What is the BRRRR method in real estate?
If you are interested in residential real estate investing, you may have heard of the BRRRR method. The acronym stands for Buy, Rehab, Rent, Refinance, Repeat. Similar to house flipping, this investment strategy focuses on buying properties that are not in good condition and repairing them. But instead of reselling them for a one-time profit, you rent them out, generating income while building equity to invest in your next purchase.
What is the BRRRR method?
The BRRRR method is a way to invest in real estate. The name describes the steps an investor must follow to make money using this method. With this investment strategy, investors focus on buying properties that need work. Then they rehab it, rent it out to cover their mortgage, do a cash refinance, and use their profits to start over with another property. It’s not for beginners – BRRRR is complex and requires experience, knowledge and finesse.
Buying a house at a discount is the key to making a profit with the BRRRR method. “Any money you make will be when you buy,” says Todd Baldwin, a seasoned real estate investor who teaches online finance courses. “Rehabilitation, leasing, refinancing and even selling the property are all great, but the money is made when you buy. If you can get a property at or below market value, you are doing very well.
What BRRRR means
This acronym describes each step required by the method, in order: buy, rehabilitate, lease, refinance and repeat.
Investors using this method should not buy just any property. It is important to focus on real estate that needs work, but will also be a good investment, i.e. it must be a good deal. Do your research and make sure you know exactly how much work a property needs. Create a timeline showing when the renovations will be completed and how soon you can start renting the property. You must fully understand what you are signing up for.
Determine your method of renovating the property. Will you do the work yourself or hire the professionals? Identify the best ways to make your property livable and attractive to tenants in an efficient time frame.
“For BRRRR in particular, have a clear understanding of the scope of work required for rehabilitation,” says Baldwin. “You want to know your exact cost as well as the time it will take to complete the work. You can lose money very quickly if you don’t get these two things right.
Investors should focus on home renovations that offer the best return on investment. This usually means updating kitchens and bathrooms as needed and, of course, making sure all hazards are removed. Keep your budget in mind when planning: A kitchen remodel can cost between $13,471 and $38,252, according to HomeAdvisor.
When the rehabilitation is complete and the property is habitable, rent it out as soon as possible. The idea is to set a monthly price that will cover your mortgage payment – or hopefully more. You will also need to consider whether you are going to manage the rental yourself or hire a property management company. The sooner you rent it out, the sooner that passive income will start rolling in.
Once you have a solid tenant in place, it becomes a waiting game as you build your equity in the property. Indeed, the next step is refinancing, and BRRRR focuses specifically on cash-out refinancing. A cash-out refi allows you to leverage the equity in your home to withdraw cash for any purpose. Different lenders will have different guidelines regarding how long you must own a property or how much equity you must have accumulated to qualify for this type of refinance. The money you withdraw, in this case, is also the last step in the process.
This final step is what makes BRRRR so appealing – and potentially lucrative. With the money from your refinance, you invest in a new property and start the whole process over again. In theory, investors can repeat the process over and over again, making money on each new property continuously.
Who is the BRRRR method for?
“No investment is without risk,” says Baldwin. The BRRRR method isn’t for everyone – it’s best for those with solid real estate knowledge and experience who can accurately assess market values, renovation costs and more. Miscalculating the price or budget, or the inability to find a tenant at the right time and at the right price, can lead to big monetary losses.
A BRRRR investor must also have enough time to devote to the process. Finding properties, renovating them and acting as an owner (potentially for several units) is a long-term commitment.
BRRRR advantages and disadvantages
This method of investing offers great advantages, but also has certain disadvantages.
- You Earn Passive Income: BRRRR investors can create a system that allows them to generate passive income, either as a source of additional income or to live off of it.
- You build equity: Buying and keeping multiple properties means your equity will continue to grow.
- It’s repeatable: unlike flipping a house, the BRRRR method isn’t unique – you can keep repeating the strategy and build wealth exponentially as you go.
- Rehabilitation can be expensive and time-consuming: quality renovations are generally not cheap or quick. Supervising work can be stressful. And depending on the extent of the repairs needed, you may need to take out a rehabilitation loan. These loans usually have higher interest rates and can be expensive.
- It takes time to make a profit: BRRRR does not offer quick money. It is a slow and steady strategy. You have to put in some work and time before you start making money.
- Being a landlord is a lot of work: finding and managing tenants can be difficult. And the more you repeat the process, the more tenants you will have.
- There is a financial risk: there are a lot of educated guesses in BRRRR. Whether you incorrectly estimate a home’s post-rehab value, overestimate the amount of rent you can charge, or underestimate the renovation budget, there’s always a chance you’ll lose money.
At the end of the line
Before you decide to go into BRRRR real estate investing, do your research thoroughly and talk to other people who have done it. Baldwin even suggests finding a mentor, if you can. The method can be very lucrative, but you need to know what you’re doing – novice investors can be overwhelmed.