The BRRRR Method for Real Estate Investing

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What Is the BRRRR Method?

The BRRRR Method is an abbreviation for Buy, Repair, Rent, Refinance, Repeat. It is used by real estate investors to get quick equity on the house while keeping an investment property that appreciates and provides rental income. This strategy may be a very powerful tool to expand an investment property portfolio quickly if an investor can get good deals on undervalued properties due to some damages or lack of maintenance. It is important to note that this investment strategy has certain risks involved, so it is important to evaluate the BRRRR investment proposal before proceeding with the strategy.

Every word in the BRRRR abbreviation stands for a step that needs to be taken by an investor to complete this strategy. Buy refers to the search, negotiation, and purchase of the property. It is the crucial step in the whole process because an investor needs to find an undervalued or even damaged property that may increase in value by more than the price the investor pays for the repairs. Not every property may provide this opportunity, so it is important to search the market carefully and estimate the costs before picking a property.

During the Repair step, an investor has to fix the property so that it is habitable and rentable. Repairs made to a damaged property usually lead to an increase in property value, but the increase is not always proportional to the cost of repairs. It is important to find a property that will increase in value more than the cost of the repairs to reap the benefits of this method.

When the repairs are done, the investor can Rent the property to pay for the monthly mortgage payments that they have to make. The goal of this method is to keep the property rather than sell it. Renting it out will provide a stream of income that can help cover the mortgage or even provide some cash monthly.

Refinance step is often optional and it depends on the financial goals of the investor. Refinance is used to either lower the monthly payments or cash out a part of the equity through a cash-out refinance program.

The last step is Repeat, which refers to repeating the same process once again with another property.

Step-by-Step Explanation of BRRRR Method

The BRRRR method contains 5 distinct steps that must be completed to get the full benefit of this strategy. Every step has unique nuances that an investor must be aware of before proceeding with the strategy. Just as any investment strategy, BRRRR possesses certain risks that may lead to large losses or even bankruptcy if not addressed properly. This section provides an overview of each step of the BRRRR method and the common ways to minimize the risk of this investment strategy.

Step 1. Buy

This is one of the most crucial steps for a successful BRRRR deal. This step deals with looking for an appropriate property, purchasing a property, and financing it. Looking for an appropriate property is the most important part of the buying process. Not every property will be a good fit for the BRRRR method. This strategy is based on adding value to the property through repairs, so if a property is brand new or is not damaged, then any efforts to force value on it may not yield positive results.

BRRRR investors usually look for properties that are undervalued due to lack of maintenance or financial distress. Buying a foreclosed property is often a good option for this strategy because foreclosed properties are often sold under the market value and require a lot of repairs.

Foreclosed properties are usually sold at an auction, which also may be risky for inexperienced investors because they may find themselves in a bidding war with other investors who can evaluate the deal much more precisely. In this case, the inexperienced investor may find themselves with a property that is worth less than the total cost of the BRRRR process. A good rule to have when buying an undervalued property is to compare the price per square foot of a house with comparable houses and see whether there is any value in the deal.

If you are living in an area with many experienced BRRRR investors, then you may get better deals through direct communication with landlords in financial distress. It is possible to purchase a pre-foreclosed property before it is passed to the lender and moves into a foreclosure stage. Before you get to talk to them and make an offer, you have to look for them.

An effective but tedious way to find good leads is through driving around the neighborhoods and looking for the signs of distressed properties, which may include uncut grass, unmaintained sidings, garbage on the property land, and anything else that may signal that the property has not been maintained in a while.

When you find a few leads that fit the description, you can start a cold calling or door knocking process to directly appeal to the homeowners. This strategy is tedious, but because it is tedious, it may be very useful as there is less competition compared to traditional auctions.

You should also consider how you finance your purchase. Most people may be eligible for a conventional loan. On the other hand, if you cannot get a conventional loan, you may consider getting a temporary hard money loan to buy and repair the property. Once your property is repaired, you can refinance your hard money loan into a mortgage. Hard money loans are usually more expensive than conventional loans, but they can be paid off in a short amount of time. You can use this hard money loan calculator to estimate how much it would cost you to get a hard money loan for your project.

Step 2. Repair

Repair is also an important part of the process because it requires certain budgeting of time and capital. The length of this process should be minimized as much as possible because when the property is under construction, it might be hard or even illegal to find tenants. Without any tenants, you will have to pay for the mortgage monthly payments out of pocket, which may become a problem over time if your budget is tight and your income is not enough to cover the payments.

The repairs step usually includes planning, designing, and working on the project. Before you get to design the needed repairs, you need to inspect the property and see what is needed to be repaired. The required repairs depend on the property, so you should not expect to have the same repairs made among different properties.

When you have made a list of repairs that need to be done, you can start budgeting for them. It might be difficult to estimate the price of repairs if you have never done them, but contractors and various calculators, such as a stair calculator, may be helpful to understand how much you should expect to spend.

Contractors may help provide you with a quick estimate of how much a certain project will cost, but the estimates done by them are usually not free, so if you are only budgeting for them, you may want to consider using construction calculators to see what materials and how many of them you need. For example, a roofing calculator may provide a good estimate of how much of different materials you need to complete the project.

Sometimes you may even need to estimate amount of raw materials that you need to purchase. For example, you may find a concrete calculator useful to estimate the amount of concrete needed for your repairs. This will not provide you with the final cost of the job, but it will help you with your research.

Once you have the budget set up, you can start looking for contractors or working on the repairs yourself if you have the proper experience. Working on the project yourself is a great way to save money, but it is important to understand that if you do not have the proper experience, you may waste materials and your time, which is essential to maximize the income from the BRRRR project.

Step 3. Rent

Once the repairs are done, you should start looking for the tenants to move in. There is a reason why looking for tenants is very beneficial to do before refinancing. When you refinance the property, the lender will look at your income, and rental income can be added to your other sources of income. A higher combined income will lower your debt-to-income (DTI) ratio, which may lead to lower mortgage rates and interest payments over the lifetime of the loan.

You can deal with looking for tenants yourself, or you can hire a real estate agent to help you find the tenants and do all the administrative tasks. It is also worth considering hiring a property manager to look after the property and respond to emergencies that may happen while the property is tenanted.

Being an owner of a rental property may be exhausting if you do not delegate the tasks to other people, so even though it may lower your rental income, it is worth considering hiring someone to take care of the property.

Step 4. Refinance

Finally, once the property is repaired and the tenants are set up, it is time to go to a bank. Refinance in the context of the BRRRR method refers to a cash-out refinance, which allows you to withdraw cash by lowering your equity on the property. Refinancing is not necessary if you are not short on cash, or you are not planning to purchase another property any time soon.

It is important to remember that refinancing comes at a cost that includes refinancing closing costs and higher interest payments, so it is important to evaluate the benefits and drawbacks by calculating the cash-out refinance outcomes.

Step 5. Repeat

This is one of the most crucial steps for a successful BRRRR deal. This step deals with looking for an appropriate property, purchasing a property, and financing it. Looking for an appropriate property is the most important part of the buying process. Not every property will be a good fit for the BRRRR method. This strategy is based on adding value to the property through repairs, so if a property is brand new or is not damaged, then any efforts to force value on it may not yield positive results.