The BRRRR method is a popular strategy among real estate investors that involves buying a property, rehabbing it, renting it out, and then refinancing to pull out your original investment plus any additional equity that has been built up. This allows you to repeat the process with a new property and grow your real estate portfolio, but it doesn’t come without its own potential pitfalls. Let's take a look at the BRRRR method, how it works and what you need to know to get started.
How the BRRRR method works
What is BRRRR, and what does it stand for? Letter by letter, BRRRR stands for “Buy, rehab, rent, refinance and repeat.” It’s like flipping, but instead of selling the property after renovation, you rent it out with an eye on long-term appreciation.
The first step is to find a property that has potential. This could be a fixer-upper that you can buy at a discount, or a property that you can add value to through renovations or other improvements or a distressed property (a home in pre-foreclosure, foreclosed or bank-owned). The ideal property is usually one that needs some upgrades but that has otherwise valuable qualities worth investing in, such as a great location. The key is finding a sweet spot between disrepair and overall potential.
Once you've found a property, the next step is to rehab it. This could involve making cosmetic upgrades like painting or flooring, or more extensive renovations like adding a bathroom or finishing a basement. The goal is to increase the value of the property and make it more attractive to potential tenants. One of the keys to a successful rehab is making the right repairs; this means determining which renovations will give you the biggest bang for your buck, whether you’re hiring contractors or rolling up your own sleeves.
After the property is rehabbed, it's time to start renting it out. This involves finding tenants, signing a lease, and collecting rent payments. You’ll likely want a rent amount that covers your own mortgage payments and, ideally, generates some profit too. Keep in mind that, as a landlord, your goal is to keep your tenants happy and your property well-maintained — which takes time and effort.
The final step in the BRRRR method is to refinance the property. This involves taking out a new loan using the increased value of the property as collateral. This can allow you to pull out your original investment plus any additional equity that has been built up, giving you cash to repeat the process with a new property.
Once you’ve successfully refinanced your home, the next step in the BRRRR method is to pat yourself on the back and consider using your hard-earned cash on your next project!
Pros and cons of the BRRRR method
he BRRRR real estate method can be an effective way to enter real estate and develop long-term revenue streams — but, like any investment, it’s never a sure bet. And, even when successful, the commitment involved may not be suitable for everyone. Let’s examine the BRRRR method in detail and cover some of the potential upsides and possible pitfalls.
- Wealth building: The BRRRR method allows you to leverage your initial investment and provide a linear path to growing your real estate portfolio. By using the equity and rental income from one property to buy the next, you can potentially increase your returns and build a real portfolio of rental properties over time.
- Passive income: With successful deployment of the BRRR method, you can develop streams of rental income that can become a steady source of funds. This can be particularly helpful if you're looking to diversify your investment portfolio and reduce your reliance on other sources of income.
- Continuous equity: During the rehab process, as you add value to the property you continue to build equity — continuously building equity and improving your refinance potential. This may help you secure a lower interest rate and reduce your monthly mortgage payments, which can free up more cash for additional investments.
- High starting costs: The BRRRR method requires a significant amount of upfront capital to buy and renovate properties. You'll need to have enough money to cover the down payment, renovation costs and other expenses, which can be a significant hurdle for many investors.
- Hunting can be difficult: The success of the BRRRR method depends on finding properties that have potential for renovation and adequate rental income. This is sometimes easier said than done, as it requires significant forecasting and relies on a great deal of estimation. Not all properties will be suitable for this approach, and you'll need to carefully evaluate each property to determine if it's a good fit.
- Speculation is risky: Real estate investing can be hazardous; there's always the possibility that your property won't appreciate in value or you’ll have difficulty finding qualified tenants. This can lead to financial losses and potentially put your initial investment at risk.
- It’s a significant commitment: Renovating and managing rental properties can be time-consuming and require a lot of effort. You'll need to handle all aspects of the rental process, from finding and screening tenants to maintaining the property and dealing with any issues that arise. This can be a significant commitment and may not be suitable for everyone.
The BRRRR method is a real estate strategy that involves flipping properties, renting them out and using equity you’ve built to refinance your loan for better terms. This can be an effective way to generate long-term income and diversify your portfolio but is a serious commitment, both in terms of money, time and responsibility. And, like any investment, it isn’t without risk.