Few techniques within the real estate investing industry have gained the same level of notoriety as the BRRR strategy. As an acronym for buy, rehab, rent, refinance, and repeat, the BRRR strategy is less of a strategy and more of a system; one that gives investors a simple plan to follow. Despite its simplicity, however, the BRRRR strategy has proven—time and time again—that it can help investors build cash flowing rental property portfolios time and time again.
The BRRRR strategy is a system implemented by passive income investors who wish to maintain a lucrative and long-term rental property portfolio. More accurately, however, BRRRR is short for buy, rehab, rent, refinance, and repeat. Not to be confused with the same audible expression many associate with frigid temperatures, BRRRR is more like a roadmap; one that’s intended to guide investors through the most prevalent steps of owning a profitable rental property. In fact, BRRRR literally directs investors to follow each step in the order it appears: buy, rehab, rent, finance, repeat. Below I’ll break down each step in more detail.
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The first step, according to the BRRRR strategy, is to buy a property. It is worth noting, however, that not any property will do; investors need to acquire the right one. As a result, it is in every investors’ best interest to mind due diligence and search for a home that not only meets their long-term goals, but also contributes to a lucrative investment strategy. There remains a thin line between securing a property which represents a sound investment deal, and one that may prove successful over the duration it is included in a rental portfolio. Therefore, be sure to conduct a thorough property analysis, which includes calculating the cost of renovations, estimating monthly rental expenses, and ensuring that the resulting rental income will provide sufficient profit margins over the useful life of the home.
A good guideline to use is the 2% rule, which suggests whether or not a rental property is worth purchasing for cash flowing purposes. If the cash flow is expected to generate more than 2% of the asset’s purchase price each month, it’s widely considered to be a “good” investment. In order for investors to justify the purchase of a $100,000 rental property for example, it should at least be able to generate $2,000 a month in rent.
Profits in the real estate industry may be realized at almost every point in the investing process. Obviously, it’s quite common for investors to increase profit margins at the closing table on a sale. Likewise, budget friendly, efficient rehab projects can increase the value of a home to the point incredible profit may be had. There is, however, one step a lot of investors forget about that may realize the most profits of them all: the acquisition. The point of sale represents the best place to increase profit margins. Therefore, attempt to find a below-market house when executing the BRRRR strategy. Prioritize distressed properties (those in foreclosure or pre-foreclosure), as their owners will most likely have more motivation to sell. It is the seller’s motivation, in fact, that may help investors buy a home below market value.
Many of today’s real estate investors use the 70% rule to help decide an offer price on a subject property. According to the 70% rule, investors should pay approximately 70% of the home’s after repair value (how much a home is worth once it is restored to the condition of local comparables). As a result, the 70% rule relies heavily on rehab costs and expenses. Specifically, the rehab costs are to be subtracted from 70% of the ARV. In other words, investors should look to acquire a deal for 70% of its ARV, minus the amount they expect to spend on rehab costs.
The second step in the BRRRR strategy recommends rehabbing the recently acquired property. That’s not to say the home needs a complete makeover (some might), but rather that it needs to be brought up to the same condition as nearby comparables. The whole idea of rehabbing, for that matter, isn’t to make the nicest, most expensive home possible; it’s to bring the property up to an acceptable condition while sticking to a strict budget. It’s entirely possible to over rehab a home; it gets to a point that the money being spent on the home isn’t worth the impending returns. Therefore, investors using the BRRRR strategy will first want to look at nearby homes and determine for themselves the level of rehab that is required. In doing so, they’ll know exactly what the home needs, without going overboard. The idea is to rehab the home to the point it is slightly better than those to which it will be compared. That way, it’ll serve as the best home on the block at an attractive price point.
While investors may be confident in their ability to rehab a home themselves, it’s almost always better to hire a contractor. Enlisting the services of a professional will come at a price, but it coincides with two very important benefits: time and quality. A good contractor will ensure the job is done correctly the first time, and with the quality one can expect from a professional; that alone is worth the cost of hiring a contractor. More importantly, however, the use of a contractor will award investors the opportunity to spend their time on more important things. With the help of a contractor, investors are free to focus on the next step: getting the property ready for a tenant.
Once the asset is deemed ready for a tenant, investors will not want to waste anytime filling the vacancy. The longer a home sits empty, the more it will act as a drain on their bottom line. In fact, a week or two before the home is ready, investors should start trying to find a tenant. Their efforts should include everything from Craigslist ads to email blasts and street signs. At this point, investors should consider hiring a third-party property manager, as their services will help find and screen tenants in a professional manner.
Once the property becomes ready to rent, and perhaps even a little sooner, investors should start accepting tenant applications. Applicant inquiries usually take place over the phone or through several email correspondences. Use whichever method you prefer as an opportunity to ask questions and verify that each inquirer meets your predetermined criteria.
Before screening your first tenant, create a list of eligibility criteria that will be applied uniformly to all interested applicants. Some of the most important things to look for when screening tenants are:
A verifiable income level
A minimum credit score
A copy of government-issued identification
No prior evictions
Those who already know what they want to look for will have a much easier time picking the right tenant for their home. It is worth noting, however, that there are laws to abide by.
Both tenants and landlords, in fact, are protected by The Fair Housing Act, enacted by the U.S. Department of Housing and Urban Development in 1968. As its name suggests, The Fair Housing Act protects homeowners and prospective renters from unlawful discrimination, not the least of which includes the screening process. As a result, investors will need to make sure they are following the laws when carrying out their own screening process.
With the property effectively rented and cash flowing, investors should then turn their attention towards refinancing their assets if a better deal comes their way. That said, refinancing is not usually an option until the home has been “seasoned.” Different banks will have different seasoning periods, so be sure to check with your own provider before refinancing. Next, you’ll want to make sure the respective bank offers the ability to conduct a cash-out refinance.
Not all banks are willing to offer a cash-out refinance immediately, or ever. Therefore, investors will need to look around for a bank that allows them to take cash out at a reasonable rate; more often than not, local banks are the best bet for a cash-out program. That’s not to say nationally institutionalized banks won’t offer a cash-out refinance on recently acquired rental properties, but local banks are often willing to do more to compete for your business.
It is of the utmost importance for investors to secure a cash-out refinance. That way, they’ll be able to use the money from their first property to fund the acquisition of a subsequent rental. Done at the right time, a cash-out refinance may simultaneously offer competitive rates and the means to secure another home. Therein lies the true benefit of utilizing the BRRRR strategy: the benefits are able to compound on themselves and promote the acquisition of more properties. It is entirely possible to repeat the process and build an entire rental portfolio of cash flowing rental homes.
Not unlike every exit strategy known to real estate investors, the BRRRR strategy isn’t without a few risks. There are, at the very least, severe things investors will want to avoid while they are carrying this strategy out, not the least of which include:
Expensive loans: The BRRR strategy is considered a long-term strategy, which depends on cheap loans. Fortunately, most interest rates in today’s market are relatively inexpensive. While they are creeping up, they are still historically low, and in favor of borrowers.
Prolonged Rehabs: Time is, as they say, money, and nowhere is that more important to consider than over the course of the BRRRR strategy. That said, investors will want to avoid lengthy rehab processes. The longer the property sits vacant, the more money they stand to lose, which could potentially jeopardize the entire plan.
Doing Everything Alone: A great deal of investors will at least consider doing everything on their own; they assume it will save them time and money. While that may be true for some, the majority will benefit from hiring professionals to help them on their journey. Attorneys, contractors and other professionals will cost money, but their services are worth the added expense. Aligning yourself with the right people will save time and money in the long run.
The BRRRR strategy has become synonymous with some of today’s best ways of building a cash flowing passive income portfolio. Done correctly, this particular strategy awards savvy and efficient investors with not only the steps required to build a real estate business, but also an easy way to remember them.
BRRRR investing is a strategy used by real estate entrepreneurs who wish to build a cash flowing rental portfolio overtime.
The BRRRR method has become known as one of the best ways to buy multiple rental properties over the course of one’s career.
BRRRR real estate investing is meant to be a passive strategy for long-term investors, not those looking to flip homes.