If you are interested in investing in residential real estate, you may have heard of the BRRRR method. The acronym stands for Buy, Rehab, Rent, Refinance, Repeat. Similar to moving house, this investment strategy focuses on buying properties that are not in good shape and repairing them. But instead of reselling for a single profit, rent them out, generating revenue while building capital for your next purchase.
What is the BRRRR method?
The BRRRR method is a way to invest in real estate. The name indicates the steps an investor should take to make money using this method. With this investment strategy, investors focus on buying properties that need work. They then rehabilitate them, rent them out to cover their mortgage, refinance their cash, and use their profits to repay it with another property. Not for beginners: BRRRR is complex and requires experience, knowledge and delicacy.
Buying a home at a discounted price is the key to making a profit with the BRRRR method. “All the money you earn will be when you buy,” says Todd Baldwin, an experienced real estate investor who teaches online finance courses. “Rehabilitation, renting, refinancing and even selling the property are great, but the money is made when you buy. If you can get a property on or below market value, you’re doing amazing.”
What does BRRRR mean?
This acronym outlines each step required by the method, in order: buy, rehabilitate, rent, refinance and repeat.
Investors using this method should not buy any property. It’s important to focus on real estate that needs work, but that will also be a good investment; in other words, it must be a good deal. Do your research and make sure you know exactly how much work a property requires. Create a schedule for when renovations will be completed and how soon you can start renting the property. You should understand well in order to register.
Determine your method for renewing ownership. Will you do the work yourself or hire professionals? Identify the best ways to make your property livable and attractive to tenants in a timely manner.
“For BRRRR specifically, having a clear understanding of the scope of work required for rehabilitation,” Baldwin says. “You want to know its exact cost as well as the time it will take to complete the job. You can lose money very quickly if you don’t have a firm idea of these two aspects.”
Investors should focus on home renovations that offer the highest return on investment. Typically, this means updating kitchens and bathrooms as needed, and obviously making sure the dangers are removed. Keep your budget in mind as you plan: A kitchen remodel can cost between $ 13,471 and $ 38,252, according to HomeAdvisor.
When the refurbishment is complete and the property is habitable, rent as soon as possible. The idea is to set a monthly price that covers your mortgage payment or hopefully more. You will also need to determine if you will be managing the rental yourself or using a property management company. The sooner you rent it, the sooner the passive income will start to occur.
Once you have a solid tenant in place, it becomes a waiting game as you accumulate your assets on the property. This is because the next step is refinancing, and BRRRR focuses specifically on refinancing cash-out. A cash back loan allows you to take advantage of your home equity to withdraw money for any purpose. Different lenders will have different guidelines on how long you must own a property or how much equity you must accumulate to qualify for this type of refinancing. The money you withdraw, in this case, is also the final step in the process.
This last step is what makes BRRRR so attractive and potentially lucrative. With the money from your refinancing, you invest in a new property and start the whole process again. Hypothetically, investors can repeat the process over and over again, making money on each new property continuously.
For whom is the BRRRR method better?
“No investment comes without risk,” Baldwin says. The BRRRR method is not for everyone; it is best for those who have solid real estate knowledge and experience and can accurately measure market values, renovation costs and more. An incorrect calculation of the price or budget, or the lack of a guarantee from the tenant at the right time and at the right price, can lead to large monetary losses.
A BRRRR investor should also have enough time to devote to the process. Finding properties, renovating them, and owning them (potentially for multiple units) is a big commitment.
BRRRR pros and cons
This method of investing offers great benefits, but there are also drawbacks.
- Earn passive income: BRRRR investors can create a system that allows them to earn passive income, either as an additional income stream or to live.
- Build Capital: Buying and maintaining multiple properties means that your wealth will continue to grow.
- It’s repeatable: unlike turning a house around, the BRRRR method isn’t unique – you can keep repeating the strategy and accumulating wealth exponentially as you go along.
- Rehabilitation can be expensive and slow: quality renovations are generally neither cheap nor fast. Supervising work can be stressful. And depending on the scope of the repairs needed, you may need to take out a rehabilitation loan. These loans often have higher interest rates and can be expensive.
- It takes time to make a profit: BRRRR does not offer fast money. It is a slow and steady strategy. You have to put in the 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 financial risk – there are many educated assumptions in BRRRR. If you incorrectly estimate the post-rehabilitation value of a home, overestimate the amount of rent you can charge, or underestimate your renovation budget, there is always the possibility that you may lose money.
Before you decide to invest in BRRRR real estate, do some research and talk to other people who have done so. Baldwin even suggests looking for a mentor, if you can. The method can be very lucrative, but you have to know what you’re doing: novice investors may be above their heads.