The traditional method of buying a rental property is to purchase the property through financing, such as a mortgage, then repair, lease, and finally, repeat the process. You can call it BFRRR: buy, finance, recover, rent, repeat. (But no one calls it that. BFRRR is a ridiculous acronym, and since many people buy properties in this way, a special name is not needed).
The traditional way of buying a house is very popular because it is the most convenient. Here, you usually buy real estate through a bank loan. You need to pay a down payment of 20% to 25%. Investors do not have to work hard to save the entire purchase price or find private or hard lenders through financing. The simplicity of this method may be tempting!
Table of Contents
What is BRRRR Method Strategy
One of the main differences between the BRRRR method and traditional real estate investment strategies is to focus on investing in non-performing assets and refinancing the purchased property to purchase another property.
If you are a real estate investor considering adopting this type of strategy, please read on to understand how the BRRRR method strategy works, its advantages and disadvantages, and whether it is suitable for your financial or real estate investment goals.
Who should use BRRRR Method Strategy
How does BRRRR Method Strategy Works
If done correctly, the BRRRR method strategy can provide passive income and a circular method of buying and owning rental properties. The method works in the following steps:
Buy a property: The property you are buying must be of inferior quality, and some work needs to be done to meet the specifications and prepare for rent. Due to the condition of the house, it may be cheaper to buy.
Rehab a property: As the property is dilapidated, it may require a lot of work. In this step, you will renovate the property to make structural, safety, and aesthetic improvements and prepare it for the tenants.
Rent out the property: Determine the rental price and find people to rent the home.
Do a cash-out refinance on the property: With cash refinancing, you can convert your principal into cash. You get the principal through a larger mortgage, borrowing more money than you currently owe. Cash can be used for anything, including buying another property.
Use funds from refinance to buy another property: In this final step, you will restart the process. Using the proceeds of cash refinancing, you will buy another distressed asset and repair it, then lease and refinance.
How much money do you normally need to start BRRRR Method Strategy?
When you buy a rental property, most banks will require at least a 20% down payment, and you will also need funds to repair the property. For a purchase of US$100,000, you may need to spend US$30,000 to purchase the property. Most people find it hard to get $30,000 for one property, let alone multiple properties. If you buy a more expensive property, the cost will increase relative to the purchase price. Therefore, it becomes very difficult for people to pay rent. There are some ways to buy with less upfront capital, but BRRRR is another way to buy more rent.
BRRRR Method Strategy Breakdown
When practicing the BRRRR method strategy, be sure to follow the exact sequence of the steps below. Here are some tips for following each step of the acronym.
Buy
Since the BRRRR method strategy is based on the purchase of non-performing assets that need to be updated and repaired, it is difficult to obtain a traditional mortgage for the house. There are several reasons for this. Most lenders need property valuation, but it is difficult to assess the value of such property. Depending on the type of loan you get, the property may also need to pass certain guidelines to qualify. Distressed assets are likely not to meet these requirements.
Before you completely exclude financing, please consult the lender to see if you have any options. It may be possible to use HELOC or hard money loans to fund the purchase, but these options can be risky and are generally not recommended.
When buying non-performing assets, it is important to calculate the repaired value (ARV). ARV is the estimated value of the house after renovation or restoration. To determine the ARV, compare the planned bottom line of the home with similar or comparable homes recently sold in the area. These houses should be similar in size, number of bedrooms and bathrooms, age, building type and condition.
When deciding how much price to provide for a house, follow the 70% rule in real estate. Avoid investing in real estate ARVs that exceed 70%. For example, if the ARV of a house is $300,000, you should not pay more than $210,000 for the house.
Rehab
When it comes to remodeling your house, the first improvement you need to make is to make your family compliant and safe to live in. Next, you need to determine the type of enhancement that really adds value. These may include updating your kitchen and bathroom, increasing curbside appeal, and installing energy-efficient windows, appliances, and other features.
Before starting your project, be sure to create a realistic budget and schedule for your project.
Rent
It is important to find tenants before refinancing (the next step), because lenders usually do not refinance until the property has tenants.
When it comes to choosing tenants, you’ll want to look for certain qualities:
- A good record of on-time payments
- A stable job with steady income
- A good credit report
- No criminal behavior or history of eviction
- Positive references
You can find this information by meeting with potential tenants, asking them to fill out application forms, checking credit reports, requesting letters of recommendation, and conducting background checks. Of course, you want to make sure to get their consent and comply with all housing laws.
When determining the rent, you want to make sure that it is fair to your tenants and generates positive cash flow for you. You can determine this by subtracting your home ownership and total rent from the total monthly rent you will collect. To give a very basic example, suppose you receive a monthly rent of $1,500 and your mortgage is $800. Excluding any other expenses, your cash flow is $700 per month. Check for comparable rents to help you find the right price.
Refinance
In the BRRRR method, you refinance cash so that you can use the money to buy another distressed asset and rent it out. To do this, you need to find a lender that provides cash refinancing, and you need to meet loan requirements.
Although lenders will have their own set of requirements, they will need to meet minimum credit score requirements (usually about 620 for cash refinancing), maximum DTI (usually about 50% or less), and own equity. house. You may also need to own the property for a period of time before you can get cash for refinancing.
Please note that you will also need to perform an assessment and may have to pay additional fees, including the cost of completing the loan.
Repeat
In the last step of the BRRRR method, you will go back and repeat the previous steps in the same order as before. If you want to repeat these steps over and over again, it is best to take notes every time you complete the process so that you can learn from past mistakes.
BRRRR Method Strategy Pro’s and Con’s
Before deciding on a BRRRR strategy, be sure to weigh the pros and cons to ensure that this is the right investment strategy for you.
Pros Of The BRRRR Method Strategy
Potential of return: One of the main benefits is the possibility of a high return on investment. When done right, investors can purchase a distressed property for a relatively low cash investment, fix it up, and rent it out for strong cash flow.
Building equity: The amount of capital accumulated during the restoration phase must also be considered. When pursuing a passive income strategy, many investors simply generate cash flow from value-for-money properties.
Top-grade tenants: If the property is properly restored to meet consumer standards in a particular market, it is likely to attract large tenants. Tenants who are willing to pay high prices for rental properties in exchange for certain features and facilities are more likely to take better care of the property and reduce expenses. Better tenants usually translate directly into better cash flow.
Cons Of The BRRRR Method Strategy
Some disadvantages to consider are the cost and labor required to repair the house. Since you may not be able to obtain a traditional mortgage, you may need to obtain a more expensive or riskier loan. What if when you refinance, you are eligible for less funds than originally planned?
This method also requires patience. In addition to waiting until the renovation is complete, you can also wait for the time required to own the house before you can get cash refinancing. Also consider that finding suitable tenants to rent out your home may take time.
Expensive loans: When choosing to use short-term or coin loans to finance real estate purchases, high interest rates can be expensive, especially during the recovery phase. Investors should make sure they know how they will pay the mortgage when the property does not generate income.
Rehabilitation: Undertaking a large-scale rehabilitation project can be expensive, and there will be a lot of trouble in the process. Repairing means dealing with project progress, managing contractors and subcontractors, and dealing with unexpected problems. Before handling the project, make sure you have the correct emergency plan and resources.
Waiting period: BRRRR is a strategy related to a longer time frame, which includes at least two waiting periods. The first is that during the restoration phase, investors must make improvements to the property before they can settle tenants and start generating income. The second waiting period is the adjustment period. This term describes the time investors must wait before the lender allows cash refinancing.
Appraisal risk: Investors usually refinance the property based on the valuation of the property, rather than the amount they paid for the property. There is always the risk that the value of the property will not reach expectations. This should be taken as a warning that it is important to run the numbers correctly beforehand.
BRRRR Method Strategy Examples
Let’s say Johnny Crushit lives in Austin, Texas and is interested in buying a house to take advantage of this emerging rental market. Find a property worth $200,000 and count the number of transactions. Johnny can make a down payment of $40,000 and loan the remaining $160,000. After walking around the house with the contractor, Johnny decided to spend $10,000 to repair the property. So far, we have these numbers:
- Sale Price: $200,000
- Down Payment: $40,000
- Loan Amount: $160,000
- Rehab Costs: $10,000
After the renovation is complete, the value of the property is US$250,000 and Johnny can rent it for US$2,500. About a year later, Johnny refinanced and received a loan at 75% of the assessed value: $187,500. Then, you use the money to pay off the original loan of $160,000, leaving $27,500 (plus ongoing monthly rental income) to buy and repair another property. The more Johnny goes through, the more investment assets he can accumulate over time. Although this example uses simplified numbers, it should help illustrate the actual operation of the BRRRR process.
Alternatives to BRRRR Method Strategy
If you think the BRRRR method is not suitable for your real estate investment strategy, you can research other strategies. The traditional investment strategy is to buy a house in good condition (using traditional mortgage or cash payment) and rent it out in exchange for rental income. The rental income can basically repay your mortgage, and any additional income can be used as you wish, although it is wise to use it to repay the mortgage faster.
A more creative strategy may be real estate investment financed through crowdfunding. This new method uses funds from a wide range of investors who pool their funds to purchase real estate. This allows people to invest with less money and work while still reaping returns.
BRRRR Method Strategy vs House Flipping (Personal Opinion)
Another question I have always encountered is whether it is better to invest in a house or use the BRRRR method to buy rent. I personally do both, but I know that not everyone is in the same position. I like buying rental homes, but it is difficult to make them work in my market because the prices in northern Colorado are so high. I started to invest more because these transactions made more sense to me. The advantage of investment is that you can have more funds to invest in leasing. The disadvantage of flipping is that once you sell the house, it no longer makes you money. You must decide which one is best for you.
My ultimate goal is to buy a house, because they will continue to make money for me until I die. I have to buy cartwheels over and over again to make money from them. I would like to rebuild the house, but you may not want to do it when I am 80 years old. I will run through these numbers to see how you think you will get more rental properties. Maybe you can start investing, but once you have invested in three houses, you have to set the rules that you will buy a rental house. This can give you enough money to buy rent, so that you can continue to replace houses, thereby generating more income to invest in rent.
Conclusion
The BRRRR method strategy can generate passive income and build your real estate investment portfolio over and over again. However, before getting cash refinancing, you need to be patient to repair the house, find tenants, and dry it. These pros and cons must be considered before planning the next step.