Investing in Real Estate Using the BRRRR Method

Aug 30, 2021

Home 9 Investment Talk 9 Investing in Real Estate Using the BRRRR Method

As you pursue your real estate investing journey, you may have encountered the acronym “BRRRR.”

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What is BRRRR?

It stands for Buy, Rehab, Rent, Refinance, Repeat. In other words, the smart investor’s investment cycle.

The traditional method of buying a rental property involves buying a property with financing, such as a mortgage, then rehabbing, renting, and eventually repeating the process later. You might call this BFRRR: buy, finance, rehab, rent, repeat. But nobody calls it that. It doesn’t roll off the tongue as smoothly—and because so many people purchase property this way, there is no need for a unique acronym.

The traditional method of buying properties is popular because it’s the most convenient. Here, you purchase properties with a loan, usually from a bank with a 20% – 25% down payment. Through financing, the investor doesn’t have to work as hard to save up the full purchase price or find a hard or private money lender. The ease of this method can be seductive!

However, like most things in life, the easiest is not often the best. Through the BRRRR method, you’ll buy homes quickly, add value through rehab, build cash flow by renting, refinance into a better financial position—and then do the whole thing again. Over time, you’ll build a real estate portfolio that’s the envy of your fellow investors.

Breaking Down The BRRRR Method

When you buy a property, fix it up, improve its value, and then refinance, you’re borrowing against the value of the property at its highest. Done correctly, this allows you to recover more of—or sometimes all of—the money you invested in the property.

Here’s what you need to know.

1. Buy

They say you make your money when you buy, and that’s definitely true. All good deals involve a good purchase, but each bad deal is bad in its own way.

Most lenders will finance 75% of a property’s value, so holders should aim for 75% all-in. And we generally do because we have some money we can leave in the deals and are prioritizing volume. If that doesn’t describe you, I would argue you should stick with the 70% for two reasons:

  1. Refinancing costs money. Most banks charge a point and there will be an appraisal, title work, and loan processing fees that eat away at your margin.
  2. Aiming for 75% offers no contingency. People go over budget more often than under budget so building in a bit more of a margin is a better idea unless you are going for volume.

A number of options can help you purchase your BRRRR property, such as cash, a hard money loan, seller financing, or a private loan. Need guidance on deciding which upfront financing to use? What’s important to note here is that different upfront financing options will result in different acquisition and holding costs. You need to account for those when analyzing a deal in order to hit your 70% or 75% goal.

So what’s the key to BRRRR success?

Buying properties under market value and never investing more than 75% of the property’s after repair value (ARV). This ensures you never run out of capital and can continue buying forever.

Let’s start with your ARV.

We recommend having a trusted source to give you a conservative number the house will appraise for once it’s been repaired the way you intend.

Take that number and multiply it by 0.75 – This is your “target.”

Your goal is to get the rehab and the purchase price to add up to this target goal. If you pay too much for a property, there is very little you can do to recover from surprises and problems.

2. Rehab

There are two key questions to keep in mind when rehabbing a rental:

  • What do I need to do to make this house livable and functional?
  • Which rehab decisions can I make that will add more value than their cost?

If you rehab correctly and make sure you add value when you do, you are pretty much guaranteed to recover your money—and then some. However, unless you buy and hold luxury rentals, generally speaking, these things aren’t necessary:

  • Granite countertops
  • Brazilian hardwood floors
  • High-end stainless steel appliances
  • Bay windows
  • Skylights
  • Hot tubs
  • Chandeliers

It’s also rarely worth finishing a basement or a garage for a rental. Instead, consider changes like two-tone paint, refinished hardwoods, and new tile. And, of course, the house needs to be in good shape. Everything needs to be functional. Being a slumlord will hurt you in the long run.

Of course, your new purchase won’t be in good shape when you purchase it. That’s the point! We intentionally look for properties that need massive repairs because we know other investors will ignore them, and the sellers will be more motivated to drop their prices.

Some of the best problems to look for are:

  • Roofs: If you add a new roof, appraisers tend to give you back the money you spent in property value.
  • Unfinished kitchen: An outdated kitchen is ugly but still usable. A partially demoed kitchen makes a house ineligible for financing and therefore much easier to buy with cash.
  • Drywall damage: Drywall damage makes a property ineligible for financing while also scaring away the majority of home buyers. The good news? Drywall isn’t super expensive to repair.
  • Horrific landscaping: Overgrown vegetation frightens the competition but costs very little to repair. You don’t need a skilled landscaper to hack down overgrown landscaping, so a few hundred dollars will take you further than you think.
  • Outdated bathrooms: You can typically remodel bathrooms for $3,000 to $5,000. Most bathrooms aren’t very big, so the material and labour costs come in low. This allows your house to compare to much nicer homes in the neighbourhood with higher ARVs.
  • Too few bedrooms: Homes with more than 1,200 square feet but less than three bedrooms offer easy ways to add value. Adding a third or fourth bedroom helps it compare to much more expensive properties, increasing your ARV.

By targeting properties like these and making repairs at below market value, you can add big equity to your deals.

3. Rent

Banks rarely want to refinance a property that isn’t occupied, so renting comes first. It’s critical to screen diligently so you get tenants that will pay each month. But it’s also important on the financing side. While appraisers shouldn’t take too much into account how clean and pleasant the tenant is, everyone is human. First impressions make a difference.

You need to notify the tenant before an appraisal. We always recommend you request interior appraisals versus drive-bys: Appraisers are more cautious and may downgrade your property unfairly with drive-bys. Send out or post a note on your tenant’s door about the date and time and give a reminder call the day before. Tenants don’t need to be present, but you should ask them to clean up and kennel any pets if they won’t be home.

One thing to keep in mind with the BRRRR strategy: Your mortgage will typically be slightly higher than with the traditional method because you are borrowing more money against the house. This is well worth it. Capital in the bank can be used to grow wealth, while equity in a property can’t be used for much. The flip side of this argument is that your cash flow will be slightly lower with the higher mortgage payment.

This just means you have to be that much more careful when it comes to running rental comps and knowing what you can expect for rent once you purchase your property.

4. Refinance

Not too long ago, it was extremely hard to find a bank that was willing to refinance single-family rental properties. Now it is much easier. Still, when looking for such banks, there are a few things that you will need to ask:

  • Do they offer cash out or will they only pay off debt? If they won’t offer cash out, move on.
  • What seasoning period do they require? A “seasoning period” is how long you have to own a property before the bank will lend on the appraised value instead of how much you’ve invested.

For the BRRRR strategy to work, you must borrow on the appraised value. These days, some banks are willing to lend on the appraised value as soon as a property has been rehabbed and rented. These are the best banks to find.

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Once you’ve narrowed your list, make sure to provide the lender with thorough, clear information. This impresses them—remember, these are human beings, not computers—and helps them decide quickly.

The trick to being successful here is getting as high of an appraised value as you possibly can. A big part of success in this area is a combination of how well you rehabbed your property and how strong your initial comps were.

Sinking a lot of capital into a deal and then failing to pull it out is a big problem. We recommend getting pre-approved for a loan before buying.

5. Repeat

The “repeat” part of the BRRRR cycle is the most fun. Take everything you learned, gained, and improved upon and put it back into action.

Work on building systems, too. Systems help you accomplish your objectives by repeating the same process, over and over. Systems cut down on mistakes and stress. The more documented your systems are, the less you’ll worry about something being missed, overseen, or forgotten about.

Need help? Call us today!

Many people struggle with the time, financial obstacles, and all kinds of realty advice when it comes to buying or selling a home. At clubhouse group, we work tirelessly to make the process seamless, and the experience enjoyable. So you can focus on what’s important to you. Creating new memories and traditions with those you love, in the home that you love. It’s what every person deserves… and frankly, it’s what you deserve.

Let clubhouse group get you home.

If you are thinking about buying or selling your next home and need guidance, give us a Call Today! It’s important for you to get the most out of your investment. We want to help you get out on top.

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