If you have ever listened to real estate podcasts or browsed the Bigger Pockets website you have likely heard about the BRRRR method. You can find BRRRR calculators all over the internet now. So who coined the phrase BRRRR? And what is it?
BRRRR stands for Buy, Rehab, Rent, Refinance and Repeat. Easy enough, right? If you subscribe to BP content religiously (like I do) you probably know that Brandon Turner is the originator, and he wrote a book about it. So there is no question he can explain it better than me. But you didn’t land here with the intent on reading a book to learn about BRRRR, did ya? You want the cliff notes version, right? You’ve come to the right place.
BRRRR Step 1 – Buy
Every deal starts with a deal. Whoa, mind blown 🤯 ! I might have to quote myself on that. For real though, if you don’t buy right, the BRRRR method will never work. This is far and away the most important step. And who better to talk about this critically important first step than a credible wholesaler like myself? That’s all I do, find GREAT deals. So maybe you should just buy a deal from me. That’s a surefire way to master step 1!
In order for BRRRR to work, you need to buy a property that needs some repairs. I suppose you could also buy a brand new house if you can get a 30% discount. But good luck with that. Look for something that is dated or needs at least 20-30k in repairs. Unsurprisingly, this is how you justify getting a discount.
Tip: Don’t buy the nicest house on the block. Buy something in a neighborhood where after repair values (ARV) are 30-50% higher than what you paid for the house.
BRRR Step 2 – Rehab
This is pretty straightforward. Hire licensed contractors to do the work. Don’t go overboard and pick out all the most expensive finishes. Consider the neighborhood- what do the nicest houses look like at the top of your ARV? Don’t install granite counter tops if the houses have laminate. Don’t install $10,000 hardwood floors if the other houses have vinyl plank flooring. Do what needs to be done to satisfy your ARV requirements.
Keep in mind, this will ultimately be a rental property. The idea here is to make some nice upgrades, but stick to a budget. If this was a flip, you may end up spending a little more. The end goal here is to get an appraisal at your desired ARV.
BRRRR Step 3 – Rent
You have two options here. Self manage or use a property manager. If this is your first rental, I would suggest self-managing to learn the business. If this is your 5th and you don’t have a PM, start thinking about it. Managing too many properties can turn into a part time (or even full time job). Believe me, you don’t want to deal with a phone call from a disgruntled tenant about a leaky faucet when you on vacation with your family. If you are a self manager and you are making a nice living, good for you. Nothing wrong with that at all. Most PM’s charge anywhere from 5-15% of the monthly rent, depending on what services you opt for.
If this is your first one, do your research. I use Rentometer.com. They quickly pull rental data from the surrounding area based on your criteria. I have found it pretty reliable. Check other ads and make sure you are charging market rents. Screen the applicants, interview them, check references and make sure they are actually employed. Call their previous landlord, make sure they paid their rent on time.
If you followed these steps so far you should have an updated rental property with a good tenant at market rent. BOOM. So far, so good? On to the fun part. Putting cash back in your pocket.
BRRRR Step 4 – Refinance
It’s always good to talk to a few lenders about your options. Most banks will let you refi at 75-80% of LTV (Loan-to-Value ratio) depending on your credit score, income, etc. So let’s do some basic math here. Let’s say you purchased this fixer upper property for $100,000. You put 20k down, took out a loan for 80k. Most houses in the neighborhood are selling for $175,000, because you got such a great deal, right? You spent $20,000 on fixing it up. New floors, appliances in kitchen, countertops, paint, bathroom upgrade, the whole sha-bang! This eyesore of a house is suddenly looking pretty fly.
So now you are all in at $120,000 (40k cash).
You call up your lender, lock in a rate and get the refi going. The appraiser comes out, checks the place out and is really impressed. You hand him your receipts for all the work you did (because you saved those receipts right?). He tilts his cap and says good work son. Guess what, the appraisal comes back at $185,000! With a cash out refinance at 80% LTV, you can refinance a new loan at $148,000. Your original loan of 80k will be paid off.
So what’s left? $148,000 – 80,000 = $68,000 – closing costs of $3,000 = $65,000 cash in you pocket. After you pay your self back the 40k spent on the down payment and repairs you still walk away with 25k. Whaaaat? Crazy, right? You now own a cash flowing rental property, with 20% equity and you put another 25k in your pocket.
There are BRRRR calculators online that can help you analyze a deal and tell you if it would work as a BRRRR.
BRRRR Step 5 – Repeat
So what do you do with extra cash? You guessed it. REPEAT! Invest it in another property and do it all again. The numbers aren’t always this perfect and there are some other costs you need to consider such as interest (holding costs) and closing costs on the buy and refi side. But all in all, this is a fantastic investment strategy and a quick way to build up your rental portfolio quickly.
Tip: The BRRRR Method works a lot faster when you can pay cash. 1) It’s easier to get better deal with cash and you have a lot more flexibility with what you can buy. 2) When you buy a property with a conventional loan, most banks will require a seasoning period of 6 months before you can refinance. When you pay with cash, this rule does not apply. Find a private money or hard money lender (HML). You will pay some points and interest, but it will be worth it when you get a better deal.
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