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Investing In Real estate Using the BRRRR Method

As you learn more about real estate investing, sooner or later you’ll encountered the acronym BRRRR. No, it’s not that these guys are cold but rather BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. In other words, this is one of many investment strategies that real estate investors adopt to increase their financial wealth. Here in this article, we break down the steps for investing in real estate using the BRRRR method.

What is BRRRR

BRRRR is a real estate investment strategy where investors specifically buy a certain type of rental property to fix it up and improve its value. Using the new appraised value, investors refinance their purchased property and reallocate the borrowed cash to purchase another property. When done correctly, this allows the investor to significantly increase their real estate portfolio and generate wealth at an astonishing rate.

Step 1. Buy

So what’s the key to BRRRR success? Buying properties under market value and never investing more than 80 percent of the property’s after repair value (ARV) into the property. Determining a property’s ARV is very important and it is recommended to have a reliable network of third party experts such as an experienced agent, lender, or other investors to give you a conservative number they believe the house will appraise for once it’s been repaired the way you intend. Take that number and multiply it by 0.8. This is your budget limit for the purchase price and to rehab the property. If you pay too much for a property, there is very little you can do to recover from surprises and problems.

Step 2. Rehab

This is the key step where you can make your money back by putting in that sweat equity. When rehabbing rental properties, it is important to consider:

  1. What do I need to do to make this house livable and functional?
  2. What can I do 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:

  • imported tiles
  • Hot tubs
  • Chandeliers

Because we’re purchasing rental properties below market value, they tend to be not maintained well and come with problems. But that’s the point! Real estate investors intentionally look for properties that need massive repairs because they know most buyers will ignore them, and the sellers will be more motivated to drop their prices.

Some of the best problems to look for are and are cost effective to fix up are:

  • Roofs: If you add a new roof, appraisers tend to give you back the money you spent in property value.
  • Old/Unfinished kitchen: An ugly kitchen deters the majority of home buyers. Fortunately, redoing a kitchen can significantly increase the ARV.
  • Drywall damage: Drywall damage scares 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: Most rental bathrooms aren’t very big, so the material and labor costs come in low. 
  • 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.

Step 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 and treat the property with at least some level of care. While appraisers shouldn’t take too much into account about how clean and pleasant the tenant is, everyone is human. First impressions can make a difference.

Step 4. Refinance

Once an appropriate time since the home sale has passed, it’s time to refinance your rental property. When looking to refinance with banks or other financial institutions, there are a few things that you will need to ask:

  1. Do they offer cash out or will they only pay off debt? Meaning, can you pull out your money invested in the property. If they won’t offer cash out, move on to the next bank or financial institution.
  2. 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 in order to go to step 5. Repeat. Typically, financial institutions won’t allow a property owner to refinance a home until 6 to 12 months after the purchase.

To find great BRRRR banks, ask around your network. A bank already lending to another investor will likely lend to you too. It is important to provide the lender with thorough and clear information. This impresses them and helps them decide quickly. Your goal is to get as high of an appraised value as you possibly can and 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.

Step 5. Repeat

Congratulations on completing your first BRRRR. 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 on the next BRRRR property. As you do more, you become more confident and develop systems too. Systems can help you accomplish your objectives by repeating the same process while cutting down on the number of mistakes and stress. The more documented your systems are, the less you’ll worry about something being missed, overseen, or forgotten about.

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