The BRRRR Method
The BRRRR method is a popular real estate investment strategy. The acronym stands for:
B - Buy
R - Rehab
R - Rent
R - Refinance
R - Repeat
This strategy allows investors to buy a property, renovate it, rent it out, refinance it, and then use the proceeds to buy more properties. In this blog post, I'll quickly go through each step of the BRRRR method and provide tips for implementing it successfully. The strategy is built around purchasing a distressed property that you can force appreciation on through value add. The value can be added via renovation, rent raises, improved property management, or all of the above.
Once the value plan has been executed, the asset is leased out to cover the expenses (and ideally have some profit on top of that), the initial investment is replenished through a cash out refinance, and the process can be repeated all over again. It is a great method for building wealth that does not require a ton of additional capital outside of your initial investment since you’re able to reuse that investment repeatedly.
Made Up Example:
Purchase distressed property for 75k
Put 25k of renovation into the property
The After Repair Value of the property is 125k (based on market comparables)
Cash out refinance the property with 80% Loan To Value (i.e. 20% down payment), resulting in a tax free check (since it’s a loan) for 100k back in your pocket
Your initial investment is returned and you’re able to do the whole process again while your assets appreciate, cash flow, and pay down the loan balance
Buy
The first step of the BRRRR method is to find a property to purchase. To ensure that you're getting a good deal, you should research the market and look for properties that are undervalued or in need of repairs. You should also have a clear idea of what type of property you're looking for, such as a single-family home or a multi-unit apartment building. I have typically stuck with single-family homes because they tend to have better comps and are more affordable.
The property purchase price + the estimated renovation costs should be less than 80% of the after repair value (ARV). I choose 80% because that is the loan to value ration I’m able to get on my commercial loans. In reality, it is difficult to hit below this mark (especially in today’s market), however, try to get as close as you can.
Rehab
Once you've purchased the property, the next step is to rehab it. This involves making any necessary repairs or renovations to the property to increase its value and make it more attractive to potential renters. You should work with contractors or other professionals to ensure that the work is done properly and within budget. Of course, finding a good contractor is one of the hardest things to do. It has taken me several years to find a reliable contractor that I can use for every project. In general, it is worth paying up a little bit for a higher quality contractor and in the end will actually save you money because the project will be done right the first time. We’ll explore choosing a contractor in more detail in another blog post.
Rent
After the property has been rehabbed, the next step is to find tenants and start generating rental income. You should advertise the property on rental websites and social media platforms, and screen potential tenants to ensure that they're reliable and responsible. I use a property management group and leave the placing of tenants and property management to them so that I can focus on the next deals.
Refinance
The next step is to refinance the property. This involves getting a new mortgage on the property based on its current value, which should be higher than the purchase price due to the renovations and rental income that allowed us to “force” appreciation. You can then use the proceeds from the refinance to pay off the initial mortgage and reinvest in more properties.
Note that the Rent and Refinance steps can vary in order depending on your market and lender. I typically am able to refinance my property before it is rented out as long as there are strong rental comps in the area to justify it.
Repeat
The final step of the BRRRR method is to repeat the process with new properties. You can use the rental income and equity from the previous property to purchase and rehab new properties, allowing you to grow your real estate portfolio and generate even more passive income.
This strategy has been what I have used to purchase over 14 doors (9 properties) over the past few years. It is a slow but steady way to build up your cashflow and have a sure fire way to get to financial independence.
Implementing the BRRRR method successfully requires careful planning, research, and execution. Here are some tips to help you make the most of this investment strategy:
Start with a clear investment plan and set realistic goals for your real estate portfolio.
Work with experienced professionals, such as real estate agents, contractors, and property managers, to ensure that each step of the process is done properly.
Research the local real estate market and stay up-to-date on industry trends and regulations.
Have a contingency plan in case of unexpected expenses or setbacks during the rehab or rental process.
Be patient and persistent, as building a successful real estate portfolio takes time and effort.
At the time of this writing, we have been living in an environment where the Fed has been raising rates aggressively over the past year. This type of high interest rate environment can make it trickier to find properties that can satisfy the requirements for a BRRRR implementation. I have observed that the monthly mortgage interest rates are increasing faster than rental rates have been rising, making it difficult to find properties that meet BRRRR criteria. That being said, Engineered Cash Flow LLC successfully completed two BRRRR projects last year. The deals are there, it just takes dedication and a strong network to find them.
One of the key advantages of this approach is that it attempts to recycle your capital, allowing you to grow your cash flow and net worth without having to continually save up enough to purchase a property. It is a powerful real estate investment strategy that can help you grow your portfolio and generate passive income.
