What is the BRRRR Method?
The BRRRR Method stands for buy, rehab, rent, refinance, repeat. This describes a strategy used by real estate investors who want to keep their properties as rentals versus flipping them (the fix and flip strategy). The overall strategy of the BRRRR strategy is to buy a property with cash or loans at a price which allows you to rehab it and then pull all of your cash out via a refinance. This allows you to acquire a cash flowing (hopefully) rental property without tying up your money long term, so you can continue purchasing more properties. In theory, if you buy right and estimate rehab costs accurately, you can continue using this strategy in perpetuity.
A variation of the BRRRR strategy is the BARRRR strategy. This stands for buy, advertise, rehab, rent, refinance and repeat. This small change can have a significant impact on your tax liability. If you can prove you completed your rehab on an advertised rental, you may be able to write off significantly more of your repairs. With that said, we are not tax experts and you should certainly consult a professional.
How does the BRRRR Method work?
The BRRRR method works by having enough equity in your property to pull out all of your invested capital so you can continue buying properties. The strategy itself is not overly complicated or complex. The most difficult part of this process is finding a property that will leave you with enough equity after your rehab to be able to pull out all of your money. Having an excellent understanding of the market to determine after repair value (ARV) is extremely important. Being off by even 5-10% on your ARV can result in having tens of thousands of dollars tied up in a property longer than you wanted. Having a very good understand of repair costs is also crucial. If you’re new to the game, consult an experienced contractor to get accurate quotes.
Does the BRRRR Method increase leverage?
Yes. You’re acquiring more loans, so by definition, you’re becoming more leveraged. With that said, assuming you’ve completed the BRRRR strategy as planned, you’re acquiring these loans without any money invested. In other words, your return on investment (ROI) is infinite since you don’t have any cash stuck in the property. Successful BRRRR investors can run into the issue of acquiring too many bank loans. Banks often have a limit on the number of loans allowed to a mortgagor. In this case, the investor may need to put someone else else the loans, or they can also seek out portfolio lenders who often have more flexible requirements.
Does Brrrr really work?
Definitely. The BRRRR strategy is excellent in concept. The biggest hurdles are finding a property that will fit your numbers and then getting a traditional bank loan after you’ve rehabbed the property. If the numbers work on your property, you can build a real estate empire with no or very little money tied up.
How much money do you need to BRRRR?
It will depend on your property. While you should be able to pull all or most of your money out at the end of the process, you’re still going to be required to contribute a significant portion up front. You’ll be responsible for the purchase price, the rehab costs, holding costs and closing costs on the buy side at a minimum. You can either pay for this yourself, or you can use other people’s money (OOP). Some common examples of OOP would be hard money lenders, loans from family and friends and even crowdfunding.
The amount you are required to invest up front all depends on how you acquire and rehab the property. Also keep in mind, if you use OOP, there will likely be interest charges and potential other loan costs. These should all be included in your analysis to ensure you’re able to pull out all of your investment and/or pay off all of your lenders.