The BRRRR method is a popular strategy for real estate investors. If you have the goal of building passive income in the future through real estate investing, then the BRRRR strategy could be a good choice for your portfolio.
Let’s take a closer look at what the BRRRR method is and how it can help you build a real estate portfolio.
What is the BRRRR method in real estate?
First things first, what is the BRRRR method? BRRRR stands for ‘buy, renovate, rent, refinance, repeat.’ As an investor, you would essentially follow the process and repeat until you’ve reached your portfolio goals.
Here’s what each step looks like:
As with all real estate investment strategies, you’ll need to find and purchase the property. For many of us, that involves saving up for a substantial down payment. Unfortunately, this can be one of the hardest parts of real estate investing. But with the BRRRR method, you should only have to save up for a down payment once to get the ball rolling.
When an investor chooses to pursue the BRRRR strategy, they should be willing to take on properties that need some rehabilitation. In fact, this investment strategy will only be successful if you can find properties that need some updates. The updates should allow you to give the property’s value a significant boost.
Without the ability to give the property a major facelift that provides a boost to its value, the BRRRR strategy will not work. Whether you do the updates yourself or hire contractors, you’ll need to be prepared to fund a major renovation.
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The next part of the process is to rent out your newly renovated property to tenants. You might choose to self manage the property or seek the help of a property manager.
Do some research on the market rental rates in your area. As you select tenants, set up screening questions that you are comfortable with. Putting in the work to find the right tenants now can save many headaches down the line.
If you are considering hiring a property manager, take advantage of our free questions to help to find the right property manager.
Once you’ve rehabbed the property and found tenants, it is time to explore your refinancing opportunities. Since you’ve increased the value of the property, you’ll be in a great position to refinance.
At this point, you’ll need to pursue a cash-out refinance. Depending on the property, you may be able to pull out enough to cover your upfront down payment and renovation costs.
When the refinancing deal goes through, you’ll have a property with an increased property value, rental income, and most of the cash that you started out with for the down payment. With that, it is easy to see why so many real estate investors pursue the BRRRR method.
After the cash-out refinance, you’ll have the money you need to pursue your next investment property in your bank account.
You can continue to repeat the process until you’ve built a portfolio that you are happy with.
Benefits of the BRRRR method
The best part is that you won’t have to continually come up with down payments each time you want to purchase a property. Instead, you’ll be able to pull out the equity you’ve built in the property throughout the renovations through a cash-out refinance.
You can use this cash to continually pursue your real estate investing goals without having to pause every time you need a down payment.
Since most of us cannot easily come up with the funds for a major down payment to on a repeated basis quickly, the appeal of this strategy is easy to see.
Drawbacks of the BRRRR method
Of course, there are downsides to consider with every type of real estate investment strategy. And the BRRRR method isn’t any different.
A major downside is the risk you will take on with each property. If you are choosing to purchase properties that need serious renovations, then you are likely to run into unforeseen rehab issues at some point. Unfortunately, hidden problems in a property can be a big expense for any real estate investor.
Additionally, the BRRRR strategy relies on taking on more debt along the way. You’ll need to determine whether or not you are comfortable taking on more debt throughout your investment journey.
How do I get started in the BRRRR method?
In order to get started the BRRRR strategy, you’ll need to save for a the first down payment. Additionally, you should have some savings on hand to fund the renovation costs.
Once you’ve built up the savings you need, it is time to find the right property. You’ll need to take some time to consider which properties you are interested in. You may decide to exclusively pursue single-family homes or choose to stick with multi-family housing opportunities. Do some research into the different property types and consider the return on investment you want to achieve. At that point, you can start looking for properties that match your unique investment criteria.
Although it can be scary to take the first step, you can move towards the real estate portfolio that you envision.
How much money to save up for the BRRRR method?
The total amount of money you’ll need on hand depends on the type of properties you are pursuing.
Let’s say you are considering a house hack to kick start your BRRRR strategy, then you will likely need a smaller down payment. That’s because you can qualify for owner financing opportunities that offer low or no down payment options. For example, you could pursue an FHA or VA loan which would require very little down to close on the property. With a house hack, you would still have the opportunity to use the BRRRR method. But the deals would look a little bit different.
If you are looking for a more traditional real estate deal, then you’ll probably need to have more funds available for the upfront costs. In either case, you should prepare to have a significant amount of money on hand to fund the repairs. As you look for potential properties, consider the amount of work you’ll need to do to make the place an attractive spot for potential renters.
How to use the BRRRR strategy without snowballing debt?
As you’e likely noticed, the BRRRR strategy will require that you take on more debt along the way. Each time you choose a cash-out refinance, you’ll essentially put yourself in more debt. Although you likely need the money to continue building your real estate investment portfolio at your chosen pace, taking on more debt comes with inherent risks.
If you are aggressively pursuing the BRRRR strategy, then you will likely see your debts grow over time. However, it is important to mitigate the risks of this growing debt. With that, you should not put yourself in a situation where you would lose the property if a tenant missed a rent payment. Essentially, this means that you may want to have an emergency fund set up for your real estate portfolio to avoid the risks of debt. With an emergency fund to cover rent for a few months, you would have some time to find a new tenant or make necessary repairs if something went awry.
Additionally, it is a good idea to consider what you want out of your real estate portfolio before taking the BRRRR method too far. For example, you could have a goal for the number of doors you want to acquire or the amount of rental income you’d like to produce. Once you hit your goal, it might be time to start paying down properties instead of taking on more debt. Taking some time to determine your goals ahead of time can ensure that you don’t take on more debt than you need to.
How to get money back from the BRRRR strategy?
When you get started with the BRRRR strategy, a key component is getting part of your initial investment back to tackle the next property. You may have the opportunity to get money back from the BRRRR strategy if you increase the value of the property significantly.
If you can give the property’s value a boost, then you’ll be able to pursue a cash-out refinance. Although the lender will likely require that you leave some equity in the home, a cash-out refinance can allow you to pull out funds from the equity you’ve built in the home. In other words, you’ll get some or all of your funds back.
How do I find properties for the BRRRR method?
If you want to pursue the BRRRR method, you’ll need to seek out properties that have potential for an increase in the property’s value. Typically, these are properties that are in need of major renovations. With that, you’ll need to seek out properties in disrepair.
It will likely take some time to find the right property. But doing research on the market, you are interested in should help you determine what to look for in your first property.
BRRRR method examples
Let’s take a look at some examples of the BRRRR method to show you how the numbers work.
Let’s say you purchase a triplex for $175,000. You need to renovate the property and spend $25,000 on the repairs. After completing the renovations and finding reliable tenants, the property is now worth $250,000.
Now it’s time to pursue a cash-out refinance with a lender. You’ll likely be able to pull out up to 80% of the new value. In this case, that’s $200,000. With that, the cash-out refinance will lead to a loan of $200,000 with $50,000 in equity still left in the property.
In this example, you were able to pull out all of the upfront investment in the property. Now you are able to pursue another investment property without struggling to save for another down payment.
Here’s a look at my third house hack for a better understanding of how this strategy can work in a real example.
When I moved to New Orleans with my significant other, we decided to pursue a house hack with the BRRRR method. With that, we looked for distressed duplexes with an accessory building or guest house. After months of looking, I found a distressed cornerstore property with a detached two-story one-car garage on the market for $345,000.
Since the property needed a major amount of work, I initially submitted a low-ball offer to get my name in the mix. Eventually, I was able to close on the property for $270,000 using a hard money loan. After extensive renovations that exceeded my original budget by $50,000, the property’s value increased dramatically. Once the renovations were complete, I took out a traditional loan at a local bank to complete the cash-out refinance portion of the process.
Now, my partner and I are enjoying our new home within a house hack. Plus, we have the funds from the refinance to invest in other properties.
Ryan, from our house hacking case studies series, is another real estate investor that pursued the BRRRR strategy while house hacking. He bought a small multi-family property in 2016 that needed significant updates.
He closed on the property for $345,000 using an FHA loan with 3.5% down. After closing, he spent $30,000 on renovations for each of the three units. With that, the total upfront investment in the property was $48,000. He was able to cover most of his housing costs for years with this house hack.
Several years later, Ryan decided to pursue a cash-out refinance to continue his real estate investment journey. With the funds from the refinance, he was able to acquire a seven-unit rental property.
Should you use the BRRRR method?
So is the BRRRR method right for you?
When you should use the BRRRR method
If you want to quickly build your real estate portfolio but don’t have a lot of cash on hand, then the BRRRR strategy is a way to stretch your funds farther. You’ll be able to acquire more doors quickly through the BRRRR method.
You’ll need to be comfortable working with properties that need major renovations. Plus, you’ll need to be comfortable taking out more debt along the way.
When you shouldn’t use the BRRRR method
If you don’t want to work with distressed properties, then the BRRRR method is probably not a good fit. You’ll need to give the properties you work with a major value boost to use the BRRRR method effectively. This can be impossible to do without a property that is in need of a major facelift.
Additionally, the BRRRR strategy might not be right for you if you are opposed to taking on more debt over time. Although you may have to build more slowly, you may want to pursue options that minimize your debt burden.
The bottom line
The BRRRR method is a great way to build a real estate portfolio with little upfront capital. If you are considering this opportunity, then take a look at our complete guide to real estate investing to help you get started today.