If you’ve been on BiggerPockets recently, or are involved in REI at any capacity, you’ve more than likely heard about this trending investment term.
It’s known as BRRRR.
When I first saw the term, I wasn’t sure what to think.
I’d receive emails with subjects that said, “Check out this BRRRR deal!”
Did it mean a really, really cool deal?
Didn’t make sense to me.
After some quick investigation, I learned BRRR was actually an acronym that stands for: Buy, Rehab, Rent, Refinance, Repeat.
Brandon Turner, VP of Growth at BiggerPockets, coined this catchy, new term.
Now, there’s nothing new about this strategy. It’s sort of just a hybrid between “Buy and Hold” and “Fix and Flip”.
In fact, even though we didn’t use the term BRRRR back then, this is exactly how my business partner and I got started back in the early 2000s.
So, what exactly is this method, and why has it become so wildly popular?
How Does the BRRRR Method Work?
This method is pretty straightforward.
The acronym says it all.
The goal behind a BRRRR strategy is to pull out all of the capital you’ve invested in a property — via the refinance — so you’ve effectively bought a property for nothing.
And, while doing all that, the goal is to still have 25 percent built-in equity to reduce risk.
No, it’s not a get-rich-quick scheme and it’s very different than the turn-key strategy many investors employ.
But, it is a strategy many use to build a passive income portfolio without significant capital outlay.
Let’s break it down.
Buy – The first step in this process is to buy a property. Typically, you’ll want to find a property listed for below market value that you can make some improvements to. Yes, buying home well below market value is difficult (some would argue impossible) in this climate, so you’ll have to be patient.
Rehab – Once the property is in your possession, you’ll want to make any necessary enhancements that will allow you to get maximum rent, and make the property worth more than when you bought it.
Note: You should ALWAYS have a home inspection before purchasing a property and get a full scope of work that will need to be completed.
When deciding what rehab to do, you’ll want to address 2 main concerns:
-Making the home livable and functional according to Indiana Landlord-Tenant Law
-Making improvements that will add more value to the home than they cost
Rent – Once the property is fixed up and ready for a Tenant, it’s time to get it rented as quickly as possible. After all, this is where your cashflow comes from.
Banks rarely want to refinance a vacant property so that’s why you need to get a Tenant in place before moving on to the next step of the process.
Refinance – Refinancing an investment property generally allows you to take out equity as cash, which you will then use to purchase another rental.
Banks typically require around 25% down, so this gives you the option to grow your portfolio without having to save up funds for each transaction.
Investor Tip: Return on Equity is a great return model to use for your investments.
You’ll want to do your research to find a bank that will offer cash out refinancing, not just loan payoff, and you will also want to ask about the Seasoning Period.
A Seasoning Period is the term used to refer to the length of time you have owned a home (or held a loan) and some banks will only allow you to refinance after a certain amount of time.
Here is a list of recommended banks to work with for Indianapolis real estate transactions.
Repeat – Once you get your money out of the last property, you look for your next deal to invest in.
So, as you can see, there are elements of the 2 strategies I mentioned above.
You’re buying undervalued properties that need some work, but instead of selling them as soon as you fix them up, you’re holding on to them and renting them out for cash flow and long-term appreciation.
What Kind of Properties Work for the BRRRR Method?
The only way this strategy really works is by finding properties that are priced well below market value. Again, easier said than done.
When you refinance an investment property, the bank will usually only give you 75% of the appraised value. If you buy a property at full retail value and then try to refinance it, you won’t get much money back out.
As with every real estate transaction, it’s crucial that you run your numbers to ensure every deal is a good one.
BiggerPockets has developed a very comprehensive BRRRR calculator to help with this.
How you finance your initial purchase is also going to affect your numbers.
There are pros and cons to leveraging vs. paying cash for an investment property.
If you go the financing route, you’ll want to make sure you have enough money to cover 20%-25% down as well as some extra for closing costs.
Is the BRRRR Method Right for Me?
I think the real question you need to ask yourself when determining if the BRRRR Method is right for you is, “Am I ready to be a Landlord?”
Because that’s really what is going to make or break you.
Buying properties to rent out is a whole new ball game compared to flipping or wholesaling.
If you decide to self-manage these investment properties, you have to be ready for a slew of expenses, frustrations, and learning.
Even if you decide to hire a property manager, you’re still a Landlord and have to understand everything that comes along with that.
Personal Success with the BRRRR Method
As I said before, this method, though we didn’t call it BRRRR, was how my partner and I found success in the real estate industry.
We didn’t start out as a property management company by any means.
I think the reason the BRRRR Method continues to be so popular, is because it works.
It’s accessible. Anyone can try it and, with patience, many are successful.