BRRRR is not just a way of exclaiming that you are cold. It is also an acronym used by investors to explain one of the simplest and most common ways to invest in real estate. BRRRR stands for Buy, Renovate, Rent, Refinance, Repeat. It is not a wholesaling investment strategy and it is not a fix and flip strategy. Those strategies are primarily used for making a good sized profit in little time. It is a long term strategy that focuses more on building wealth over the course of several years through positive cashflow, mortgage pay down, and appreciation of properties.
We are going to dive into this and go in depth about this process, and explain the benefits of it and how you can do it too. You may be reading this now and thinking it doesn’t apply to you, since you aren’t an investor and don’t have the time to learn how to be. I encourage you to read on with an open mind and an ambitious mindset, however. Most people who make lots of money through real estate investing have never had a formal education in investing. They just saw an opportunity, acted on it, realized that the process can be replicated indefinitely, and learned tips and tricks along the way.
Something that I find fascinating is that you can use the BRRRR method and scale it however much or little you want to. Some people use it just to make a few extra hundred bucks a month, while others use it to eventually replace their full time job with the passive income, retire early, and fulfill their dreams. The BRRRR method-if done correctly- is a fantastic way to create passive income that will never stop coming in, build your net worth more and more with every property you obtain, and then set you up to do it all again.
The idea is that you find a good rental property that you can buy below market value because it needs some work done to it. You then Renovate it, find a tenant who would like to rent the property, and refinance the property later on in order to repeat the process. Let’s go through it step by step now.
Buy
The most important step in the entire process is buying. It is important to get the right house at the right price, but note that getting the right price is much more important than the right house. Even if you buy the wrong house and it isn’t great as a rental, as long as you got it at a good deal, you still have options, such as leasing, wholesaling, flipping, etc. On the contrary, if you bought a great house but at a bad price, your options may be much more limited if you can’t sell it for what you have in it and the mortgage for the property costs more than what you could rent it for.
So buying is the most important step, and it’s important to have someone with some experience by your side to help identify great deals. When you are looking for the right buy, think about things such as- How much money does it need in repairs? What could it be worth when the house is finished? How long will it take? What could it rent for in this area? How much will the mortgage be? Is this a house in an area that shows signs of appreciation?
When looking at houses that will make great rentals, you obviously need a house where the mortgage will cost less than what the house will rent for. This is obviously a confusing idea, but one of the easiest ways to find houses that fit that criteria (or make a house fit that criteria) is to buy a house and renovate it so that the house is worth a higher rent. In order to fit the criteria of having a higher rental value than mortgage after the repairs and refinance, you might need to find some distressed properties. These may or may not be on the market, and you can often get them for less than they are worth, since you will be the one putting in the time and sweat equity. The most important thing to look for in these houses is a solid structure. Those are the bones of the house and often the most expensive repairs. For example, maybe you find a house that could use some fresh paint, new carpet, a good landscaping job, and some leaks fixed in the roof. The floorpan also isn’t great, and you see there is a non-load bearing wall separating the kitchen and living room that is really dating the house. The house is a two bedroom for $60,000, but you noticed it has some extra area that could easily fit another bedroom.
You’ll want to determine the cost of the needed repairs and the ARV, or the After Repair Value. After the rehab is finished and opening up the kitchen and living room, the house will looks 50 years newer and be worth $120,000. The upgrades will cost $30,000. BUT, with the extra bedroom that you want to add, converting a house from a 2 bedroom to a 3 bedroom is a significant upgrade, and if you do that the house could be worth $140,000 since it will be competing against other 3 bedroom homes on the market rather than other 2 bedroom homes.
Now that you’ve decided to pursue the deal, you need to obtain financing for the property. This might be a bit of a trick on a distressed property, and you may be limited on what types of loans you can use. You may also want to consider using a private investor. You negotiate the house down to $55,000, and you put down a 10% down payment of $5,500 and boom, you own the house.
Renovate/Rehab
This step will be started in the Buying phase, as that is when you will be identifying what repairs need done and how much they will cost. Now that you have ownership of the house, you are ready to finally do them.
Not everyone might have the $30,000 laying around to do those repairs. If this applies to you, you should start looking for answers to this problem during the buying phase. You might be able to purchase the home using a Home Equity Line Of Credit, or if you are using a private investor to fund the deal, they can also supply funds for the repairs. Or perhaps you got a regular loan for the house, and this is the step where you bring in a private investor or an additional loan for the repairs. There are so many ways to obtain financing for real estate, so be creative. Everyone knows there is money to be made in real estate, and private investors will beg you to take their money if they can make a decent return on their share.
After the rehab is completed, you have $85,000 in the property total, but you might have as little as $5,500 (or less) of your own cash invested. The rest is debt from purchasing the property and the repairs. The house is now worth $140,000, meaning that you have just created $55,000 in equity. That’s a nice little jump in your net worth!
Rent
Now it is time to fill that property and have a tenant cover the mortgage and other expenses you are incurring from the property. The property is worth $140,000, and after your research you find you can rent it for $900 in rent each month. Once you start having some people interested in renting the property, be sure to screen them thoroughly and make sure you find a great tenant. A bad tenant can be a world of a headache, so be sure to make sure you get someone great, even if it means waiting a few weeks before accepting an application.
Refinance
Many banks will require you to own a property for 6 months to a year before you can refinance. Once you are able to do a refinance, you will want to go through a bank and pull out a loan that will accomplish a few things for you. First, you want to use the money you are receiving to pay off all other debt related to this property. Of course during a refinance, the new loan will take place of the previous mortgage on the home, but if you have other debts such as the rehab, you will need to pull out enough money to pay off that loan as well. You want to simplify your finances in this step by only having one loan for the property.
The next thing this refinance is going to do is allow you to pull out enough of that equity you created to be able to restart this whole process. Your equity may be much more than in the example above or it could be less, so determine how much money you want to pull out to use on the next property. Do you want enough just to use as a down payment for the next house, or do you want enough to also be able to cover all the repair costs out of pocket? The most important thing in this step is to not refinance so high that your rent will not cover the new mortgage. The beautiful thing about the refinance is that you are pulling out extra cash that you will not have to pay back. The rent you receive each month will be paying off that loan (which will increase your net worth every month) and be putting some money in your pocket as well.
In our example, maybe you would decide to refinance the house and pull out $105,000. You pay off the original loan of $49,500 and the private investors loan of $40,000 (That is including $10,000 in interest. Private investors may charge higher returns than a regular lender because they won’t collect monthly payments and they will loan on things than lenders will not). So $89,500 of the $105,000 is being used to consolidate the other debts into one, the remaining $15,500 goes into your pocket as funds to get you started on the next project, and you still have $35,000 in equity in the property itself (it’s worth $140,000 and you now have a loan against it for $105,000). The rent you receive each month pays off the mortgage and puts about $150 in your pocket each month.
Repeat
You now already have the funds for the next deal, and even more knowledge on how to make it smoother than the last. You will get better at every step in the BRRRR the more times you do it, and the rewards will add up to be significant after a few times.
Sure, making an extra $150 a month probably won’t change your life. But if you do this a few times, you can have 5 properties all paying you $150-400 a month. A thousand extra dollars a month is likely a nice pay jump for most of us, but it’s much better than just that. Every month your rental income will also be paying down your debts, AND your properties will all be appreciating at the industry average rate, meaning that after these houses are paid off, you will have hundreds of thousands of dollars worth of real estate that you have never even made a payment on.
I am not a Financial Counselor and I am in now way trying to give financial advice. This post is simply to explain the process, the benefits, and how it can be done.
Thanks for reading this weeks post, and I hope you have a great week!
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