Heard of the BRRRR method and wondering what it is?
Well, you’ve come to the right place.
In this guide, we're going to discuss what BRRRR stands for and how it works in real estate investing. We'll then give you some detailed "how to" advice and share a real-life example of the BRRRR method.
Let’s dive in.
BRRRR stands for buy, rehab, rent, refinance, and repeat. It’s a real estate investment strategy where the investor buys distressed properties with other people’s money (hard money or private money), rehabs the property, rents it out to tenants, and then does a cash-out refinance that allows them to purchase a new property with the same funds.
The BRRRR method allows you to recycle your initial funds into new properties and grow your business beyond your personal financial capabilities — that’s the biggest benefit.
1. Buy
It all starts with finding a good deal.
As the old real estate saying goes, “You make your money when you buy.”
That’s because you only make money if you find a great deal. In fact, we recommend trying to meet these two criteria with the properties you purchase as often as possible…
Purchase homes that are likely to appreciate over time.
Only purchase homes that are A-C class assets.
But how do you know if you’ve found a great deal?
You’ve probably heard of the 75% rule before — it states that an investor should pay no more than 75% of the ARV (After Repair Value) of a property. For BRRRR, though, you’ll also need to consider holding costs.
2. Rehab
Assuming that you’ve found a good deal, secured funding, and purchased a property, it’s now time to rehab.
Of course, you should have a very good idea of rehab costs before you buy (the 75% formula doesn’t work without a rehab cost estimate).
And it’s difficult to overstate the importance of being accurate in your rehab cost estimate. This is one of the most common places for deals to go sideways — because an optimistic investor underestimates rehab costs.
3. Rent
The next “R” in BRRRR stands for “Rent”.
You’ve found a deal, purchased it with someone else’s money, rehabbed it, and now it’s time to find some tenants to get the property cash-flowing. This is critical so that you can start paying back your loan (and ideally, make a little profit every month, too).
In fact, the only way the BRRRR method works is if your properties keep cash flowing.
That requires tenants… good tenants.
But how do you find good tenants? Well, the first step is marketing. List the rental on as many websites as you can: Zillow, Realtor, Aparments.com, Rent.com, etc. You can also put a sign in the yard of the property or pay for an ad in the local newspaper. The more you market it, the faster you’ll find tenants.
Here are some criteria for choosing tenants.
Don’t consider tenants who’ve been evicted before.
Tenants should make 2.5 to 3 times the cost of their rent.
Verify the tenant’s income and rental history.
If there’s no rental history, require someone to cosign.
Check referrals.
4. Refinance
This is where the rubber meets the road and you find out if you got yourself a good deal in the first place.
You’ll want to do a cash-out refinance. This type of refinancing allows you to recoup and reinvest your own money or pay back your hard money lender so that you can find a new hard money lender.
So long as the property is cash flowing, it should pay for itself on the new mortgage.
Unfortunately, you’ll usually have to wait at least 12 months before doing a cash-out refinance — this is called the “seasoning period” and nearly all banks require it.
That’s why finding a good deal is so important… the deal can’t just be good right now… it’ll need to be good one year from now, too.
But finding a bank that will do a cash-out refinance can take some time. Seek out local regional community banks and ask them…
Do they do cash-out refinancing on residential properties?
What is the interest rate?
How long is their seasoning period?
Try and stay away from institutional lenders, which typically have a much higher interest rate.
5. Repeat
Now you repeat the process!
If your first deal went well, you have the choice of using the same private money lender or finding a new one.
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