How Real Estate Investors Can Use the BRRRR Strategy
The BRRRR strategy is one way that real estate investors can begin to build generational wealth.
There are a number of popular and successful investment strategies available in real estate. One that’s become increasingly popular is the BRRRR method, or the Buy, Rehab, Rent, Refinance, Repeat.
In many ways, it’s a combination of flipping and buy-and-hold investing. Investors purchase properties that need work, which they renovate as they would with a flip. But, instead of selling them once the renovations are complete, the investor rents them out. The main advantage of this strategy is the fact that you can repeat it over and over. A well-executed BRRRR can serve as the foundation of your future wealth. As with any real estate investment strategy, it has its pros and cons. Here’s what you need to know about the BRRRR method.
BRRRR at a Glance
Real estate investors use the BRRRR method when renovating houses to rent. For this strategy, an investor will buy a property that needs some love or is otherwise underpriced. The investor will then rehab it to become a turnkey property — that could mean anything from a deep cleaning to a complete gut renovation.
Once the property is habitable, the investor will rent it out at market rates. With the gained equity in the home, either through the renovations or through the general rising of the area real estate market, or both, the investor will refinance the home. When the loan is refinanced and money taken out, it’s time to repeat the strategy.
In the BRRRR method, the money made from the first investment serves as money to facilitate the next one. Repeated over time, a successful real estate investor is born. However, you can’t just buy any house or do any renovation. You need to make planned business decisions along the way.
Real estate investors looking to buy properties using the BRRRR method have specific criteria. One of the simplest ways to identify a home that might work for BRRRR is the 2% rule, which states that if you can rent the property for 2% of the price you pay for it, you’ll make money. But, of course, that doesn’t include renovation costs. Use a calculator, like this BRRRR calculator that takes into account everything from purchase price to renovation cost to the after repair value (ARV) to the expected monthly rental income.
The complexity of the rehab stage depends on a variety of factors. For example, the condition of the house you purchase and the money you are willing to put into the property. At the bare minimum, the house needs to be habitable and nice enough to attract tenants. In some cases, this simply involves a deep cleaning, small updates, changing light fixtures, or minor repair work. However, some homes may require more work. Upgrading certain features that are attractive to renters, like nice appliances, new flooring or a new kitchen or bathroom, can go a long way into enticing quality tenants.
Since you are renovating this property for business, it’s important to get an accurate estimate of all your renovation costs and stick with your renovation plan as much as possible. Spend too much on renovations, and you’ll have a hard time recouping the cost in the rent and refinance stages of the BRRRR strategy. Most renovations run about 20 percent over budget, so make sure you pad that number in your budget to avoid any surprises.
It’s time to find the right tenant for your investment property. The ideal tenant is a stable, long-term one who will take good care of your property. There are a few steps for successfully renting out your property. Before you get started, you want to make sure you abide by state and local rental laws.
Key in this process is pricing your rental correctly. To do so, you’ll want to run rental comps, or know what nearby similar properties are renting for. There are investment property tools, such as Rentometer.com that can help you make sure your rental price is spot on. Or, you can look around at comparable listings yourself to see what prices are — just keep in mind you don’t know for sure that the listed rental price is actually the final agreed-upon rental price.
If you don’t need to rent ASAP, you might price your rental at the top of the comps and negotiate down. That said, some owners like to price on the low side, which may draw a larger prospective tenant pool and allow the landlord to choose the right tenant for the property — just remember to have clear, consistent criteria that also abides by the law.
For this step, most BRRRR investors move to cash-out refinance on the investment property. Once you’ve been doing this for a while, you’ll have your preferred lenders on speed dial. If you’re new, shop around to get quotes — looking for the lowest rate and most favorable terms.
Some mortgage lenders may balk at cash-out refinancing on an investment property. Others may require a certain amount of time pass from owning a home to doing a cash-out financing (often at least six months). Investment properties are usually considered riskier investments than a primary home, so you may get a higher mortgage rate or face a more difficult approval process than with a loan for your primary home. Stay optimistic and shop around. You’ll find a lender who understands your goals with enough due diligence; many investors have luck with smaller banks and credit unions.
Most real estate investors who employ the BRRRR method are looking to build a portfolio of properties as part of their overall real estate investment strategy. This strategy is attractive to investors who are looking to generate steady, passive income from a rental business and who are planning for longer-term gains in the form of property appreciation.
As you get more experience in the method, you’ll get better at identifying the properties that work best. You’ll also discover the areas that work best and have an eye for what types of renovations are necessary. Plus, you’ll start to build a trusted team, everyone from contractors to a property manager, to help you run your business.
Get your next BRRRR deal on Sundae’s marketplace
First, you need to buy the right property. It serves as the foundation for every step thereafter. A steady stream of vetted properties can help immensely. Sundae’s online investor marketplace connects you directly with properties that can become the lynchpin of your successful BRRRR method.