This success story got my attention: Real estate investor Ehab Shoukry achieved financial freedom in just four years using the BRRRR method.
He wanted to have enough regular income from his rentals to let him retire and he got there by using the BRRRR method. He did it with only four Airbnb properties that generate more than $100,000 every month.
Maybe you have heard about the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat) and its power to make you wealthy but you don’t understand exactly how it works.
Don’t worry, you are not the only one. A quick search on the BiggerPockets website shows a ton of investors also looking to understand the BRRRR method.
Examples of BRRRR posts on BiggerPockets:
- “Confused about the BRRRR method”
- “Is the BRRRR method worth the risk?”
- “I’d like to know your opinion on this: Is the BRRRR method the best option for real estate investment?”
- “Hello BP! I am considering doing the BRRRR method but unsure if it is the right step for my current situation.”
If, like these other investors, you’ve heard exciting things about this strategy but want to understand exactly what is the BRRRR method? And how does the BRRRR method work? This article’s for you.
So, what about you? Is the BRRRR method right for you? Here’s just a couple of ways the BRRRR method can work for you.
- No money down
BRRRR investing, if you work the numbers, can potentially be a way to own an investment property with little or no money out of pocket.
- Major ROI
Because you only need a small out-of-pocket cash investment, the ROI can be big. For example, if you put just $10,000 down and you can charge a monthly rent of $2,500, it’s a 25% cash-on-cash return.
What is the BRRRR method?
The BRRRR method, when you get it right, will provide you with rental income and a way of financing additional rental property purchases.
With this method, you buy a property that needs work, fix it up, and then refinance the property to provide funds to buy your next rental property and keep repeating the process.
Here’s the five BRRRR steps
- You BUY a property
- You REHAB the property
- You RENT the refreshed property to tenants until the equity builds up
- You buy a second property by REFINANCING the first
- You REPEAT the process
Let’s get into those steps in more detail.
Step 1 BUY
Find an undervalued property. Likely the reason the property is a good deal is because it’s in poor condition and needs work.
If you can’t make a full cash offer, here are some options:
- You can get a traditional loan but this usually needs at least a 20% down payment
- You can borrow from hard money lenders who will lend you money based on how good the investment looks and use the property as collateral
- You can borrow from friends or family members
But how do you know if a property that you’ve found will work with the BRRRR strategy?
You need to find out what the ARV or (after repair value) of the property will be. Get someone you trust with experience to tell you what they think the ARV of the property will be, based on the rehab strategy you plan to use.
Many experienced investors use the 70% rule which means you shouldn’t pay more than 70% of the after repair value for the property you are thinking of purchasing.
You find a great deal on a property that needs work and you buy the property for $200,000.
You decide on a rehab strategy that will cost you $40,000.
Now you get the property appraised. The value of the property after your repairs (the ARV) is $350,000.
If you multiply that $350,000 by 0.70 or 70%, you get a total of $245,000.
This is an example of getting it right at the BUY stage of a BRRRR deal. The purchase price of the property should be good enough that 70% of the ARV ends up being at least equal to or more than your initial purchase amount plus your renovation costs.
In the example, your purchase amount is $240,000 and 70% of your ARV is $245,000. For a BRRRR deal to be successful it should meet this 70% rule criteria which is also followed by most house flippers.
Step 2 REHAB
At the rehab stage of the BRRRR method, you will update the distressed home you have bought. It might need anything from minor remodeling to major renovations.
Most of these houses will need new paint and flooring. When choosing your renovation strategy, it’s a good idea to choose necessary things that will give you a good bang for your buck.
The idea is to make the property liveable and make rehab choices that add a value greater than their cost.
- Adding bedrooms
- Repairing damaged drywall
- Replacing the roof
- Sprucing up the landscaping
- Updating and upgrading bathrooms and the kitchen
- You’ll need to make any repairs necessary to bring the house up to code requirements
Step 3 RENT
Attract good tenants and start collecting rent for cash flow. Once you’ve done your rehab, you’ll need to decide how much rent to charge. Set a price that more than covers your mortgage and expenses without pricing yourself out of the market.
When using the BRRRR method, you need to know that most lenders won’t refinance rental properties without tenants. After you decide on your rental price, screen tenants carefully. Look for applicants with:
- Favorable references
- Good credit
- No history of eviction or criminal behavior
- Record of on-time payments
- Steady income from a stable job
Step 4 REFINANCE
The fourth step comes after a period of time called a “seasoning period”. This is usually between 6 months to 2 years. At this fourth step you will do “a cash-out refinance” on the property.
In other words, you’ll get a new loan on the property based on the property value after your improvements. The new loan amount will be higher than your initial loan amount so you can pay off your entire initial loan and also get back the cash you invested in the rehab.
Not all lenders offer cash-out refinance loans, so shop around for those that do. Each lender will have specific qualifications and requirements, such as:
- An appraisal
- Closing costs
- Maximum debt-to-income ratio, which is usually up to 50%
- A minimum credit score, typically around 620
- Minimum length of time that tenants have occupied the property, which is typically six months
- Rental income and expense records
If possible, find a bank that is willing to lend to you based on the appraised value right after the property is rehabbed and rented.
How can you find banks that are great to work with for the BRRRR strategy? The best way is to ask other investors either in person or on the BiggerPockets Forum.
Step 5 REPEAT
If you have implemented the steps properly you will at this point have a cash flowing property that costs you none of your own money.
The fifth step is to repeat the process with the money you used for the purchase of the original property that has now been returned to you. If you follow the process and do it well you can purchase multiple properties with the same small amount of capital you started with.
A great tip is to make a document for each step of the process that outlines what you did. You can refine the document as you learn. In this way you will be building systems. You can follow these documented systems each time you repeat the BRRRR process. This will help you to cut out errors and reduce stress.
Want to get started using the BRRRR strategy?
If you intend to buy and sell multiple properties using the BRRRR method, you need a website with the right look and feel to make both buyers and sellers understand that your business is credible and trustworthy.
Although many companies create websites, you want to work with a website company that understands your needs as a real estate investor.
Done Deal Website has focused on providing high-quality websites tailored toward real-estate investors for almost 20 years. To set yourself up with a real estate investor website that fits perfectly with your BRRRR investment goals check out our demo.