The BRRRR property investment strategy is similar to the traditional rental property investment method and seems pretty straightforward. Investors buy a flip property, fix it, rent it, go to a bank, refinance and flush and redo. But of course it’s not that simple. Let’s do a quick BRRRR analysis to see if this strategy is right for you.
What does BRRRR mean?
The BRRRR method is an acronym for buy, rehab, rent, refinance, repeat, and it’s a break with the traditional way of finding property and running a rental business. At BRRRR, an investor uses a short term loan to buy a distressed property, redevelops it, builds equity (by doing the redevelopment), rents it (and builds cash flow), refinances the home loan, and repeats the process. It is an investment cycle that can quickly build an investor’s portfolio.
Benefits of the BRRRR strategy
Possibly out of money
BRRRR investing can be a strategy for investing with very little money. Some investors can avoid depositing their own money. If the investor works with the numbers, he could get a rental property for very little money.
High return on investment (ROI)
This strategy works with minimal investor cash, so the ROI can be huge. If an investor can generate $ 10,000 from the transaction and the property’s cash flow is $ 2,500, that equates to a cash-on-cash return of 25%. And that doesn’t include the equity that you built up when renovating the property.
As the property is being redeveloped, it automatically receives equity, so that the investor immediately owns a property that is worth more than he paid for it. And it’s always better to own a property that’s worth more than what you bought it for!
Renting a renovated property
A newly renovated rental property is easier to rent, can attract better tenants, and lowers the maintenance budget. All of these factors help make renting out easier.
More on BRRRR from BiggerPockets
Disadvantages of the BRRRR strategy
Short term loans usually have a higher interest rate – and these are the types of loans that investors use to finance a BRRRR property. To avoid negative cash flow at any point in the project, many investors use cash or a home equity loan for the first half of the project. Once they get refinanced, they use the money to buy another property.
Potential for a low rating
There is always the possibility that the property will not be valued well. Because of this, the investor needs to study the numbers and make sure their budget is right.
There is a certain amount of time that tenants must have tenants before a bank will even consider refinancing the loan. This is known as “seasoning” and can take anywhere from six months to a year.
The timing of the loans must be right. A minimum term of 18 months is recommended for a short-term loan that covers the cost of buying and refurbishing the property. This leaves plenty of time in the event that the 12th month refinancing doesn’t work and gives six months of leeway to sell the property or find another lender.
Dealing with a rehab
After all, every rehab is a big project that is unpredictable. Many moving parts and complications can easily increase rehab costs and become a major problem. It’s not easy and shouldn’t be taken lightly!
BRRRR analysis in numbers
Here’s a very simple way to illustrate BRRRR calculations.
Let’s say the purchase price for a property is $ 200,000 and the investor is budgeting $ 40,000 for rehab. That adds up to $ 240,000 plus $ 10,000 in acquisition and retention costs, for a total of $ 250,000. This means the Post-Repair Value (ARV) of the property should be around $ 350,000 for it to work.
The investor then takes out a short term loan of $ 250,000. This can be with a hard money lender borrowing from a line of credit or money from a 401 (k). This money will be used for the purchase and renovation of the property.
After the rehab, the property will be rented out and the rental income will be $ 2,500 a month. But the investor pays a lot in interest. Coin lenders typically charge a higher interest rate of around 12%. And who wants to pay so much interest?
After the maturity period of six to twelve months, the investor can apply for refinancing of the property. Appraisers take a look at the property, and since the investors’ calculations were correct, the property is set at $ 350,000. (There’s been an appreciation since you redeveloped the property.) And the investor found a bank willing to take 80%, which is a $ 280,000 loan. Even if the investor found a new lender who returned 70-75%, that would still be good!
At this point, the hard cash loan ($ 250,000) is ready to be paid off, with an additional $ 30,000 left. The nice thing is that the new loan is for a 30 year mortgage at 4% interest, which makes the monthly mortgage payments really manageable. The property is basically brand new and requires little to no maintenance. Since the property is beautiful, it attracts good tenants. And real estate values and rents tend to rise over time. A good bonus is that the investor has no money and can do it all over again. So it’s a win-win-win-win-win for the investor!
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Analysis of a real BRRRR deal
I found an upside down property that I was really looking forward to as it was basically turnkey and ready to move into.
I renovated the kitchen and most of the appliances were new. That meant the electricity bill was lower and the house didn’t require as much maintenance. It didn’t have a refrigerator, but I could easily budget that for that.
The house had two renovated rooms and a bathroom on the second floor. The only problem was that I like to buy three bedroom houses because they have better cash flow and I don’t usually buy flips.
I went to look at the house anyway and saw that it was possible to divide the house and rent the second floor to a family. The first floor had a full bathroom and I was able to convert the garage into a bedroom for another tenant. And because it would be a converted garage, it would have its own entrance. I thought we could get $ 1,000 for the first floor and $ 1,200 for the second floor.
When I did the math, however, my assessment didn’t look so good. The asking price was $ 209,000, which was workable given that the property had potential. I thought it would cost $ 15,000 to convert the garage into a bedroom.
We definitely had to get the numbers right to make it worth it. Here is what happened.
- Asking price: $ 209,000
- Offer: $ 189,000
- Counter offer: $ 200,000
- Conversion: $ 15,000
- Proposed Equity: $ 4,000
Had we got the property for $ 189,000, we would have had $ 10,000-15,000 in equity. That would have been enough to cover the cost of converting the garage into an additional room.
Instead, with the $ 200,000 counteroffer, that meant I would spend $ 15,000 on the renovation and only have $ 4,000 in equity. I had to pay out of pocket to do the renovation, which just didn’t work for me.
There weren’t enough reasons to buy the property and in the end we passed it on.
Who Should Use the BRRRR Investment Strategy?
Realistically, anyone could use the BRRRR method. But it is more attractive to certain types of investors. If the investor agrees to use expensive hard or private money and is systematic, well budgeted, handles rehab well and wants to use little of their own funds, then the BRRRR investment strategy is for them.
However, if the investor’s long-term goal is to achieve financial independence with their own money through cash flow rental property, then sticking to traditional rental property investment is the way to build passive income. All they have to do is find a property to buy with a 5% to 25% down payment and find a tenant and they will make money.
If the investor has $ 100,000 to close a BRRRR deal, they wouldn’t see their money until after the maturity period. That can be six months to a year.
Traditional investors could use that $ 100,000 as a down payment to buy five homes. These investors immediately have five houses in their rental business that they don’t need to renovate, waiting for them to be “spiced up” and then refinanced. It will have cash flow once there are tenants. And a portfolio of five houses has higher cash flow than a BRRRR property.
BRRRR really is a different way of thinking and doing business so it all depends on what the investor is willing to do.
You may still be wondering if the BRRRR method is legitimate? The quick and dirty answer is yes, it is. It takes an investor with certain skills or years of experience to be a true master at it. BRRRR is definitely a great way to use other people’s money to build personal wealth. There are things to watch out for. However, the property needs to have the potential to generate equity for rehab, it needs to be rented and “seasoned” before you can refinance it, and the bill needs to be right.