Residential real estate investing has historically been a great way to generate passive income. The various approaches for both hands-off and hands-on investors make residential real estate investing appealing to the masses. If you’re interested in the hands-on approach, using the BRRRR method may be ideal for you.
The BRRRR (Buy, Rehab, Rent, Refinance, Repeat) method is similar to house flipping, but there’s a slight twist. Instead of reselling the property for a one-time profit, you rent it out while generating passive income and building up equity to fund your next real estate investment venture.
If completed correctly, the BRRRR strategy is an excellent way to approach residential real estate investing. Keep reading as we explore the ins and outs of the BRRRR method to help you decide if this approach is ideal for your financial and real estate investing goals.
What Is The BRRRR Method?
The BRRRR (Buy, Rehab, Rent, Refinance, Repeat) method is an approach to residential real estate investing where the investor purchases a distressed property, fixes it up, and rents it out to cover the mortgage, then uses a cash-out refinance to fund their next rental property investment.
While the BRRRR strategy seems similar to the traditional way of purchasing an investment property, the main difference is the focus on fixer-uppers and leveraging a refinance to purchase the next property. The BRRRR method may not be ideal for novice real estate investors as it’s an intricate strategy that requires experience and expansive knowledge.
However, if you can nail down this strategy, you can generate a solid passive income and a continuous cycle of purchasing and possessing rental property. Here’s how the BRRRR method works:
- Purchase a property: When following this strategy, you’ll need to focus on purchasing a distressed property that needs extensive work to ensure it meets code and is ready to rent. Since the property is a fixer-upper, there’s a good chance you can buy the home at a lower price.
- Rehab the house: After the purchase is complete, you’ll need to renovate the property for potential structural and safety improvements. Once the property’s core is up to snuff, you can start to improve the house, so it’s aesthetically pleasing for renters.
- Rent the house out: You may want to work with a real estate agent to help determine a fair market rental price. Once you’ve found renters, you can move to the next step.
- Use a cash-out refinance on the property: Leveraging a cash-out refinance allows you to turn the equity you’ve built in the home into cash. With a cash-out refinance, the money can be used toward anything, including purchasing your next rental property.
- Repeat the process: The final step in the BRRRR method is using the funds from the refinance to repeat the process.
Buy, Rehab, Rent, Refinance, Repeat: A Breakdown Of Each Step
The BRRRR method only works if each step is followed in the proper order. Here is a breakdown and tips to successfully execute each step in the BRRRR investment strategy.
Buy
The BRRRR method involves purchasing properties that are considered fixer-uppers. It may be difficult to get approved for a traditional mortgage because most lenders require an appraisal of the property. It can often be challenging to assess those types of homes’ value accurately. Additionally, depending on the loan type, the home may need to pass certain regulations to qualify. Unfortunately, fixer-uppers tend not to meet those conditions.
Fortunately, there are other avenues for financing. You’ll want to connect with your lender to see what options they may have for you. A home equity line of credit (HELOC) may be an option but risky for the borrower.
During this step of the strategy, it’s essential to determine the after repair value (ARV). The ARV provides you with an estimated value of the property after renovations are complete. To find your property’s ARV, you’ll compare the intended outcome of the home to similar properties recently sold in the area.
Before you submit an offer on the home, it’s important to adhere to the 70% rule in real estate, meaning that you don’t invest more than 70% of the property’s ARV. For instance, if a property’s ARV is $350,000, you should not extend more than $245,00 for the house.
Rehab
The rehab phase of the BRRRR method is simply another word for renovation. Since the property most likely will need extensive repairs, the first area of concern should be bringing the home up to safety standards. After that is complete, you should locate areas for improvement that will ultimately increase the property value. Home improvements you may want to consider include:
- Updating specific rooms such as the kitchen, bathroom or bedrooms
- Installing modern appliances
- Boosting the curb appeal
- Improve or installing energy-efficient lighting
- Window replacements
Before you start with the home renovations, you must create an accurate budget and timeline, so you don’t overspend or waste valuable time.
Rent
After the property’s turned around and ready to go on the market, you’ll need to search for tenants. The rent stage comes before the refinance stage because most lenders will not issue a refinance until the home has tenants.
If you’re unfamiliar with renting, you may want to connect with a real estate agent to help you identify good tenants. If you would rather search for renters on your own, it’s important to understand what makes a good tenant. A good tenant’s characteristics include a record of making on-time payments, a reliable job with a stream of income, a good credit history, no past criminal record or history of evictions and much more.
To find out that information, you can meet with the potential renter and have them fill out an application, where you review their credit report and conduct a background check. If you go that route, ensure you receive consent and follow housing laws.
Lastly, you’ll want to determine a rental price. This part can be challenging because you want to ensure the price is at fair market value, but you always want to ensure a positive cash flow for your investment. The best way to go about this is by taking the total expenses to own and rent the house and subtracting that from the total monthly rent you may charge. For example, you want to charge $1,700 monthly for rent, and the monthly mortgage payment is $900. Disregarding any other expenses, your net cash flow is $800.
That may be fair, but you’ll have to look at other comparable rental properties in the area to determine an accurate price.
Refinance
The BRRR strategy requires you to do a cash-out refinance on the investment property. That’s because you can use the money to repeat the process. You’ll want to meet with a lender that offers a cash-out refinance, and you’ll need to meet their qualifications.
Each lender may have different requirements regarding a cash-out refinance. However, the general requirements include:
- A minimum credit score of 620
- A debt-to-income ratio (DTI) of no more than 50%
- Having owned the property for a specified time
As with most cash-out refinances, the lender may require an appraisal of the property. Additionally, you may have to pay fees associated with closing costs.
Repeat
The last step to properly executing the BRRRR method is to simply repeat the previous four steps in the same exact order. Each time you complete the BRRRR strategy, you should note what you could’ve done differently so you can learn from previous mistakes to perfect this approach.
Pros And Cons Of BRRRR Strategy
Before determining if the BRRRR method is ideal for your financial and real estate investing goals, you should carefully consider the following advantages and disadvantages of this investment strategy.
Pros of BRRRR method
- Earn passive income: The inherent system that the BRRRR method creates allows for consistent cash flow as either a primary or secondary source of income.
- Ability to build up equity: The buying and holding of multiple properties create a system where your equity will continue to increase.
- A repeatable process: The traditional method of flipping houses is generally a one-and-done process, whereas the BRRRR strategy is a repeatable process that allows you to rapidly build wealth as you go.
- Increases your real estate portfolio: Since you’re buying and holding the properties, your real estate investment portfolio increases each time you implement this strategy.
Cons of BRRRR strategy
- Expensive and time-consuming: Purchasing distressed properties and producing quality renovations is generally expensive and time-consuming. Depending on the extent of the repair needed, investors sometimes have to find other sources of financing, generally through a loan.
- Doesn’t allow for fast cash: The BRRRR method is a drawn-out process requiring investors to have a slow and steady mindset regarding making a profit. A lot of capital and work must be put in before the cash flows.
- You become a landlord: Unlike flipping houses, where the property is generally sold to a buyer, the BRRRR method requires you to be a landlord. And the more you repeat the process, the more properties and tenants you’ll have.
- Financial risk: Similar to other types of investing, there is a great deal of financial risk. The BRRRR method requires you to make numerous educated guesses along the way. For example, you may overestimate the home’s renovation value, the amount of rent you can charge or vice versa and underestimate the budget. Without knowing certainties, there’s always a chance you can lose money.
Learn More About Residential Real Estate Investing
The BRRRR method can be a great residential real estate investing strategy if done correctly. You can ensure passive income with positive cash flow, increase your real estate investment portfolio and much more. However, this strategy may not be an ideal fit for you if you’re more of a hands-off investor who doesn’t want to be a landlord or someone who is looking for a quick ROI.
Do you want to learn more about real estate investing? Check out some of our latest articles here and more on our blog.
- Beginner’s Guide to Buying Investment Property: Being a beginner in the investment property space can seem challenging. Discover how you can navigate the process with little to no roadblocks.
- How to Refinance an Investment Property: Check out our step-by-step guide to the mortgage refinancing process.
