Whether you’re a beginner or experienced real estate investor, you're bound to come across the BRRRR method used for real estate investing, and for good reason. It's one of the many ways to invest in real estate.
In this article, we’ll share what the BRRRR method is as well as cover its benefits and potential downsides. If implemented correctly, the BRRRR method can be a great strategy for increasing your rental portfolio significantly over a short amount of time.
What is the BRRR method?
The BRRR method is an acronym that stands for buy, rehab, rent, refinance, and repeat. Let's break it down.
- Buy — Purchase a property that needs some sprucing up.
- Rehab — Improve the property; you could hire people if it’s in your budget to do the manual work for you. Most people using BRRRR tend to do the majority of the work themselves to keep costs low.
- Rent — Find a tenant and rent out the property.
- Refinance — If you used a loan to buy the property, you could use a cash-out refinance to rid yourself of the original loan.
- Repeat — Any profit or leftover refinance money can be used to purchase your next property.
Benefits of the BRRRR method
The BRRRR method wouldn’t be one of the most popular real estate investment strategies if it didn't work. Here are some of the benefits when you use the BRRR method.
- You can own a large property portfolio without having your own cash tied up between them for long periods of time. If you went with the traditional method and got a mortgage on these properties, you’d have cash tied up for a long period of time.
- Once you’ve got a tenant in place and the property has been renovated, you’ll be able to get cash back out of the property using cash-out refinancing method, which allows you to invest in another additional rental property.
Downsides of the BRRRR method
Here are some of the downsides of the BRRRR method.
- With any investing strategy, there will always be drawbacks; no method is perfect. A possible negative side to this method is that renovations can take time and there's no guarantee your renovations will significantly improve the value of the rental property purchased.
- Another downside would be that the value of your property is market dependent. If you purchase a property and the real estate market does down, you could be on the hook for some serious financial loss short term. While you can wait things out, this means your cash is tied up until the market goes up again.
BRRRR method for real estate
The BRRRR method is a popular though hands-on approach to real estate investing.
Here’s what to do to get started.
The first and most important step is to find a property to buy. Of course, you’ll want to find a property that is somewhat undervalued. Doing your research here is key. What are the homes in the area going for at market rate? What makes the houses being sold special?
Take a stroll around a few neighborhoods for potential investments, or take a look on a listing site. Auction houses are another great option for finding properties at a low price.
Once you find a few potential investment properties, you’ll need to take a deeper look to see if they’re financially viable in the long term. You can use the after repair value (ARV) formula to understand how much you can get from refinancing and the general value of the property if you decide to just flip the home.
Another thing you should be doing is a rent analysis; you’ll be able to determine if the property is suited to being a profitable long-term rental property. Take a look at this insightful video on how to analyze your rental property.
The next step in the buying process is to get the cash to pay for the property; if you’ve got your own cash, you can buy it outright.
If you don’t have the cash on hand, you’ll most likely not be eligible for a standard mortgage considering the property will likely require significant renovation and repairs. In this case, you can go down the route of private financing or a less than ideal loan.
These options don’t have as many requirements, but they’re expensive to pay back, which is why most people try to pay them off as soon as possible.
The sooner you get your rehab phase completed, the better. Most people try to complete this phase by themselves with some help from friends or family. With the BRRRR method this is where the money is made.
Go into the rehab phase with a specific budget in mind and do everything you can to keep costs low. The interest payments on loans can quickly eat into your margin, which is why it’s important you plan out the entire project with precision.
It’s important not to get too strung upon making the rental property perfect; the goal is to make it habitable and comfortable for the tenants and to get out of any loans ASAP.
If it’s your first time renting, make sure you’re brushing up on your legal rights as a landlord and those of your tenant, a good start is this linked resource.
You should also be prepared to pay for any repairs you’re liable to fix for your tenant, maybe keep a small fund for such issues when they arise.
If you’re wondering how to decide on a price, a very basic way is to reference what other properties are renting for in the local area.
There are also a few online tools that can help you determine a fair price. After you’ve advertised your property, it could be a few days or a few weeks before you get your first tenant.
Having a tenant in place brings stability, security, and a steady income; this will then be more attractive for you to refinance the home with the help of a lender. Lenders will have very particular criteria for you to follow, and it’s important you follow these requirements to an absolute T.
This will speed up the process for you; finding a lender is the hardest part of the process. It is also a good idea to start building a relationship with one specific lender and agent; this will make your life much easier in the long run.
It’s worth noting that banks will generally only support you with refinance payment equating to 75% of the appraised value of the property, so if you’re looking to use this to buy another property, have a plan if the valuation doesn’t go the way you initially thought.
5) Repeat the process
If you get through the full process without any additional, unexpected costs, then you might be able to supplement the refinancing money, ultimately lowering the loan amount needed for the second property. Whether you're giving the BRRRR method a try and calling it a day, or wanting to try it again, simply follow the steps above and rinse and repeat.
Alternatives to the BRRRR method
As you can probably tell, the process is quite labor-intensive if you’re trying to maximize the profit margin by completing the refurbishments yourself. But, there are real estate investing options to consider.
1) Traditional real estate investing
The most common method of real estate investing would be to buy a property that’s already in good shape using a mortgage and then pay off the mortgage with the rent you receive from the tenants. Many investors buy multi-family properties, live in one of the units, and rent out the remainder.
2) Group Investments
One way to take some risk off the table is to form a group of real estate investors and spread the risk and cash minimum across multiple people. If you’re going to rehab the property, it’ll be complete much faster and work out to be cheaper per person.
The issue with group investments you have to share the profits with the other investors, but if you own multiple properties together, the rent payments will slowly grow.
Investing in digital real estate with the Parcl Protocol
Investing in real estate via the Parcl Protocol requires zero labor and you don’t need the huge cash requirements that you’d need with traditional investing.
The Parcl Protocol is a blockchain-based synthetic real estate protocol which basically means you can invest in the price movement of your favorite neighborhoods like Manhattan, Miami, and Phoenix, and trade it like you’d trade any other liquid asset.
The trading platform is built to be an easy and cost effective way for investors from all backgrounds to get real estate exposure. The price feed is determined by Parcl’s property valuation database, which leverages public transaction data, tax assessments, & property listing data.
The BRRRR method is popular real estate investing strategy and can be profitable if done correctly but it still exposes you to a fair amount of risk. Whether that be unexpected refurbishment or labor costs, these setbacks could quickly eat away at your profit margins.
If you enjoy the real estate markets and don't mind putting in the work, it's a great investment strategy to consider.
BRRRR method FAQ
What is the BRRRR method?
The frequently used acronym stands for:
How much do you need to BRRRR?
Generally it's recommended to have budget 50-150k USD per property you wish to apply the BRRRR method.