If you haven’t already, subscribe to our newsletter here to get our articles directly to your inbox and follow us on Twitter, Instagram, and YouTube! In our Educational Series we will be taking a deep dive into different ways to invest your money in hopes that one or multiple of these methods strikes you as interesting and encourages you to invest your money to grow your wealth.
What does BRRRR stand for?
The BRRRR method has become a very popular investing strategy for buy and hold investors. BRRRR stands for “buy, rehab, rent, refinance, repeat”. This defers from the most popular method of putting 20% to 25% down, rehabbing the property if necessary, then renting out the property because the refinance aspect of the BRRRR method allows the potential to pull out any money you put into the house and reuse that money for another property. I have yet to use this strategy as depending on the market it may be difficult to pull all or majority of your money in the deal and tough to execute, but does not mean it is not possible or that you cannot pull out any money out of the deal. I’ll breakdown the steps to this strategy below.
Now this may seem self-explanatory, you need to purchase a property in order to own it right? Well this may be the most important portion because how you finance the deal and the purchase price of the deal will determine how much you’re able to pull out of the deal. Typically, the majority of lenders will lend up to 75% of the deal, requiring you to put 25% of the purchase price down. In order to determine how much you rehab for the property you need to determine the after repair value or the ARV. That is another newsletter within itself, so here is another resource from BiggerPockets on how to calculate ARV. With the calculated ARV, you need to determine if ~70% of the ARV would cover what you put into the property because refinancing costs some money and gives you some buffer if you miscalculate slightly. This is an important step because the difference between the purchase price of the property and the ARV (after the rehab costs) and will determine how good of a deal it is.
Now this might be the most difficult portion of the BRRRR method as you either need to have great contractors (which you’ll most likely need to scale your real estate portfolio regardless) or you’ll need to know how to do various tasks in order to rehab the property. This involves managing contractors or various projects in order to get the home up to the standard you’d like to rent the property. This part is also crucial because you do not want to “over rehab” or “under rehab” based on the other properties or options in the neighborhood. The rehab process can be the longest portion of this depending on how much of the property needs to be rehabbed and availability of contractors.
This portion is important prior to refinancing a property because banks rarely want to refinance a property prior to being rented out. Also the amount the property is rented for will help you determine how much you’d like to refinance for so the property can cashflow or the rental income can at the very least cover the expenses.
This is what makes this method awesome. By refinancing out of the loan, you’re able to pull the money you put into the deal and reuse that money repeatedly to gain more assets. Now, it does cost money to refinance with a bank and you should consult with a bank prior to purchasing a house or have a relationship with a bank where you know it will be possible to refinance. Granted, this is the last step so there may have been hiccups along the way but pulling money out with the ability to reuse it while having renters pay down loans is extremely valuable.
You also need to know how long your bank’s seasoning period is. A seasoning period is how long you have to own a property before the bank lends on the appraised value instead of how much you’ve invested. You must borrow based on the appraised value for this strategy to be successful, therefore knowing the period will help you set the necessary deadlines.
Now that you have your money that you put into the deal out, now you can use that money to repeat the process and gain more assets!
This is a very brief explanation to give you a general idea on what this strategy entails, but there are plenty of great resources to find out more about this. There’s a few blog posts from BiggerPockets and BiggerPockets even sells a book on the strategy so if you are interested check out those resources as well as searching for the BRRRR method in your favorite podcast player!
Have a great rest of your week!
Brandon & Dan
Disclosure: The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock, asset, or cryptocurrency. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.