Pursuing your real estate investing dream no doubt means you’ve come across the acronym BRRRR, which stands for buy, rehab, rent, refinance, repeat. In other words, the BRRRR method is a property investment cycle that’s also easy and alluring.
Find out how you can invest in real estate using the BRRRR strategy.
Breaking Down the BRRRR Strategy
Good deals start with a great purchase. It’s certainly true that you make your money when you buy.
Aim to finance the investment at 75 percent of the property’s value so that there is some money available within the deal. Seventy percent is even better considering that refinancing costs money, and 75 percent financing offers no contingency.
Refinancing can be expensive when banks add fees and charges – these extra costs can eat away at your margin. Buyers can go over budget more easily than going under budget, so a bigger margin is a good idea unless you’re investing in multiple properties and therefore need the capital.
When it comes to financing your BRRRR strategy purchase, there are various options, such as cash, seller financing, a hard money loan, or a private loan—deciding on which upfront financing to use will result in different holding and acquisition costs. Ensure you account for those when analyzing a purchase deal to hit your 70 (or 75) percent goal.
The key to the BRRRR strategy purchase is buying properties with a maximum 75 percent investment amount calculated to the after repair value (ARV).
To get your ARV, use a trusted agent or experienced investor to give you an appraisal that predicts the value after the repairs on the property have been complete. Multiply this value by 0.75 to get your target purchase price. When making the purchase, you should not go over this target amount on both the property price and the associated fees.
If you pay over the odds for a property, there isn’t much you can do to recover from problems and surprises.
Always bear in mind what you need to do to make the property livable and functional, and which rehabbing decisions will add value to the investment over and above the amount of the rehab costs.
Assuming you add value, you will almost always recover your money and more.
Luxury purchases, like granite countertops, expensive hardwood flooring, and chandeliers aren’t necessary unless you’re specifically buying luxury rentals.
Fundamentally, the house needs to be in good shape after the rehabbing process. If you can buy properties that need lots of repairs, you can get a good deal as other investors might be put off, and sellers want to get rid of the property and may drop the price accordingly.
Renting is important in the BRRRR strategy because banks will want to know that the property can be occupied to provide finance.
Screen tenants enough, so you are confident that they will pay rent each month.
When doing an appraisal, try to make a good impression. Notify the tenant beforehand and ask them to clean up ready for an interior appraisal. A drive-by appraisal may result in an undervaluation, so it’s good to spend that extra for an interior appraisal.
Your mortgage will be higher than the traditional method because you are borrowing more capital against the property. This is a good thing because you’ll be left with more money in the bank.
For the BRRRR strategy to work, you’ll need a bank that offers cash out when refinancing. Investigate the best options for what seasoning period they require. This is how long you have after owning the property before they will lend on the appraisal value. Because you’re borrowing on the appraisal value, you must find a bank that finances based on this figure and can quickly release the capital.
To find such a bank, ask fellow investors and check with your current lender. Provide them with clear and details information that will impress them. Getting the highest appraisal value is the main aim.
Get pre-approved for the loan before you buy – there’s no point putting capital into an investment if you can’t pull it out after rehab.
Being able to ‘repeat’ is the best part of the BRRRR strategy because it means you’ve been successful and can now try again, taking everything you’ve learned.
Use all the tools you can to make your job easier and achieve your objectives in a more efficient way.
Buy – maximum 75% ARV
Rehab – add value, over and above repair costs
Rent – find good tenants and get an internal appraisal
Refinance – get the loan pre-approved before you buy, and get the highest appraisal value
Repeat – learn from each investment
When you purchase a property, do it up, increase its value, and then refinance, you borrow against the value of the property at its highest. When done correctly, this allows you to recover more of the money you invested in the estate.
To get the latest insights from Ray, sign up for his free newsletter for updates 5 days a week. Subscribe to the free newsletter.
Has this guide on the BRRRR strategy been helpful? Are you now inspired to become a real estate entrepreneur? Let us know in the comments section below.