The BRRRR Method aims to help real estate investors grow their portfolio with just one property. BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. It can be an effective investment strategy, if you have the expertise. But BRRRR isn’t for everyone. There are pros and cons, as well as significant risks. Let’s break down how this method works and whether it’s for you.
A financial advisor can help you create a financial plan for your investment needs and goals.
What Is the BRRRR Method?
The BRRRR method (Buy, Rehab, Rent, Refinance, Repeat) is a real estate investment strategy that focuses on rehabbing houses, fixing them up and renting them. Unlike house flipping, the BRRRR method focuses on renting instead of selling the home for a quick profit. You then use the equity in the property to finance another investment.
How Does the BRRRR Method Work?
This strategy has four different parts that must be executed smartly for it to be profitable, then repeated. Let’s cover how each of these parts works.
The emphasis of this method is on buying a distressed property. A lot of times these homes have been foreclosed on, repossessed and are often in disrepair. Financing a purchase of one of these houses can be hard. You won’t be able to get a conventional mortgage if the home is deemed to be in livable condition. And if it’s in better shape, you may have to be able to put 30% or more down.
Besides a cash purchase, you could try refinancing your primary residence to take cash out. You’ll have enough equity in your home to make it work. Mortgage lenders typically require you to keep a minimum of 20% equity in your home.
Before you put an offer on a place, you’re going to have to calculate how much it will cost to fix and what its after-repair value (ARV) will be. While you won’t be flipping it, with the ARV calculated, you can understand how much you should be spending. Generally, you don’t want to spend more than 70% of a house’s ARV. Remember that you’re going to need to have money for repairs too.
Once you’ve bought the property, now is the time to get to work rehabbing. You need to fully assess the scope of the work. Here are several questions you need to answer before getting started:
- Is the home livable?
- Does the home need to be brought up to code?
- Will you do the repairs or will you hire someone?
- What’s your budget?
- What’s the timeline?
- What repairs can be done that will truly add value to the home?
Once you know the answers to these, you can prioritize the work. Maybe you need to hire an electrician to update the breaker box, but you can install new kitchen tile and appliances on your own. Stick with your budget and your timeline. Remember the plan is to invest in this property for the long haul. But, to start getting paid, you’ll need to wrap the rehab and find renters.
Finding steady renters can be difficult, which makes it important to know the rental market around your investment property. What’s the average income of the area? What major employers are nearby? Is there a university nearby? All of these are helpful questions to ask yourself.
It will be beneficial for you to screen renters for:
- Credit scores
- Employment history
- Criminal background
Also, you’ll need to set the rental price. If you have a mortgage on the property, the rent will need to cover the mortgage payment and maintenance costs at minimum. You’ll also need to decide if you want to manage the property directly or hire a property manager.
For a single property, you may feel up to handling it yourself. But many properties can be a handful. A property manager may cut into your profits, but a good one will keep your tenants happy and your rental properties occupied and maintained.
Once you’ve successfully rehabbed the property and are renting it out, you can leverage the equity you have in it through a home equity loan or cash-out refinance. Either of these products gives you your home equity in a lump sum in exchange for loan payment.
With a home equity loan, you can access up to 90% of your home equity. With a cash-out refinance, it’s 80%. Say you own a property worth $300,000. A home equity loan would let you pull out $270,000, whereas a cash-out refinance would let you pull out $240,000. The difference is that the home equity loan would likely come with a higher interest rate.
Depending on where the market is, it may be smart to wait until interest rates drop.
With your property’s equity in hand, you can go out and repeat the process. Just remember that you need to be smart with your next purchase. Your current property is being used as collateral for a secured loan for your future rehab.
Who’s the BRRRR Method For?
The BRRRR method won’t make everyone successful. Those with experience in real estate, renovation and property management are the best candidates. After all, a miscalculation in rehab costs or a series of irresponsible renters can put a serious dent in your profits. You need to have the capital to purchase and rehab the property
BRRRR Method Pros and Cons
As with any investment, there are upsides and downsides to the BRRRR method. Here are three pros and three cons to consider before going deeper.
- Passive income. With the BRRRR method, your properties generate a passive income that you can live off of. When the mortgages are paid off, you can rake in significant profit.
- Increase your rental portfolio and your equity. This method lets you methodically grow your rental portfolio off the purchase and repair of one property. With your growth in equity, you’re growing stable, long-term wealth.
- You can repeat it exponentially. Once you’ve repeated this method once, you have two properties to work with. As you pay off the financing, you can repeat the method with every different property you hold, growing your portfolio at a faster rate.
- You need to be patient. The BRRRR method is a long game. There’s no quick cash here. The number of viable rehabs on the market may be low, or interest rates may be unfavorable for refinancing. Renovations can take time and you may have to wait before you can start renting.
- There’s significant risk. This method requires a lot of calculated guesswork. If the rehab is more costly and time-consuming, you’re going to pay for it. If the ARV isn’t as high as you had estimated, you may not be able to pull as much equity out when refinancing.
- It’s time-consuming. It’s a lot of work finding properties to buy and rehab, rehabbing them, then finding renters and keeping them happy. This is especially true once you have several properties in different conditions at once.
Real estate is an area with a lot of potential to earn passive income. It takes some work, especially up front, and it does come with risks. But a portfolio of rental properties can deliver income and help you and your family build wealth for years to come. If you have the knowledge and the skills, the BRRRR method can work for you.
Tips for Real Estate Investing
- A financial advisor can help you determine whether a real estate investment makes financial sense for you. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you’re just getting started, you can better understand the impact of real estate investing for you by reading our guide.
- You need to know how to set rent to pay off the mortgage on your real estate investment. One way you can prep for paying a mortgage is by utilizing our mortgage calculator.
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