BRRRR is not a weather forecast - it is an acronym for Buy, Rehab, Rent, Refinance, Repeat. The BRRRR method of real estate investing is a great and powerful way to accelerate the buildup of equity in a rental property portfolio and provide financial independence by way of leveraging one property to obtain the next. By building equity in a property through renovations, investors can leverage the after repair value to improve the property's cash flow and invest in additional real estate by refinancing.
The success of a BRRRR investing strategy hinges on rehabbing properties to add value, then tap the equity you have gained as capital to acquire additional properties. You parlay one property into another until you build up a portfolio of profitable rental units. This can be accomplished with single family homes, multi-familiy apartment buildings and even commercial properties.
There is a degree of risk involved in using the BRRRR strategy, but risk can be minimized by careful research and due diligence. What the investor should look for is a rehab project that is within a solid rental market. The project should be one that can be rehabbed with a minimal amount of cost to bring the property up to the standard of the surrounding neighborhood. No one wants to live in the worst house on the block. A nice property in a good neighborhood will be more likely to attract good tenants who are likely to take good care of the property.
Another main benefit is the possibility of a high ROI (return on investment). A distressed property can usually be obtained with a relatively small investment. If the fix-up costs are kept to a reasonable amount, the equity can be substantially raised (for refinancing later) and the property can be rented out for a positive cash flow. In short, there are two main objectives: building equity, and positive cash flow.
Mortgages/Loans: If possible, it is usually best if you can purchase and rehab with cash, as that lowers your overall costs. Other choices can involve banks, other investors or even hard money lenders. Hard money is the most expensive and not recommended if there are other options available. Local banks are often more flexible than the larger banks. Do your due diligence investigating and lining up your financing options - higher costs mean less equity and lower cash flow.
Rehabbing: This part of the method, itself, can incur risk. More often than not, the problems visible to the naked eye are not as they seem. Always plan on cost over-runs for issues that crop up during repairs - you never know what you will find until you open a wall. There is also the time that rehab takes - contractors are nortorious for running behind schedule, which costs you rental income while still having to meet mortgage payments. So it is a good idea to have contractors & suppliers in place and the time budgeted before tackling a rehab.
Another potential risk lies in the eventual appraisal. If the finished property has a lower than expected appraisal, it can result in having to wait to draw out the equity necessary for the next property, or force you to come up with the extra cash necessary (usually from the positive cash flow).
The success of a BRRRR investing strategy hinges on rehabbing properties to add value, then tap the equity you have gained as capital to acquire additional properties. You parlay one property into another until you build up a portfolio of profitable rental units. This can be accomplished with single family homes, multi-familiy apartment buildings and even commercial properties.
There is a degree of risk involved in using the BRRRR strategy, but risk can be minimized by careful research and due diligence. What the investor should look for is a rehab project that is within a solid rental market. The project should be one that can be rehabbed with a minimal amount of cost to bring the property up to the standard of the surrounding neighborhood. No one wants to live in the worst house on the block. A nice property in a good neighborhood will be more likely to attract good tenants who are likely to take good care of the property.
Advantages of the BRRRR Strategy
There are pros and cons with any real estate investing method, and BRRRR is no different. A primary advantage of the BRRRR method is the potential to build an extensive portfolio of rental units for passive income, while increasing net worth. By owning a number of rental properties, it is possible to reduce the overall costs by "expense sharing". For example, if you act as your own groundskeeper, the cost of a good riding mower can be spread out among all the properties.Another main benefit is the possibility of a high ROI (return on investment). A distressed property can usually be obtained with a relatively small investment. If the fix-up costs are kept to a reasonable amount, the equity can be substantially raised (for refinancing later) and the property can be rented out for a positive cash flow. In short, there are two main objectives: building equity, and positive cash flow.
Disadvantages of the BRRRR Method
As mentioned earlier there is always risk associated with any investing strategy. Pay close attention to the following caveats and you should not have any need to be concerned.Mortgages/Loans: If possible, it is usually best if you can purchase and rehab with cash, as that lowers your overall costs. Other choices can involve banks, other investors or even hard money lenders. Hard money is the most expensive and not recommended if there are other options available. Local banks are often more flexible than the larger banks. Do your due diligence investigating and lining up your financing options - higher costs mean less equity and lower cash flow.
Rehabbing: This part of the method, itself, can incur risk. More often than not, the problems visible to the naked eye are not as they seem. Always plan on cost over-runs for issues that crop up during repairs - you never know what you will find until you open a wall. There is also the time that rehab takes - contractors are nortorious for running behind schedule, which costs you rental income while still having to meet mortgage payments. So it is a good idea to have contractors & suppliers in place and the time budgeted before tackling a rehab.
Another potential risk lies in the eventual appraisal. If the finished property has a lower than expected appraisal, it can result in having to wait to draw out the equity necessary for the next property, or force you to come up with the extra cash necessary (usually from the positive cash flow).
Now let's take a look at how you can use the BRRRR strategy to grow your portfolio - and your wealth.
In the buying stage, the goal is to acquire a property that can benefit a good deal from remodeling (rehab) at a reasonable cost to increase the investor's equity enough to be able to pull out as much of that equity as possible to finance the next property. This may sound like a daunting task for the novice, but it need not be so, as outlined below. Finding a property with the potential to effectively add value is key. There are several good sources for learning how to locate a bargain and determine its potential such as "The Simple Man's Guide to Real Estate" by investor/author Bill Vaughn, recommended because it offers many strategies to help accomplish the goal. In addition, it is the only resource found that includes free mentoring for those who need to be walked through their first few transactions. For the "newbie", mentoring can be critical.
When implementing a BRRRR investing strategy many investors use a 70% rule as a guide, meaning that the cost to acquire the property plus rehab costs represent 70% or less of the after-rehab value (ARV) of the property. That is the simple formula. Reality, however, can throw a wrench into it if the investor is not prepared for the additional costs that often come into play. For example, if the property is vacant during the rehab, there are costs of service debt - the mortgage, property taxes and insurance. For that reason it is imperative that the investor be able to effect all remodeling in as short a time span as possible. Know in advance who the contractors and suppliers will be, and what their availability is. The investor might work out an agreement with them that his projects will receive high priority in exchange for all the work that future projects will provide to those contractors and suppliers. Loyalty begets loyalty.
Most rehab projects go over budget, so a conservative number like 70% is wise. That way, if you end up in a situation where acquisition and rehab costs represent 75-80% of ARV, you have still created a reasonable amount of equity to allow you to invest in your next BRRRR property.
The BRRRR strategy works best if you can purchase a property and pay for rehab costs using all cash, to maximize profitability, but that is not necessary. It's also possible to joint venture with other investors or use hard money loans, but those options will increase the cost and complexity.
NOTE: self-employed individuals and couples can take advantage of a relatively new type of 401K called a Self-Directed Solo 401(k). This type of 401(k) is special - it allows the individual to contribute a huge amount of self-employment income (for 2021, the contribution limit increased to $58,000 or $64,500 if age 50 or over) and allows you total "checkbook" control to make investments. When you find a property, simply write out a check. It's that simple, and all profits are tax deferred. This adds a lot of power to your portfolio.
It is strongly advised that the investor avoid rehabbing properties in need of major structural repairs such as a cracked foundation or sagging roof. They are seldom worth the time and money it takes to rehab them. For more on what to look for in an older home, see the FREE ebook "The Simple Man's Guide to Buying an Older Home" by IntelliBiz . Be sure to put a little curb appeal on the front of the house to make a great first impression for a loan appraisal. A clean front, clean yard, a few flowers and shrubs and fresh paint. Maybe a new door, if necessary. Remember - appraisers are people, too. If the first impression of your property is appealing to the eye, it could well increase the appraisal, allowing the maximum equity ceiling the lender will use in determining how much they will loan on that equity.
If you have the know-how and the inclination, you can increase profits by doing some or all of the work yourself UNLESS your 401(k) owns the property. The IRS does not permit the owner of a 401(k) to provide much more than a minor amount of the work on the property - your participation must be passive.
For intensive rehab projects, you might consider hiring a project manager or at least a lead contractor to manage the many day-to-day variables and decisions.
You can obtain relatively high loan-to-value financing in a reasonably short period of time after putting the property in service provided the rents still cover everything. As an individual investor, it's possible with the right properties and good financing to pull 100% of your initially invested capital out of a property and move onto the next deal, perhaps within 3-6 months. If not, before refinancing simply collect rents for the period necessary to provide the additional funds required. If you use your IRA or 401k to purchase, expect to leave some capital tied up in the initial property and a longer period between refinance transactions.
If you purchase through your IRA, once a property has mortgage financing in place it will be generating UDFI - Unrelated Debt-Financed Income, which is subject to taxation. The tax impact is generally nominal, but you will want to work with your CPA to understand the process and prepare the necessary tax return for your IRA. However, investors with a Solo 401(k) plan mentioned earlier will benefit at this stage, as a Solo 401(k) is exempted from taxation on UDFI generated via real estate debt.
Bear in mind, these figures are for example only - they will vary considerably from one area to another. In this example the investor has located an out-dated home in a nice neighborhood, and the price is $150,000. A $30,000 down payment (20%) would be required by most lenders, leaving $120,000 to be financed. Assuming $10,000 will cover rehab costs, the investor must invest a total of $40,000 plus service debt (mortgage, tax/insurance costs during the rehab period).
You have already determined the the ARV (after repair value) should be around $190,000 with rental income of $2,000 per month. When feasible, usually about a year later the investor would refinance at 75% of value - $142,500. If financed for 15 years, in one year you would refinance, pay off the loan balance of about $113,000 leaving you $29,500. Your mortgage had been roughly 1200/month including taxes & insurance, leaving you $800/month positive cash flow for those 12 months, or $9,600. Adding that to the amount from the refi, you have roughly $39-40,000 with which to repeat. the process. If you need more, hold for an extra couple of months for an extra $2,000.
You now own a $190,000 property with (after your new mortgage) roughly $700/month positive cash flow, and you have all your money back, ready to buy another. (cash flow will be higher if you refi for 30 years). Imagine doing one a year for just 10 years - your positive cash flow (allowing for raising rents periodically) would be close to $8-10,000/month ($100,000-120,000/year) and you would own 10 homes with a total equity of over a half million dollars. Considering you always get your original investment back, none of that profit cost you a dime.
NOTE: It gets better - and faster - if you use the BRRRR Method in conjunction with other strategies in "The Simple Man's Guide to Real Estate". For example, if you purchase a foreclosure from a bank, or at auction, at a discount. Or if you use discounted notes for part of the purchase price. There are several strategies that can be incorporated to reduce your cost and boost the profit margin.
Bear in mind that, while this method may seem daunting at first, "The Simple Man's Guide to Real Estate" fills in a lot of the details that helps make it all come together. And free, unlimited access to one of their mentors practically insures success in any of their methods.
Good luck, fellow investors!
B -- Buy
When pursuing the BRRRR strategy, the old adage that "you make money when you buy" is absolutely true. And for the most part, so is the "location, location, location" mantra. Still, location is not always the "be all" in real estate these days as it was decades ago. Advances in transportation and other factors now allow an investor to "scrimp" a bit on location - we have become a very mobile society, and many now work from home. But for multi-family units and commercial properties, location is still important.In the buying stage, the goal is to acquire a property that can benefit a good deal from remodeling (rehab) at a reasonable cost to increase the investor's equity enough to be able to pull out as much of that equity as possible to finance the next property. This may sound like a daunting task for the novice, but it need not be so, as outlined below. Finding a property with the potential to effectively add value is key. There are several good sources for learning how to locate a bargain and determine its potential such as "The Simple Man's Guide to Real Estate" by investor/author Bill Vaughn, recommended because it offers many strategies to help accomplish the goal. In addition, it is the only resource found that includes free mentoring for those who need to be walked through their first few transactions. For the "newbie", mentoring can be critical.
When implementing a BRRRR investing strategy many investors use a 70% rule as a guide, meaning that the cost to acquire the property plus rehab costs represent 70% or less of the after-rehab value (ARV) of the property. That is the simple formula. Reality, however, can throw a wrench into it if the investor is not prepared for the additional costs that often come into play. For example, if the property is vacant during the rehab, there are costs of service debt - the mortgage, property taxes and insurance. For that reason it is imperative that the investor be able to effect all remodeling in as short a time span as possible. Know in advance who the contractors and suppliers will be, and what their availability is. The investor might work out an agreement with them that his projects will receive high priority in exchange for all the work that future projects will provide to those contractors and suppliers. Loyalty begets loyalty.
Most rehab projects go over budget, so a conservative number like 70% is wise. That way, if you end up in a situation where acquisition and rehab costs represent 75-80% of ARV, you have still created a reasonable amount of equity to allow you to invest in your next BRRRR property.
The BRRRR strategy works best if you can purchase a property and pay for rehab costs using all cash, to maximize profitability, but that is not necessary. It's also possible to joint venture with other investors or use hard money loans, but those options will increase the cost and complexity.
NOTE: self-employed individuals and couples can take advantage of a relatively new type of 401K called a Self-Directed Solo 401(k). This type of 401(k) is special - it allows the individual to contribute a huge amount of self-employment income (for 2021, the contribution limit increased to $58,000 or $64,500 if age 50 or over) and allows you total "checkbook" control to make investments. When you find a property, simply write out a check. It's that simple, and all profits are tax deferred. This adds a lot of power to your portfolio.
R -- Rehab
The focus of the rehab stage of the BRRRR method is to add value, cost effectively. Avoid high end finishes and expensive upgrades like you see in those TV shows like "Flip This House" - such rehabs often cost more than the value they add to the property and almost always result in a net loss to the investor. Those shows go high-end for television ratings value. You, on the other hand, need to make the greatest profit possible while providing yourself with a rental property that is clean, functional, safe, and reasonably appealing. Focus on the repairs and updates that achieve that goal. A good rule of thumb: judge the neighborhood, and do only enough rehab to be able to compete favorably with other properties on the block. A mansion among a trove of blue collar homes will never sell for its appraised value, nor will it be rentable at a profit.It is strongly advised that the investor avoid rehabbing properties in need of major structural repairs such as a cracked foundation or sagging roof. They are seldom worth the time and money it takes to rehab them. For more on what to look for in an older home, see the FREE ebook "The Simple Man's Guide to Buying an Older Home" by IntelliBiz . Be sure to put a little curb appeal on the front of the house to make a great first impression for a loan appraisal. A clean front, clean yard, a few flowers and shrubs and fresh paint. Maybe a new door, if necessary. Remember - appraisers are people, too. If the first impression of your property is appealing to the eye, it could well increase the appraisal, allowing the maximum equity ceiling the lender will use in determining how much they will loan on that equity.
If you have the know-how and the inclination, you can increase profits by doing some or all of the work yourself UNLESS your 401(k) owns the property. The IRS does not permit the owner of a 401(k) to provide much more than a minor amount of the work on the property - your participation must be passive.
For intensive rehab projects, you might consider hiring a project manager or at least a lead contractor to manage the many day-to-day variables and decisions.
R -- Rent
Once the property has been rehabbed and is ready for tenants, place your ads, or have a local Realtor advertise it for you. The sooner you can get the property producing positive cash flow, the better. As with any rental property, there are some tricks to marketing and screening that will help you find the best possible tenants. There are a number of businesses online that provide screening services. You positively MUST screen potential tenants. You want tenants who will take good care of the property and pay the rent regularly and on-time. Realize it may be some time before you can refinance, and you still want the property looking sharp when the bank sends an appraiser.R - Refinance
The goal at this stage of the process is to pull as much cash out of the property as possible to provide the necessary funds to acquire additional properties. The objective is two-fold: you want yo draw out enough for your next property without creating an "alligator" that will eat you out of house and home. At this point you do not need much positive cash flow because you are building a portfolio, but you do not want to lose money, either. Even after drawing on your equity, the rents should still cover mortgage, taxes, insurance, maintenance and any other costs involved in the ownership.You can obtain relatively high loan-to-value financing in a reasonably short period of time after putting the property in service provided the rents still cover everything. As an individual investor, it's possible with the right properties and good financing to pull 100% of your initially invested capital out of a property and move onto the next deal, perhaps within 3-6 months. If not, before refinancing simply collect rents for the period necessary to provide the additional funds required. If you use your IRA or 401k to purchase, expect to leave some capital tied up in the initial property and a longer period between refinance transactions.
If you purchase through your IRA, once a property has mortgage financing in place it will be generating UDFI - Unrelated Debt-Financed Income, which is subject to taxation. The tax impact is generally nominal, but you will want to work with your CPA to understand the process and prepare the necessary tax return for your IRA. However, investors with a Solo 401(k) plan mentioned earlier will benefit at this stage, as a Solo 401(k) is exempted from taxation on UDFI generated via real estate debt.
R -- Repeat
If you've purchased and re-financed effectively, you (or your IRA) should now own a performing property with only a small amount of capital locked up into the deal. The IRA can then move that capital forward and repeat the process with additional properties over time.Example of a typical BRRRR Method
You have already determined the the ARV (after repair value) should be around $190,000 with rental income of $2,000 per month. When feasible, usually about a year later the investor would refinance at 75% of value - $142,500. If financed for 15 years, in one year you would refinance, pay off the loan balance of about $113,000 leaving you $29,500. Your mortgage had been roughly 1200/month including taxes & insurance, leaving you $800/month positive cash flow for those 12 months, or $9,600. Adding that to the amount from the refi, you have roughly $39-40,000 with which to repeat. the process. If you need more, hold for an extra couple of months for an extra $2,000.
You now own a $190,000 property with (after your new mortgage) roughly $700/month positive cash flow, and you have all your money back, ready to buy another. (cash flow will be higher if you refi for 30 years). Imagine doing one a year for just 10 years - your positive cash flow (allowing for raising rents periodically) would be close to $8-10,000/month ($100,000-120,000/year) and you would own 10 homes with a total equity of over a half million dollars. Considering you always get your original investment back, none of that profit cost you a dime.
NOTE: It gets better - and faster - if you use the BRRRR Method in conjunction with other strategies in "The Simple Man's Guide to Real Estate". For example, if you purchase a foreclosure from a bank, or at auction, at a discount. Or if you use discounted notes for part of the purchase price. There are several strategies that can be incorporated to reduce your cost and boost the profit margin.
Is The BRRRR Method right For You?
If you have access to the necessary funds, you are not intimidated by the rehab portion of the BRRRR Strategy and you have the time to invest in building a portfolio, you would do well to consider this strategy. If you are touch and go on financing or credit, or easily discouraged, it would be a better recommendation to follow any one of the remaining 24 methods in "The Simple Man's Guide to Real Estate".Bear in mind that, while this method may seem daunting at first, "The Simple Man's Guide to Real Estate" fills in a lot of the details that helps make it all come together. And free, unlimited access to one of their mentors practically insures success in any of their methods.
Good luck, fellow investors!
© IntelliBiz
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