How to increase your passive income with the BRRRR method
The BRRRR Method
Imagine yourself attending a real estate investment networking event and you hear someone say “BRRRRR.” Chances are, your colleague isn’t commenting on the temperature of the room but is discussing a popular investment strategy known as the BRRRR Method. Anyone wondering how to build wealth in real estate should consider this unique framework that represents a hybrid of active and passive income.
Meaning of BRRRR
The BRRRR method means “Buy, Renovate, Rent, Refinance, Return”, in English: “buy, rehab, rent, refinance, repeat”
and describes a strategy and framework used by investors looking to build passive income over time. These acronyms represent steps that must be implemented in the exact order in which they appear. First, an investor purchases a property and proceeds with the renovation. The renovated property is then rented out to tenants for an extended period, through which the rental income can allow the owner to pay off the mortgage, earn a profit, and build equity over time. Once a significant amount of equity has been built in the property, the investor can purchase a second property by refinancing the first, and so on.
Matt Woodley of Mover Focus states that “The BRRRR method is a real estate investment strategy that helps investors identify, research, and purchase properties at a discount. The BRRRR method involves three steps: brainstorming, researching, and reselling. By brainstorming potential investment properties, investors can understand the market and find undervalued properties. After researching, investors can determine whether or not the property is worth purchasing and make any necessary repairs or upgrades. Finally, after purchasing and renovating, the property can be resold at a profit.”
Click to increase your passive income with the BRRRR method
buy
The first letter in the BRRRR method is 'B', which stands for Buy. When searching through listings, remember that this step serves as a critical point and determines the outcome of the investment. There is a tricky intersection between ensuring that a property represents a sound investment deal and ensuring good performance as a rental property.
This will require extensive deal analysis, including calculating the cost of renovations, estimating monthly rental expenses, and confirming that the rental income generated will provide a satisfactory profit margin. Ensuring a strong performance of a rental property may include researching the best rental markets and ensuring that the purchase price provides enough buffer to allow for renovation costs. Many investors rely on the 70 percent rule, which estimates the cost of repairs and after-repairs, to help determine a maximum offer for a property. Using this rule, they can better ensure that a profit remains after the property is renovated.
renovation
At the most basic level, landlords need to identify how to make their rental properties habitable and functional. Once these requirements are met, updates or renovations can be considered that add value to the property (and thus justify increasing rental rates). On the other hand, investors should be wary of making excessive upgrades that will cost more than can be generated in rental income.
The renovation phase of the BRRRR strategy, representing the first of four ‘R’s, requires a thorough cost-benefit analysis at each stage. Investors are advised to only choose home renovation projects that will provide a high return on investment. Here are a few high-ROI rehab projects to look out for:
Roof repairs: It is common for appraisers to refund the money you spent on the property value when adding a new roof.
Updated Kitchen: Kitchens are often unattractive, but many of the features may still be usable. Also, homes with remodeled kitchens are not eligible for financing, which often results in a cash purchase. Home renovations have been proven to have a high ROI.
Drywall Repair: Drywall damage also makes a home ineligible for financing. While this may be a red flag for most homebuyers, it can be an opportunity for remodelers since drywall is actually very inexpensive to repair.
Landscaping: Simple landscaping projects, such as removing overgrown vegetation, can be done for you at little cost. This type of landscaping also doesn't require a professional to complete, making it an inexpensive remodeling project.
Bathroom Updates: Bathrooms are usually not very large and their material and labor costs are inexpensive. Updating your bathroom will allow your home to compete with higher quality homes in the area at a small cost to you.
Additional Bedrooms: Homes with an unusual amount of square footage but lacking enough bedrooms offer renovators an opportunity to increase value at little cost to themselves. Increasing a home's bedroom count to 3 or 4 will allow it to be more competitive with higher-end properties in the area.
renting
Once the property renovation phase is complete, the investor can proceed with the rental phase of the process. This may include screening and selecting tenants, managing turnover, and responding to maintenance and repair requests. After a period of time, an investor will typically understand whether their due diligence practices were satisfactory. Possible things that can go wrong include vacancies, bad tenants, or rental expenses that exceed the income generated. All of these possible outcomes can quickly drive a property underwater, increasing the risk of foreclosure. This is not intended to scare investors away from becoming a homeowner or engaging in the BRRRR strategy, but rather to emphasize the importance of running the numbers properly before making any investment decisions.
מימון
Once your property has been renovated and effectively rented out, you can begin to devise a plan for how to refinance it. Some banks will offer a cash-out refinance, while others will only offer to pay off the existing debt; you will want to choose the former of these two options. You will also want to pay attention to the required “seasoning period,” which indicates how long you must own the property before the lender will consider refinancing against the value of the property. While you may encounter a few banks that are unwilling to refinance single-family rental properties, investors can usually tap into their networks to find a lender that is a good fit for their refinancing needs.
Return
Finally, the investor can use the refinancing of their first rental property to finance the purchase and renovation of the second. Cash-out refinancing offers additional benefits, such as interest rates that are often favorable compared to other sources of capital, tax benefits, and control over your financial timeline. Faced with the learning curve, an investor is sure to encounter some difficulties and mistakes from their first BRRRR cycle. However, they can apply their experience and newly acquired wisdom when they tackle their second, third, or fourth property, and so on.
Example of the BRRRR method
Reviewing an example of the BRRRR real estate strategy can help illustrate how to perform each step.
Let's say Johnny lives in Austin, Texas, and he's interested in purchasing a home to take advantage of the booming rental market there. He finds a property for $200,000 and runs the numbers on the deal. Johnny can put down $40,000 and takes out a loan for the remaining $160,000. After touring the house with a contractor, Johnny decides to spend $10,000 renovating the property. So far, we have the following numbers:
Selling price: $200,000
Down payment: $40,000
Loan amount: $160,000
Renovation costs: $10,000
After the renovations are complete, the property is appraised at $250,000, and Johnny can rent it for $2,500. About a year later, Johnny refinances and takes out a loan for 75 percent of the appraised value: $187,500. He then uses that amount to pay off the original $160,000 loan, leaving him with $27,500 (plus the ongoing monthly rental income) to purchase and renovate another property. The more Johnny follows this process, the more assets he can accumulate to invest over time. While this example uses simplified numbers, it should help illustrate the BRRRR process in action.
How to finance BRRRR assets
One of the most difficult hurdles for beginning investors is figuring out how to finance BRRRR properties. Typically, you will need to finance the property more than once. First, when you purchase the property, and second for any repairs or improvements. Most beginning investors do not have the funds to finance the property without a loan. If you are purchasing a property for the first time, Here are several options:
Conventional bank loans: You will need about 20% - 25% as a down payment. However, the interest rate should be similar to that of an owner-occupied loan. It is important to note that if the property is in poor enough condition, the bank may not offer you a loan to purchase it.
Local Bank Loans: Local banks offer a significantly greater amount of flexibility when lending for rental properties. While they will likely require the same down payment as conventional bank loans, they may also waive any repair costs. They also offer flexibility around mortgage limits and debt-to-income ratio issues.
Private lenders: Private money is purchased from people you know personally, whether it’s family, friends, business partners, or other investors. In this case, rates can vary depending on the property and your relationship with the lender. It’s common for private lenders to also finance any repairs the property needs.
Hard Money Lenders: These lenders specialize in lending to homebuyers and rental investors. The cost and rates of hard money lenders are usually higher than bank loans. However, they will likely cover repairs and improvements.
Refinancing a BRRR property
There are two main ways to refinance your BRRR property. One option is through conventional financing. This option is the most popular and comes with the lowest interest rates available. Another option to refinance can be found in commercial financing, although they come with higher interest rates.
BRRRR Advantages
Every investment strategy will promise certain benefits while carrying a certain level of risk, and the BRRRR method is no exception. Before implementing any strategy, be sure to review the pros and cons and determine for yourself whether or not BRRRR is the right strategy for you:
Potential for Return: One of the main advantages is the potential for 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: Consideration should also be given to the amount of equity built during the rehabilitation phase. When pursuing a passive income strategy, many investors only create cash flow from a property that is worth the price at which it was purchased.
Top-notch tenants: If a property has been properly renovated to meet consumer standards in a specific market, it is likely to attract top-notch tenants. Tenants who are willing to pay top dollar for their rental property in exchange for certain features and amenities are more likely to take better care of the property and reduce their expenses. Better tenants often translate directly into improved cash flow.
Economies of Scale: Once you reach your BRRRR milestone, you can achieve something called economies of scale, where owning and operating multiple rental properties at once can help you lower your overall costs by reducing your average cost per property and spreading your risk.
BRRRRR Disadvantages
The following list helps shed some light on potential risks associated with the BRRRR strategy. However, it should be noted that these points are not necessarily disadvantages. Instead, they warn investors of what can happen if they are not careful and do not stand up to their due diligence:
Expensive loans: When choosing to use a short-term loan or hard money to finance a property purchase, investors can find themselves overly leveraged, especially during the renovation phase. According to Brian, a real estate investor and founder of SparkRental.com, “Too many new investors underestimate expenses like repairs, maintenance, vacancy rates, and other irregular but unavoidable expenses that don’t hit you every month.” Investors should make sure they know how they will make mortgage payments while the property isn’t generating any income.
Renovation: Taking on a major renovation project can be expensive, with many headaches along the way. Renovation means dealing with project schedules, managing contractors and subcontractors, and dealing with unexpected problems. Make sure you have the right resources and contingency plans before tackling a project.
Waiting Period: BRRRR is a strategy with a longer time horizon, involving at least two waiting periods. The first is during the renovation phase, where the investor must improve a property before they can place tenants and start earning income. The second waiting period is seasoning, a term that describes the period an investor must wait before a lender allows cash financing.
Valuation risk: Investors typically refinance a property based on the property’s valuation, rather than how much money they paid into it. There is always a risk that the property will not be valued at the expected amount. This should serve as a warning that running the numbers correctly up front is essential.
Who should use the BRRRR method?
The BRRRR method is perfect for investors looking to build a passive income portfolio from start to finish. The process is more demanding than purchasing a rental unit, although it can be very rewarding. Investors who are comfortable with a certain level of risk, who have the capital available for an initial down payment, and who are willing to roll up their sleeves and do in-depth market research will be well-suited to this real estate strategy.
Who should not use the BRRRR method?
One of the biggest determinants of whether or not the BRRR method is right for you is whether or not you are willing to take on a renovation project. Arguably, this is the most intensive step required in the BRRRR method; and those who don’t have the time or dedication to see a renovation through will not find success. For those who are intimidated by the thought of managing a renovation but still want to implement the BRRRR strategy, I recommend building a strong real estate team. This could be a business partner who is willing to be more hands-on if you provide the capital. Alternatively, it could be finding a reliable contractor who can handle the bulk of the renovation process.
How much can you earn with the BRRRR method?
Investors can achieve significant returns with the BRRRR method, if they are able to secure the right purchase price for each property. Investors should also pay close attention to the market, as this will determine how well they are able to find consistent tenants and generate rental income. Essentially, the amount of money you can make with the BRRRR method comes down to how well you can find great leads at all stages of the process. As you can imagine, results can vary depending on a number of factors in financing methods. Always do your due diligence and be sure to develop a reliable system for analyzing potential investments.
Alternatives to the BRRRR method
If you decide that the BRRRR method is not the right real estate investment strategy for you, there are other strategies you can try. One option is to purchase a property and rent it out, collecting the monthly rent paid on the property. Another option is to crowdfund real estate. This is the process of leveraging financing from a wide range of investors who pool their money to purchase real estate, allowing for investments that are made with less money and work.
Imagine yourself attending a real estate investment networking event and you hear someone say “BRRRRR.” Chances are, your colleague isn’t commenting on the temperature of the room but is discussing a popular investment strategy known as the BRRRR Method. Anyone wondering how to build wealth in real estate should consider this unique framework that represents a hybrid of active and passive income.
Meaning of BRRRR
The BRRRR method means “Buy, Renovate, Rent, Refinance, Return”, in English: “buy, rehab, rent, refinance, repeat”
and describes a strategy and framework used by investors looking to build passive income over time. These acronyms represent steps that must be implemented in the exact order in which they appear. First, an investor purchases a property and proceeds with the renovation. The renovated property is then rented out to tenants for an extended period, through which the rental income can allow the owner to pay off the mortgage, earn a profit, and build equity over time. Once a significant amount of equity has been built in the property, the investor can purchase a second property by refinancing the first, and so on.
Matt Woodley of Mover Focus states that “The BRRRR method is a real estate investment strategy that helps investors identify, research, and purchase properties at a discount. The BRRRR method involves three steps: brainstorming, researching, and reselling. By brainstorming potential investment properties, investors can understand the market and find undervalued properties. After researching, investors can determine whether or not the property is worth purchasing and make any necessary repairs or upgrades. Finally, after purchasing and renovating, the property can be resold at a profit.”
Click to increase your passive income with the BRRRR method
buy
The first letter in the BRRRR method is 'B', which stands for Buy. When searching through listings, remember that this step serves as a critical point and determines the outcome of the investment. There is a tricky intersection between ensuring that a property represents a sound investment deal and ensuring good performance as a rental property.
This will require extensive deal analysis, including calculating the cost of renovations, estimating monthly rental expenses, and confirming that the rental income generated will provide a satisfactory profit margin. Ensuring a strong performance of a rental property may include researching the best rental markets and ensuring that the purchase price provides enough buffer to allow for renovation costs. Many investors rely on the 70 percent rule, which estimates the cost of repairs and after-repairs, to help determine a maximum offer for a property. Using this rule, they can better ensure that a profit remains after the property is renovated.
renovation
At the most basic level, landlords need to identify how to make their rental properties habitable and functional. Once these requirements are met, updates or renovations can be considered that add value to the property (and thus justify increasing rental rates). On the other hand, investors should be wary of making excessive upgrades that will cost more than can be generated in rental income.
The renovation phase of the BRRRR strategy, representing the first of four ‘R’s, requires a thorough cost-benefit analysis at each stage. Investors are advised to only choose home renovation projects that will provide a high return on investment. Here are a few high-ROI rehab projects to look out for:
Roof repairs: It is common for appraisers to refund the money you spent on the property value when adding a new roof.
Updated Kitchen: Kitchens are often unattractive, but many of the features may still be usable. Also, homes with remodeled kitchens are not eligible for financing, which often results in a cash purchase. Home renovations have been proven to have a high ROI.
Drywall Repair: Drywall damage also makes a home ineligible for financing. While this may be a red flag for most homebuyers, it can be an opportunity for remodelers since drywall is actually very inexpensive to repair.
Landscaping: Simple landscaping projects, such as removing overgrown vegetation, can be done for you at little cost. This type of landscaping also doesn't require a professional to complete, making it an inexpensive remodeling project.
Bathroom Updates: Bathrooms are usually not very large and their material and labor costs are inexpensive. Updating your bathroom will allow your home to compete with higher quality homes in the area at a small cost to you.
Additional Bedrooms: Homes with an unusual amount of square footage but lacking enough bedrooms offer renovators an opportunity to increase value at little cost to themselves. Increasing a home's bedroom count to 3 or 4 will allow it to be more competitive with higher-end properties in the area.
renting
Once the property renovation phase is complete, the investor can proceed with the rental phase of the process. This may include screening and selecting tenants, managing turnover, and responding to maintenance and repair requests. After a period of time, an investor will typically understand whether their due diligence practices were satisfactory. Possible things that can go wrong include vacancies, bad tenants, or rental expenses that exceed the income generated. All of these possible outcomes can quickly drive a property underwater, increasing the risk of foreclosure. This is not intended to scare investors away from becoming a homeowner or engaging in the BRRRR strategy, but rather to emphasize the importance of running the numbers properly before making any investment decisions.
מימון
Once your property has been renovated and effectively rented out, you can begin to devise a plan for how to refinance it. Some banks will offer a cash-out refinance, while others will only offer to pay off the existing debt; you will want to choose the former of these two options. You will also want to pay attention to the required “seasoning period,” which indicates how long you must own the property before the lender will consider refinancing against the value of the property. While you may encounter a few banks that are unwilling to refinance single-family rental properties, investors can usually tap into their networks to find a lender that is a good fit for their refinancing needs.
Return
Finally, the investor can use the refinancing of their first rental property to finance the purchase and renovation of the second. Cash-out refinancing offers additional benefits, such as interest rates that are often favorable compared to other sources of capital, tax benefits, and control over your financial timeline. Faced with the learning curve, an investor is sure to encounter some difficulties and mistakes from their first BRRRR cycle. However, they can apply their experience and newly acquired wisdom when they tackle their second, third, or fourth property, and so on.
Example of the BRRRR method
Reviewing an example of the BRRRR real estate strategy can help illustrate how to perform each step.
Let's say Johnny lives in Austin, Texas, and he's interested in purchasing a home to take advantage of the booming rental market there. He finds a property for $200,000 and runs the numbers on the deal. Johnny can put down $40,000 and takes out a loan for the remaining $160,000. After touring the house with a contractor, Johnny decides to spend $10,000 renovating the property. So far, we have the following numbers:
Selling price: $200,000
Down payment: $40,000
Loan amount: $160,000
Renovation costs: $10,000
After the renovations are complete, the property is appraised at $250,000, and Johnny can rent it for $2,500. About a year later, Johnny refinances and takes out a loan for 75 percent of the appraised value: $187,500. He then uses that amount to pay off the original $160,000 loan, leaving him with $27,500 (plus the ongoing monthly rental income) to purchase and renovate another property. The more Johnny follows this process, the more assets he can accumulate to invest over time. While this example uses simplified numbers, it should help illustrate the BRRRR process in action.
How to finance BRRRR assets
One of the most difficult hurdles for beginning investors is figuring out how to finance BRRRR properties. Typically, you will need to finance the property more than once. First, when you purchase the property, and second for any repairs or improvements. Most beginning investors do not have the funds to finance the property without a loan. If you are purchasing a property for the first time, Here are several options:
Conventional bank loans: You will need about 20% - 25% as a down payment. However, the interest rate should be similar to that of an owner-occupied loan. It is important to note that if the property is in poor enough condition, the bank may not offer you a loan to purchase it.
Local Bank Loans: Local banks offer a significantly greater amount of flexibility when lending for rental properties. While they will likely require the same down payment as conventional bank loans, they may also waive any repair costs. They also offer flexibility around mortgage limits and debt-to-income ratio issues.
Private lenders: Private money is purchased from people you know personally, whether it’s family, friends, business partners, or other investors. In this case, rates can vary depending on the property and your relationship with the lender. It’s common for private lenders to also finance any repairs the property needs.
Hard Money Lenders: These lenders specialize in lending to homebuyers and rental investors. The cost and rates of hard money lenders are usually higher than bank loans. However, they will likely cover repairs and improvements.
Refinancing a BRRR property
There are two main ways to refinance your BRRR property. One option is through conventional financing. This option is the most popular and comes with the lowest interest rates available. Another option to refinance can be found in commercial financing, although they come with higher interest rates.
BRRRR Advantages
Every investment strategy will promise certain benefits while carrying a certain level of risk, and the BRRRR method is no exception. Before implementing any strategy, be sure to review the pros and cons and determine for yourself whether or not BRRRR is the right strategy for you:
Potential for Return: One of the main advantages is the potential for 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: Consideration should also be given to the amount of equity built during the rehabilitation phase. When pursuing a passive income strategy, many investors only create cash flow from a property that is worth the price at which it was purchased.
Top-notch tenants: If a property has been properly renovated to meet consumer standards in a specific market, it is likely to attract top-notch tenants. Tenants who are willing to pay top dollar for their rental property in exchange for certain features and amenities are more likely to take better care of the property and reduce their expenses. Better tenants often translate directly into improved cash flow.
Economies of Scale: Once you reach your BRRRR milestone, you can achieve something called economies of scale, where owning and operating multiple rental properties at once can help you lower your overall costs by reducing your average cost per property and spreading your risk.
BRRRRR Disadvantages
The following list helps shed some light on potential risks associated with the BRRRR strategy. However, it should be noted that these points are not necessarily disadvantages. Instead, they warn investors of what can happen if they are not careful and do not stand up to their due diligence:
Expensive loans: When choosing to use a short-term loan or hard money to finance a property purchase, investors can find themselves overly leveraged, especially during the renovation phase. According to Brian, a real estate investor and founder of SparkRental.com, “Too many new investors underestimate expenses like repairs, maintenance, vacancy rates, and other irregular but unavoidable expenses that don’t hit you every month.” Investors should make sure they know how they will make mortgage payments while the property isn’t generating any income.
Renovation: Taking on a major renovation project can be expensive, with many headaches along the way. Renovation means dealing with project schedules, managing contractors and subcontractors, and dealing with unexpected problems. Make sure you have the right resources and contingency plans before tackling a project.
Waiting Period: BRRRR is a strategy with a longer time horizon, involving at least two waiting periods. The first is during the renovation phase, where the investor must improve a property before they can place tenants and start earning income. The second waiting period is seasoning, a term that describes the period an investor must wait before a lender allows cash financing.
Valuation risk: Investors typically refinance a property based on the property’s valuation, rather than how much money they paid into it. There is always a risk that the property will not be valued at the expected amount. This should serve as a warning that running the numbers correctly up front is essential.
Who should use the BRRRR method?
The BRRRR method is perfect for investors looking to build a passive income portfolio from start to finish. The process is more demanding than purchasing a rental unit, although it can be very rewarding. Investors who are comfortable with a certain level of risk, who have the capital available for an initial down payment, and who are willing to roll up their sleeves and do in-depth market research will be well-suited to this real estate strategy.
Who should not use the BRRRR method?
One of the biggest determinants of whether or not the BRRR method is right for you is whether or not you are willing to take on a renovation project. Arguably, this is the most intensive step required in the BRRRR method; and those who don’t have the time or dedication to see a renovation through will not find success. For those who are intimidated by the thought of managing a renovation but still want to implement the BRRRR strategy, I recommend building a strong real estate team. This could be a business partner who is willing to be more hands-on if you provide the capital. Alternatively, it could be finding a reliable contractor who can handle the bulk of the renovation process.
How much can you earn with the BRRRR method?
Investors can achieve significant returns with the BRRRR method, if they are able to secure the right purchase price for each property. Investors should also pay close attention to the market, as this will determine how well they are able to find consistent tenants and generate rental income. Essentially, the amount of money you can make with the BRRRR method comes down to how well you can find great leads at all stages of the process. As you can imagine, results can vary depending on a number of factors in financing methods. Always do your due diligence and be sure to develop a reliable system for analyzing potential investments.
Alternatives to the BRRRR method
If you decide that the BRRRR method is not the right real estate investment strategy for you, there are other strategies you can try. One option is to purchase a property and rent it out, collecting the monthly rent paid on the property. Another option is to crowdfund real estate. This is the process of leveraging financing from a wide range of investors who pool their money to purchase real estate, allowing for investments that are made with less money and work.
Imagine yourself attending a real estate investment networking event and you hear someone say “BRRRRR.” Chances are, your colleague isn’t commenting on the temperature of the room but is discussing a popular investment strategy known as the BRRRR Method. Anyone wondering how to build wealth in real estate should consider this unique framework that represents a hybrid of active and passive income.
Meaning of BRRRR
The BRRRR method means “Buy, Renovate, Rent, Refinance, Return”, in English: “buy, rehab, rent, refinance, repeat”
and describes a strategy and framework used by investors looking to build passive income over time. These acronyms represent steps that must be implemented in the exact order in which they appear. First, an investor purchases a property and proceeds with the renovation. The renovated property is then rented out to tenants for an extended period, through which the rental income can allow the owner to pay off the mortgage, earn a profit, and build equity over time. Once a significant amount of equity has been built in the property, the investor can purchase a second property by refinancing the first, and so on.
Matt Woodley of Mover Focus states that “The BRRRR method is a real estate investment strategy that helps investors identify, research, and purchase properties at a discount. The BRRRR method involves three steps: brainstorming, researching, and reselling. By brainstorming potential investment properties, investors can understand the market and find undervalued properties. After researching, investors can determine whether or not the property is worth purchasing and make any necessary repairs or upgrades. Finally, after purchasing and renovating, the property can be resold at a profit.”
buy
The first letter in the BRRRR method is 'B', which stands for Buy. When searching through listings, remember that this step serves as a critical point and determines the outcome of the investment. There is a tricky intersection between ensuring that a property represents a sound investment deal and ensuring good performance as a rental property.
This will require extensive deal analysis, including calculating the cost of renovations, estimating monthly rental expenses, and confirming that the rental income generated will provide a satisfactory profit margin. Ensuring a strong performance of a rental property may include researching the best rental markets and ensuring that the purchase price provides enough buffer to allow for renovation costs. Many investors rely on the 70 percent rule, which estimates the cost of repairs and after-repairs, to help determine a maximum offer for a property. Using this rule, they can better ensure that a profit remains after the property is renovated.
renovation
At the most basic level, landlords need to identify how to make their rental properties habitable and functional. Once these requirements are met, updates or renovations can be considered that add value to the property (and thus justify increasing rental rates). On the other hand, investors should be wary of making excessive upgrades that will cost more than can be generated in rental income.
The renovation phase of the BRRRR strategy, representing the first of four ‘R’s, requires a thorough cost-benefit analysis at each stage. Investors are advised to only choose home renovation projects that will provide a high return on investment. Here are a few high-ROI rehab projects to look out for:
Roof repairs: It is common for appraisers to refund the money you spent on the property value when adding a new roof.
Updated Kitchen: Kitchens are often unattractive, but many of the features may still be usable. Also, homes with remodeled kitchens are not eligible for financing, which often results in a cash purchase. Home renovations have been proven to have a high ROI.
Drywall Repair: Drywall damage also makes a home ineligible for financing. While this may be a red flag for most homebuyers, it can be an opportunity for remodelers since drywall is actually very inexpensive to repair.
Landscaping: Simple landscaping projects, such as removing overgrown vegetation, can be done for you at little cost. This type of landscaping also doesn't require a professional to complete, making it an inexpensive remodeling project.
Bathroom Updates: Bathrooms are usually not very large and their material and labor costs are inexpensive. Updating your bathroom will allow your home to compete with higher quality homes in the area at a small cost to you.
Additional Bedrooms: Homes with an unusual amount of square footage but lacking enough bedrooms offer renovators an opportunity to increase value at little cost to themselves. Increasing a home's bedroom count to 3 or 4 will allow it to be more competitive with higher-end properties in the area.
renting
Once the property renovation phase is complete, the investor can proceed with the rental phase of the process. This may include screening and selecting tenants, managing turnover, and responding to maintenance and repair requests. After a period of time, an investor will typically understand whether their due diligence practices were satisfactory. Possible things that can go wrong include vacancies, bad tenants, or rental expenses that exceed the income generated. All of these possible outcomes can quickly drive a property underwater, increasing the risk of foreclosure. This is not intended to scare investors away from becoming a homeowner or engaging in the BRRRR strategy, but rather to emphasize the importance of running the numbers properly before making any investment decisions.
מימון
Once your property has been renovated and effectively rented out, you can begin to devise a plan for how to refinance it. Some banks will offer a cash-out refinance, while others will only offer to pay off the existing debt; you will want to choose the former of these two options. You will also want to pay attention to the required “seasoning period,” which indicates how long you must own the property before the lender will consider refinancing against the value of the property. While you may encounter a few banks that are unwilling to refinance single-family rental properties, investors can usually tap into their networks to find a lender that is a good fit for their refinancing needs.
Return
Finally, the investor can use the refinancing of their first rental property to finance the purchase and renovation of the second. Cash-out refinancing offers additional benefits, such as interest rates that are often favorable compared to other sources of capital, tax benefits, and control over your financial timeline. Faced with the learning curve, an investor is sure to encounter some difficulties and mistakes from their first BRRRR cycle. However, they can apply their experience and newly acquired wisdom when they tackle their second, third, or fourth property, and so on.
Example of the BRRRR method
Reviewing an example of the BRRRR real estate strategy can help illustrate how to perform each step.
Let's say Johnny lives in Austin, Texas, and he's interested in purchasing a home to take advantage of the booming rental market there. He finds a property for $200,000 and runs the numbers on the deal. Johnny can put down $40,000 and takes out a loan for the remaining $160,000. After touring the house with a contractor, Johnny decides to spend $10,000 renovating the property. So far, we have the following numbers:
Selling price: $200,000
Down payment: $40,000
Loan amount: $160,000
Renovation costs: $10,000
After the renovations are complete, the property is appraised at $250,000, and Johnny can rent it for $2,500. About a year later, Johnny refinances and takes out a loan for 75 percent of the appraised value: $187,500. He then uses that amount to pay off the original $160,000 loan, leaving him with $27,500 (plus the ongoing monthly rental income) to purchase and renovate another property. The more Johnny follows this process, the more assets he can accumulate to invest over time. While this example uses simplified numbers, it should help illustrate the BRRRR process in action.
How to finance BRRRR assets
One of the most difficult hurdles for beginning investors is figuring out how to finance BRRRR properties. Typically, you will need to finance the property more than once. First, when you purchase the property, and second for any repairs or improvements. Most beginning investors do not have the funds to finance the property without a loan. If you are purchasing a property for the first time, Here are several options:
Conventional bank loans: You will need about 20% - 25% as a down payment. However, the interest rate should be similar to that of an owner-occupied loan. It is important to note that if the property is in poor enough condition, the bank may not offer you a loan to purchase it.
Local Bank Loans: Local banks offer a significantly greater amount of flexibility when lending for rental properties. While they will likely require the same down payment as conventional bank loans, they may also waive any repair costs. They also offer flexibility around mortgage limits and debt-to-income ratio issues.
Private lenders: Private money is purchased from people you know personally, whether it’s family, friends, business partners, or other investors. In this case, rates can vary depending on the property and your relationship with the lender. It’s common for private lenders to also finance any repairs the property needs.
Hard Money Lenders: These lenders specialize in lending to homebuyers and rental investors. The cost and rates of hard money lenders are usually higher than bank loans. However, they will likely cover repairs and improvements.
Refinancing a BRRR property
There are two main ways to refinance your BRRR property. One option is through conventional financing. This option is the most popular and comes with the lowest interest rates available. Another option to refinance can be found in commercial financing, although they come with higher interest rates.
BRRRR Advantages
Every investment strategy will promise certain benefits while carrying a certain level of risk, and the BRRRR method is no exception. Before implementing any strategy, be sure to review the pros and cons and determine for yourself whether or not BRRRR is the right strategy for you:
Potential for Return: One of the main advantages is the potential for 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: Consideration should also be given to the amount of equity built during the rehabilitation phase. When pursuing a passive income strategy, many investors only create cash flow from a property that is worth the price at which it was purchased.
Top-notch tenants: If a property has been properly renovated to meet consumer standards in a specific market, it is likely to attract top-notch tenants. Tenants who are willing to pay top dollar for their rental property in exchange for certain features and amenities are more likely to take better care of the property and reduce their expenses. Better tenants often translate directly into improved cash flow.
Economies of Scale: Once you reach your BRRRR milestone, you can achieve something called economies of scale, where owning and operating multiple rental properties at once can help you lower your overall costs by reducing your average cost per property and spreading your risk.
BRRRRR Disadvantages
The following list helps shed some light on potential risks associated with the BRRRR strategy. However, it should be noted that these points are not necessarily disadvantages. Instead, they warn investors of what can happen if they are not careful and do not stand up to their due diligence:
Expensive loans: When choosing to use a short-term loan or hard money to finance a property purchase, investors can find themselves overly leveraged, especially during the renovation phase. According to Brian, a real estate investor and founder of SparkRental.com, “Too many new investors underestimate expenses like repairs, maintenance, vacancy rates, and other irregular but unavoidable expenses that don’t hit you every month.” Investors should make sure they know how they will make mortgage payments while the property isn’t generating any income.
Renovation: Taking on a major renovation project can be expensive, with many headaches along the way. Renovation means dealing with project schedules, managing contractors and subcontractors, and dealing with unexpected problems. Make sure you have the right resources and contingency plans before tackling a project.
Waiting Period: BRRRR is a strategy with a longer time horizon, involving at least two waiting periods. The first is during the renovation phase, where the investor must improve a property before they can place tenants and start earning income. The second waiting period is seasoning, a term that describes the period an investor must wait before a lender allows cash financing.
Valuation risk: Investors typically refinance a property based on the property’s valuation, rather than how much money they paid into it. There is always a risk that the property will not be valued at the expected amount. This should serve as a warning that running the numbers correctly up front is essential.
Who should use the BRRRR method?
The BRRRR method is perfect for investors looking to build a passive income portfolio from start to finish. The process is more demanding than purchasing a rental unit, although it can be very rewarding. Investors who are comfortable with a certain level of risk, who have the capital available for an initial down payment, and who are willing to roll up their sleeves and do in-depth market research will be well-suited to this real estate strategy.
Who should not use the BRRRR method?
One of the biggest determinants of whether or not the BRRR method is right for you is whether or not you are willing to take on a renovation project. Arguably, this is the most intensive step required in the BRRRR method; and those who don’t have the time or dedication to see a renovation through will not find success. For those who are intimidated by the thought of managing a renovation but still want to implement the BRRRR strategy, I recommend building a strong real estate team. This could be a business partner who is willing to be more hands-on if you provide the capital. Alternatively, it could be finding a reliable contractor who can handle the bulk of the renovation process.
How much can you earn with the BRRRR method?
Investors can achieve significant returns with the BRRRR method, if they are able to secure the right purchase price for each property. Investors should also pay close attention to the market, as this will determine how well they are able to find consistent tenants and generate rental income. Essentially, the amount of money you can make with the BRRRR method comes down to how well you can find great leads at all stages of the process. As you can imagine, results can vary depending on a number of factors in financing methods. Always do your due diligence and be sure to develop a reliable system for analyzing potential investments.
Alternatives to the BRRRR method
If you decide that the BRRRR method is not the right real estate investment strategy for you, there are other strategies you can try. One option is to purchase a property and rent it out, collecting the monthly rent paid on the property. Another option is to crowdfund real estate. This is the process of leveraging financing from a wide range of investors who pool their money to purchase real estate, allowing for investments that are made with less money and work.
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