
Our innovative, cutting-edge platform gives investors full access to the data and analytics they need to make buying rental property with the BRRRR strategy profitable.
The BRRRR strategy is an excellent way for real estate investors to make money from rental properties. Though the strategy comes with its fair share of risks, conducting due diligence and planning accordingly can help mitigate the potential issues.
Mashvisor provides various tools to help you find the right property and achieve success in your investing journey, particularly in relation to the BRRR strategy.
To get access to our real estate investment tools, click here to sign up for Mashvisor today and enjoy 15% off of your quarterly or annual subscription.