What is the BRRRR method and how can it make you money in real estate?

The BRRRR method aims to help real estate investors grow their portfolio with a single property. BRRRR stands for Buy, Rehabilitate, Lease, Refinance, Repeat. This can be an effective investment strategy if you have the expertise. But BRRRR is not for everyone. There are pros and cons, as well as significant risks. Let’s see how this method works and if it is for you.

A financial advisor can help you create a financial plan tailored to your investment needs and goals.

What is the BRRRR method?

The BRRRR method (Buy, Rehab, Rent, Refinance, Repeat) is a real estate investment strategy that focuses on home rehabilitation, refurbishment and rental. Unlike house flipping, the BRRRR method focuses on renting out instead of selling the house for a quick profit. You then use the equity in the property to fund another investment.

How does the BRRRR method work?

This strategy has four different parts that must be executed intelligently for it to be profitable and then repeated. Let’s see how each of these parts works.

To buy

This method focuses on buying a distressed property. Often these houses have been seized, repossessed and are often in poor condition. Financing the purchase of one of these homes can be difficult. You will not be able to obtain a conventional mortgage if the house is deemed to be in good condition. And if it’s in better condition, you may need to drop 30% or more.

Besides a cash purchase, you can try refinancing your primary residence to get cash out. You will have enough equity in your home to make it work. Mortgage lenders generally require that you maintain a minimum of 20% of the equity in your home.

Before bidding on a venue, you are going to need to calculate how much it will cost to repair and what its After Repair Value (ARV) will be. Although you won’t return it, with the calculated ARV you can figure out how much you should spend. Typically, you don’t want to spend more than 70% of a house’s ARV. Don’t forget that you will also need money for repairs.

The story continues

rehab

Once you have purchased the property, now is the time to get to work. You must fully assess the scope of work. Here are several questions you need to answer before you begin:

• Is the house habitable?

• Does the house need to be brought up to code?

• Will you do the repairs or hire someone?

• What is your budget ?

• What is the timeline?

• What repairs can be made that will really add value to the home?

Once you know the answers to these questions, you can prioritize the work. You may need to hire an electrician to update the circuit breaker, but you can install new kitchen tiles and appliances yourself. Stick to your budget and schedule. Remember that the plan is to invest in this property for the long term. But, to start getting paid, you’ll need to complete rehab and find tenants.

Lease

Finding stable tenants can be difficult, so it’s important to know the rental market around your investment property. What is the average income in the neighborhood? What are the main employers nearby? Is there a university nearby? All of these questions are useful to ask yourself.

You will benefit from screening tenants for:

Also, you will need to set the rental price. If you have a mortgage on the property, the rent will need to cover at least the mortgage payment and maintenance costs. You will also need to decide if you want to manage the property directly or hire a property manager.

For a single property, you may feel able to manage it yourself. But many properties can be a handful. A property manager may cut into your profits, but a good manager will keep your tenants happy and your rental properties busy and maintained.

Refinance

Once you’ve successfully rehabilitated the property and are renting it out, you can leverage the equity you have through a home equity loan or cash refinance. Either product gives you the equity in your home in a lump sum in exchange for paying off the loan.

With a home equity loan, you can access up to 90% of the equity in your home. With a cash refinance, it’s 80%. Let’s say you own a property worth $300,000. A home equity loan would allow you to withdraw $270,000, while a cash refinance would allow you to withdraw $240,000. The difference is that the home equity loan would likely come with a higher interest rate.

Depending on the market situation, it may be wise to wait for interest rates to fall.

Repeat

With your home equity in hand, you can walk out and repeat the process. Remember, you have to be smart with your next purchase. Your current property is used as collateral for a secured loan for your future rehab.

Who is the BRRRR method for?

The BRRRR method will not make everyone successful. Those with experience in real estate, renovation and property management are the best candidates. After all, a miscalculation of rehabilitation costs or a series of irresponsible tenants can seriously reduce your profits. You must have the capital to buy and rehabilitate the property

Advantages and disadvantages of the BRRRR method

As with any investment, the BRRRR method has advantages and disadvantages. Here are three advantages and three disadvantages to consider before going any further.

Advantages

• Passive income. With the BRRRR method, your assets generate passive income that you can live off of. When the mortgages are paid off, you can make significant profits.

• Increase your rental portfolio and your equity. This method allows you to methodically develop your rental portfolio through the purchase and repair of real estate. Thanks to the growth of your equity, you accumulate a stable and long-term wealth.

• You can repeat it exponentially. Once you’ve repeated this method once, you have two properties to work with. As you repay the financing, you can repeat the method with each different property you own, growing your portfolio at a faster rate.

The inconvenients

• You must be patient. The BRRRR method is a long game. There is no quick money here. The number of viable rehabilitations on the market may be low or interest rates may be unfavorable to refinancing. Renovations can take time and you may have to wait before you can start renting.

• There is a significant risk. This method requires a lot of calculated guesswork. If rehab is more expensive and takes longer, you’re going to pay for it. If the ARV is not as high as you estimated, you may not be able to withdraw as much equity when refinancing.

• That takes time. It’s a lot of work to find properties to buy and rehab, rehab them, and then find tenants and keep them happy. This is especially true once you have multiple properties in different conditions at once.

Conclusion

Real estate is an area with a lot of potential for earning passive income. This requires work, especially upstream, and it involves risks. But a portfolio of rental properties can generate income and help you and your family build wealth for years to come. If you have the knowledge and skills, the BRRRR method may work for you.

Advice for real estate investment

• A financial advisor can help you determine if a real estate investment is right for you financially. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.

• If you’re just starting out, you can better understand the impact real estate investing has on you by reading our guide.

• You need to know how to set the rent to pay off the mortgage on your real estate investment. One way to prepare for a mortgage payment is to use our mortgage calculator.

Photo credit: ©iStock/Pattanaphong Khuankaew, ©iStock/yongyuan, ©iStock/ArLawKa AungTun

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