Bring in Recurring Real Estate Income Using the BRRRR Method
Unlike a fix-and-flip transaction in which the property is typically sold to a new buyer in a single transaction for a one-time profit, the BRRRR method is designed with real estate investors in mind. Using the BRRRR method, investors can secure a pipeline for ongoing residual rental income and the means to finance future transactions.
Here’s what you need to know about how BRRRR works and whether it’s a good investment strategy for your real estate portfolio.
Buy, Rehab, Rent, Refinance, Repeat
The BRRRR method stands for buy, rehab, rent, refinance, and repeat. It allows real estate investors to build a recurring rehab and rent system that can ultimately feed and sustain itself with each subsequent property.
The BRRRR method allows real estate investors to capitalize on each transaction by earning refurbished property equity and securing residual income through rental payments.
Here’s a summary of the steps involved in taking advantage of the BRRRR method:
Buy
Distressed properties with rehab potential are the ideal choice for a BRRRR investment. Purchasing and rehabbing a distressed property for rental income allows investors the ability to capitalize on high leverage and funded rehabs without a large outflow of initial capital.
Additionally, securing traditional mortgage loans is more difficult for distressed properties. Alternative real estate financing, like hard money loans or non-qm loans, becomes the best source to secure funding for a distressed property quickly and with fewer hurdles than traditional financing. The terms and approval process for hard money loans are looser and tied to the property value as opposed to the borrower’s personal assets and credit profile.
In real estate investing, as in life, timing is just about everything, especially with an initial BRRRR investment where the return on investment may take longer than a traditional fix and flip.
Rehab
Depending on the state of the property and coding requirements in the region, distressed properties can be cheaper to buy but more expensive to rehab. However, many hard money and private lenders provide up to 100% rehab funds to complete the project and boost after-repair value (ARV). If you plan on funding the rehab with cash, prepare your timeline and budget for upfront costs like building materials and appliances.
Rent
Start earning rental income as soon as the property is up to code and ready to hit the rental market. You’ll also be responsible for the cost of upkeep and ongoing maintenance.
Your property will need tenants before you can move onto the next “R,” as most lenders won’t refinance a loan for a rental property lacking renters.
Refinance
Once the property has been refurbished and rented, use the new line of equity to secure funding for the next investment to often access a lower interest rate and long-term 30-year fixed terms with a DSCR rental loan. This most often means a cash-out refinance on the property to leverage the equity you’ve built.
Repeat
Once you have done this once, every time you repeat the BRRRR method, it gets easier and easier. Find another property and repeat the process, using the cash-out equity from the refinance.
Balancing potential and caution
While the BRRRR method offers a comprehensive strategy for building wealth through real estate, it's important to balance the potential benefits with understanding the associated risks and rewards. To gain a deeper insight into these aspects, learn about the risks and rewards of generating recurring income. This knowledge will help you navigate the complexities of the BRRRR method more effectively.
What are the Best Financing Options for BRRRR Real Estate Investments?
The key to rolling out the BRRRR method for multiple investment properties is a cash-out refinance loan, where the property’s equity value after repairs allows investors to borrow cash in order to invest in a new property.
Since traditional mortgage loans' terms and approval criteria are more stringent and often difficult to secure for distressed properties, a cash-out refinance loan with a hard money lender allows investors to secure funding for new investments using the property’s post-rehab equity value.
Cash-out refinance loan terms are looser than traditional mortgages, so you can use the money to purchase a new distressed property and pay for the upgrades and new building costs.
Hard money loans are also an alternative to traditional loans that offer faster and easier approval and closing and provide cash flow to buy and refurbish distressed property for sale or rental.
Understanding the financial intricacies of the BRRRR method is crucial for long-term success. It's not just about finding the right financing but also ensuring that each investment adds to your portfolio's profitability. To better understand this aspect, assess the profitability of your real estate investment for sustained income. This will help you make informed decisions about which properties to invest in and how to manage your finances throughout the BRRRR process.
Who Should Use the BRRRR Method?
The BRRRR method can be an attractive and lucrative vehicle for the long-term growth of a real estate investment portfolio. The complex nature of the BRRRR method can also make it a more extensive investment than a standard fix-and-flip that makes the process repeatable.
It’s ideal for both seasoned and beginner real estate investors with a solid understanding of every stage involved in the process. You’ll want to have deep knowledge in finding and accurately assessing the value of distressed and below-market properties, adequately planning for the repair costs, and navigating the rental market.