If you’re getting started as a real estate investor, you may have heard about the BRRRR method. BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat and is a popular five-step investment strategy.
The BRRRR method involves purchasing distressed or undervalued properties, renovating/rehabbing them, and renting them to tenants. Once rehabbed and rented, the property gains value, which the investor can leverage to refinance, using that money to purchase another property so they can repeat the process.
Let’s dive into each step of the process and talk about the advantages, challenges, and financing options investors should know before getting started.
What is the BRRRR Method?
One of the prerequisites to the BRRRR strategy is that the property is purchased below market value. This is an essential component, as you’ll need to build enough equity to recover your original investment quickly.
Here are some points to consider in each step in the BRRRR method:
Buy
Step 1 in the BRRRR method is Buy. You’ll need to identify a suitable property first. Ideally, it will be one that requires some upgrades but still has desirable qualities that make it worth the investment. Potential is key! A distressed property in a great location is one example, or perhaps a building that’s under foreclosure or bank-owned.
Be sure to conduct a thorough inspection before you commit. A good rule of thumb is not to purchase any property for more than 70% of its post-rehab value. That gives you a 30% buffer for repairs, and you’ll still have enough equity for a refi when you’re done. This is occasionally called the 70% rule or the maximum allowable offer (MAO). MAO is the maximum you can pay upfront and still make a profit.
Other metrics investors typically use to evaluate deals include the after-repair value (ARV). You can estimate this amount by adding the added value from the repair to the purchase price or by looking at similar properties in the area to gauge the fair market value.
So, for example, if your ARV is $750,000, your MAO is $525,000.
Rehab
Once the deal is completed, it is time to start on step 2 of the BRRRR method: rehabbing the property, upgrading, and repairing it so it’s ready for tenants. Upgrades could be purely cosmetic or more extensive, but the ultimate goal is to make it a desirable place to rent. Choose your upgrades based on what will give you the most bang for your buck. Updating bathrooms and kitchens, finishing basements, new paint, and refinishing floors are just a few examples.
Rent
When your property is ready to occupy, you’ll move on to step 3 in the BRRRR process: finding suitable tenants. Rental income covers your expenses, so do your due diligence to ensure they will make good tenants who will stay long-term. The rent should be enough to cover your mortgage payments with some profit on top of it. Keep your property maintained, be a responsive landlord, and keep the lines of communication open.
Refinance
Once your property is occupied and income-generating, it’s time to refinance. In step 4 of the BRRRR process, you’ll want to use the equity you’ve built in the property as collateral, and pull out of your initial investment plus whatever additional equity there is so you can repeat the process with a new property. You’ll need to have owned the property for a minimum period before you can refinance, replacing the existing mortgage with a new one at more favorable terms. In the case of a cash-out mortgage, the refinanced amount will be more than what’s owed, and you will receive the balance in cash.
Repeat
The fifth and final step in the BRRRR method is to use the funds you received through your refinance to go back to step 1 and start the process over again. The goal is to keep repeating this same strategy as you build out your overall portfolio for more profit and better returns.
Advantages of BRRRR for Investors
The BRRRR method is an excellent way for investors to scale their portfolios—as long as the variables are in your favor.
The main benefits of the BRRRR method are:
Requires minimal investment. If the property is undervalued enough and you can do most of the rehab work yourself, there is massive profit potential.
High ROI. Depending on what you paid for the property, there’s excellent potential for generating a high return on your investment over time.
Easily scalable. The steps are easy to follow, and if your first property was a success, you’ll have learned from the process and will know what you’re facing for future investments.
Great passive income potential. If you find great tenants, you’re in a good position to achieve steady cash flow.
Equity building. As you build equity through the rehab process, you could net better interest rates, lower payments, and more buying power that you can leverage into new investments.
Challenges of the BRRRR Method
Sometimes, it isn’t so easy to lock into the right circumstances with BRRRR. Here are some of the challenges you could face.
Finding the right property isn’t always easy. The success of your BRRRR strategy hinges on purchasing the right property at the right price. Careful evaluation is essential to ensure your efforts and investment are worthwhile.
It’s speculative. There’s always a chance you won’t find suitable tenants, or the property won’t gain value, putting your investment at risk.
It’s hard work. Managing rental properties isn’t for everyone. It can be extremely time-consuming and stressful, especially with multiple properties or tenants. All the pieces need to be in place to ensure success.
High up-front costs. You’ll need to ensure you can cover the down payment, renovation costs, and operating expenses until the property is income-generating, which could be a barrier for some investors.
Financing Options for the BRRRR Strategy
You have a few options for financing your BRRRR strategy, but a fix to rent loan is recommended as it is tailor-made for BRRRR.
Fix to Rent loans are essentially two loans in one. Investors start with a fix and flip loan that covers both the purchase and repair costs of the property. Once the rehab is complete and the investor is ready to rent the property long-term, you have the option to roll into a 30-year fixed-rate rental loan. Working with the same lender when you are ready for the refinance can prove beneficial as they already have your documents on file, you are familiar with your loan advisor, and they may offer incentives for continuing to work with them.
Ultimately, this is a fast and simple solution for investors looking to purchase income properties they intend to own long-term, which goes to the heart of BRRRR. Speak to a loan advisor to see if you qualify for a fix-to-rent loan.
Final Thoughts on BRRRR
Real estate investing is an excellent way to build wealth and equity, and the BRRRR method may be what you need to achieve your investment goals. Choosing the right financing partner is critical, as success hinges on the right rates and terms. The qualified lending advisors at LendingOne will work with you to ensure you have the best financing vehicles to get you where you want to be. Contact us today, or take a moment to request a quote. We specialize in real estate investment loans and are here to help.