When you hear real estate investors going “BRRRR,” it might sound like chilly fall weather has gotten the best of them, but in actuality, they’re more likely discussing a strategic method for growing a real estate investment property portfolio! The BRRRR strategy is a five-step method for efficiently scaling your real estate investment rental property portfolio without putting 20% down each time.
Table of Contents
- Starting BRRRR with Hard Money
- Some Nuances of BRRRR
- Buy Cheap
- Rehab Conscientiously
- Rent to a Quality Tenant
- Refinance low and slow
- Strategy and Precaution with BRRRR Strategy
Today we will elaborate on the five parts of the BRRRR strategy: Buy, Rehab, Rent, Refinance, Repeat!
These steps sound simple enough, but there are still basics and strategy to understand before using the BRRRR method to your advantage.
- To maximize the BRRRR strategy, buy a house or rental property at a discount
- Strategically rehab the property.
- Market and rent out the rehabbed property.
- Refinance the initial loan with a bank, after understanding and anticipating your project’s after repair value.
- Repeat this process utilizing the cash flow and equity gained in the first rental to invest in your next one.
Using the BRRRR method, utilizing strategic thinking and hard money can majorly impact the scale and cash flow of your rental portfolio. Strategizing and anticipating potential roadblocks at the front end of your rehab will contribute to your success using the BRRRR strategy. There are a few things to note about using hard money for this process, and before embarking on a BRRRR strategy rehab there are some nuances and precautions to be aware of.
Starting BRRRR with Hard Money
BRRRR will set off a cascading process that allows aggressive growth quickly with little to no capital. This is not a method for making large profits off rehab projects themselves; rather, BRRRR is an exciting and effective way to efficiently grow your net worth and real estate rental portfolio by increasing the amount of cash flow and equity you have by strategically growing your portfolio of rental properties fast.
Typically, at the end of this method, a real estate investor will be able to pull all their funds back out with little to zero personal capital left in the deal. As the newly renovated property is rented to a strong tenant, you will see your profit in equity and cash flow. Using hard money is a strategy for scaling a business without having to personally supply the down payment for your first property.
Hard Money loans are issued based upon the After-Repair Value of the property, and often include some provision for the actual rehab costs. In the “refinance” stage of the BRRRR method the hard money loan will ideally be paid off and replaced by a long-term loan from a commercial bank.
Even though BRRRR can be started with a cash down payment or other sorts of financing, using hard money is a smart way to work an already strategic method. Each step of this method has additional strategies to unpack and understand as well, making this not only a strong real estate investment scaling tool, but an enjoyable learning process too!
Some Nuances of BRRRR
Like a fixer-upper rental property itself, you can’t always take the five pillars of BRRRR at face value. The instructions sound simple, but you can’t overlook some of their implied guidelines. Here are some things to remember along the way:
To get the most out of the BRRRR strategy, the initial property purchase makes all the difference. The challenge of this process is finding a discounted house that isn’t in such bad shape that it will be expensive to get market ready. When strategically seeking properties to develop with the BRRRR method, seek properties that are well below market value and yet do not require major work. Enlisting the help of a wholesaler at this juncture can be a wise and time saving choice for this step!
A good way to calculate the maximum purchase price you should spend on a BRRRR method rental is 60 to 70% (neighborhood dependent) of the after-repair values – the cost of repairs.
Remember to leave yourself a little wiggle room for the unexpected, as well as the fees associated with refinancing such as title work and potential loan processing fees.
The rehab step is often where you will see the most opportunities to enhance your return on investment. The BRRRR strategy is not a scenario where you want to be dealing with major fixer uppers. Your goal is to rehab to rent ready condition.
If there are major structural needs in the property, such as a bad roof or foundation, the costs of the necessary renovations to make the building safe and inhabitable might not be suitable for adding that building to your rental portfolio at a time of fast scaling. Depending on your appraisal, these sorts of rehab tasks might not be deal breakers, but they are certainly things to consider wisely. Simply put, when rehab costs are minimal, the profit margin increases.
For many real estate investors, rehabbing is most of the fun. It is certainly the best way to increase your rental property’s value! The more value your repairs add to the property, the stronger likelihood of receiving a higher appraisal and better bank loan when refinancing the finished property.
However much fun you find rehabbing, reign it in a little when scaling your portfolio in this way. Strike a balance between cost efficiency and style. Be aware of trends in the market so you can anticipate what a renter would be looking for, but without decorating the property in too trendy of a way.
Design decisions can sometimes be a deterrent for renters. Neutral, timeless designs will be appealing to renters and help prevent the property from “aging” in its appearance when home décor trends change. You don’t want to waste money down the road re-doing this step to increase market desirability!
Rent to a Quality Tenant
Renting is an essential component of this strategy for two reasons:
- Renting provides the cash flow which will allow you to profit off of this endeavor in the end
- The property will most likely appraise higher in the refinance stage if it is inhabited by tenants and may be required by your bank
Each step of the BRRRR method plays a role in the scaling of your personal net worth, but this stage is where the process typically justifies itself financially. Getting renters in your BRRRR method rehab is going to provide the means to repay the final, refinanced bank mortgage monthly, and then start to turn a profit on the spread between total rent and costs.
Refinance low and slow
Refinancing plays a key role in the next step, repeat. Refinancing is also the final step in reaping the benefit of your strategic investing with the BRRRR method. In this stage, you will refinance the loans you took out to rehab the property after your repairs are done with a long-term loan. Typically, this loan is with a local bank.
With low interest rates and a slow repayment period, a conventional mortgage can be a great refinancing option. Commercial banks will typically lend between 70% and 80% of the ARV. FasterFunds Lending offers hard money loans of 75% ARV. Since the bank will typically refinance on the same 75% ARV that your initial hard money loan would likely be based on, you can almost always expect to see all your money back that went into the purchase and rehab.
Let’s consider an example BRRRR method renovation that would set you up too repeat the process. Say you purchase a rental house at $50,000. Ideally, you would have first received a hard money loan made on the projection of the ARV, and likely up to 75% of that amount. Typically, this covers purchase and some rehab costs.
Say you anticipate the bank appraising the final product for $100,000, and keep your rehab costs low, putting $25,000 into the property. You are now in this property for $75,000 with a net in equity of $25,000.
When you refinance and get a long-term loan, you can pay off the hard money loan from the first stage and often recoup any rehab costs you had, so long as your repairs didn’t exceed 75% of the ARV.
Since the bank won’t refinance until there is a tenant in the property and you have proof that there is viable cash flow, you will start turning a profit on the rental once the refi step is complete.
Now, you can do this again on a new property – using little personal capital to turn a property into potential capital for future business growth. While this is exciting and functional thanks to the method’s emphasis on careful strategy, it is important to not get carried away- remember these important details:
Strategy and Precaution with BRRRR Strategy
As with all forms of real estate investment rehabbing, you should not go into a flip using the BRRRR strategy without a contingency plan in place. One of the strengths of the BRRRR strategy is how straightforward it is. Knowing in advance the steps you will need to complete provides the opportunity to anticipate potential setbacks at each stage and allow you to plan for unexpected setbacks such as:
- The length of the “seasoning” period, also known as the period between the property purchase and your refinancing. With a scaled portfolio, be sure to have a safety net in the event one or more refinances do not yield the results you hope for.
- Sudden changes in the market, which could affect the ease of finding a renter, or that renter’s financial viability. In the event of an unexpected market downturn, anticipate a worst-case scenario of not having full occupancy and needing to financially sustain all your properties without regular cash flow from renters.
- Factors in the rehab stage that are out of anyone’s control, such as inclement weather. Delays of any kind can quickly add to renovation costs not anticipated when applying for the project’s initial hard money loan.
- While BRRRR can be done on properties far and wide, remember that property maintenance costs, property taxes, and other expenses may vary state to state and budget accordingly.
- Be prepared for the possibility of an unexpectedly bad property appraisal. If you do your numbers right and the property appraises where it should, you should not have to put your own money in the deal. However, since every appraiser is different the end result can be somewhat subjective. Appraisers determine property value based on comps; some consider rentals generally risky and won’t appraise them for high values. For example: say you have $20,000 in the deal. You may optimistically think all 20k will be coming back out in the refinance stage to use for your next BRRRR investment property, but if you get a bad appraisal for only $10,000, you can only get $10,000 out for next property. In the end, the project cost you 10k instead of breaking even. The likelihood of this happening can be contingent on the overall housing marking, and in our current competitive market, preparing for unfavorable appraisals should be on the list of precautions.
Perhaps the most strategic planning you can do in advance of embarking on BRRRR method rehabs, after building up a rainy-day emergency fund, is advance research into contractors and materials option for the rehab stage. This stage is important for paving the way to future cash flow on the property and going into it with options and research can act as a safeguard against rushed decisions and in-the-moment financial snafus.
During the rehab stage, a lot of your pending financial success with the property is in the hands of the contractor, so choose wisely! Especially in advance your first BRRRR method property overhaul, utilizing your local network of real estate investors and fellow rehabbers to select reliable contractors will be an important precaution.
In the rehab stage, there are more mundane precautions that a real estate investor must take to help facilitate a strong profit at the end: keep rehab costs low, but don’t be so cheap that the final product doesn’t appraise as expected!
Some rehab options cost more up front but are a greater value in the long run. Flooring is a great example: carpet is cheaper than laminate, but will wear down faster over time and incur replacement costs. Laminate flooring may feel too extravagant for a quick cosmetic rehab, but will look nice and last for many tenants.
Choices like this are important to weigh: aim to add long-term value to your rental, and avoid the missed opportunity costs of having to fix or replace poor options within the first few years of use.
If you have questions about implementing this process on St. Louis area properties or are looking to begin your first BRRRR rehab with a hard money loan, we at FasterFunds Lending, local St Louis hard money lender, are here to help!
If you would like to get started give us a call at (636) 223-4262 or click the button below.
- St Louis Real Estate Investor with 5 years of personal investing experience
- Completed 7 Flips while acting as the general contractor
- Grew up in a real estate investing family and experienced first-hand the power of flipping, cashflow and the BRRRR method
- Owns a rental portfolio of 3 rentals, specializing in St Charles county
- Experienced wholesaler
- Works for FasterFunds Lending, a hard money lender in St Louis, MO
- Walked over 400 houses with real estate investors in order to help them fund their real estate deals