Real estate investment has always been a viable financial strategy, but its popularity has increased over the past few years. In 2021 alone, 31% of investors channeled their money to real estate investment which is twice higher than the previous year. This popularity is due to strategic flexibility, low-interest rates, and the increased demand for rental properties.
Investing in the real estate industry through methods like building your property or buying a new property requires a lot of money. However, there are numerous affordable investment options that you can consider, such as the “BRRRR method .”While “BRRRR” might sound like a silly acronym, you shouldn’t discount it! It’s an excellent way to spend less cash when buying rentals and earn a steady passive income.
The BRRRR method involves buying a low-priced property, improving and renting it then selling it at a profit. Though the method may seem pretty straightforward, it’s vital to know its the ins and outs for the best chances of success. This guide gives you everything about the BRRRR method, from its definition, how it works, its advantages, disadvantages, and how you can finance it.
What Is the BRRRR Method?
The BRRRR (Buy, Rehab, Rent, Refinance, and Repeat)method is a popular real estate investment strategy invented by Robert Kiyosaki in his book “Rich Dad Poor Dad.” The method is straightforward- buy distressed properties at a low price, transform them into rental properties, then refinance them to fund another investment.
The BRRRR investment method relies on your ability to identify dilapidated properties which you can transform into precious assets. The main difference between the conventional investment property strategy and the BRRRR method is that it focuses on investing in distressed properties and refinancing them to buy another one.
How Does the BRRRR Method Work?
The BRRRR method has a sequential order which you need to follow for it to be a productive investment strategy. Here’s what each step entails:
Step 1: Buy
The first phase of the BRRRR method is to find a distressed property that you can do value addition on through repairs and renovations. Examples of distressed property that you can consider are foreclosure homes or those already owned by the bank. These properties are usually in poor condition and are available at a lower price than the current market.
When buying the distressed property, ensure that it’s a profitable investment. Calculate the post-renovation value of the property, estimate the monthly rental income, and determine if the rental income will provide a sufficient profit margin. To successfully do this, identify similar properties in the area and use their recent rental and selling prices.
Step 2: Rehab
Once you have purchased the property, the next step is to make structural, aesthetic, and safety renovations. The aim is to improve the property’s value and make it a livable and functional space for tenants. Some of the most impactful home renovations are:
- Kitchen update
- Rooms addition
- Roof repair
- Additional windows
- New garage wall
Before beginning the rehab process on your property, identify the areas that will help increase its value and have the proper construction permits. Also, have a budget to avoid the temptation to make excessive upgrades that cost more than what you get from rental income, decreasing your profit.
Step 3: Rent
Now that your property is in perfect condition, it’s time to rent it out. The key to success in this phase is to determine the rental price in the current market and rent it out to high-quality tenants. Use the rental income to pay the mortgage and build equity to use in the next step (refinance). The rent phase involves the following processes:
- Marketing the property
- Screening tenants
- Rent collection
- Managing tenant turnover
- Handling maintenance requests.
Step 4: Refinance
After building a reasonable amount of equity in the property, refinance it and channel your equity and cash savings toward buying another distressed property. To obtain the best rates, have an excellent borrower credit score and a property generating consistent cash flow. Additionally, have a tenant who has paid rent for more than six months and equity of about 25% after the previous refinance.
Step 5: Repeat
After refinancing your property, start the process again. Use the cash-out refinance from your previous property or apply equity from the initial one to buy and rehab the next one. Here is a simplified example of BRRRR financing:
Property buying price: $100,000Loan: 100,000
Down payment: $50,000
Cost to rehab the property: $25,000
Total investment (rehab costs and down payment): $75,000
Monthly rental income: $1,500
Value of the property within 12 months: $150,000
Refinance loan for 75% of the appraised value: $112,500
Initial loan payment: $100,000
Cash leftover: $12,500 (112,500 – $100,000)
How Can You Finance the BRRRR Method?
The best way to finance real estate investment is cash. It protects you from paying high interests or being in a hurry to sell the property at a low price. However, even without money, you can consider other financing options like:
Conventional Bank Loan
A conventional bank loan is similar to a residential mortgage loan. It has different requirements in terms of down payments and credit scores depending on an individual’s financial state. However, most times, you’ll need to have a credit score above 620 and be prepared to put down 15% to 20% for a single-unit investment property.
This loan is perfect if you seek temporary funding for your property or want to buy property before securing permanent financing later. It is one of the best loans because it focuses on collateral and assets rather than credit scores and income. The downside of this loan is that you may lose your assets if you are unable to pay it on time.
Hard Money Loans
A hard money loan is a short-term, non-conforming loan from private companies or individuals who accept assets as collateral. You can consider this loan if you don’t have an excellent credit score. The disadvantage of this loan is that if you fail to repay, the lender can take over ownership of the asset to recoup its loss.
These are funds from people you know such as family, business partners, friends, or “angel investors”. The rates and terms of these loans depend on your relationship with the lender. Depending on your agreement, private lenders may also allow the loan to cover rehab costs.
What Are the Benefits of the BRRRR Method?
Many advantages come with the BRRRR method, such as:
High Return On Investment (ROI)
The goal of every real estate investment is to maximize return on investment. The BRRRR method allows this since you can pay less for the property upfront, spend some money on improvements and rent it out at a high rate. Besides, you can sell the property at a profit after a few months of renting.
With the BRRRR method, you don’t own a property with the same value as you initially paid. Instead, you buy a low-cost property, spend some money renovating it, and quickly build equity in the property. You can then use the equity to expand your portfolio through home equity lines of credit home equity loans.
Achieve Economies of Scale
After repeating the BRRRR process severally, you can achieve economies of scale, which allows you to operate and own several properties. More properties help you lower your overall costs and spread risks since you have other properties to fall back on if something goes wrong.
What Are the Disadvantages of the BRRRR Method?
Though the BRRRR method sounds like a sure and sound way to invest, like any other significant investment, it has its disadvantages. They include:
The BRRRR method requires a rental investment which means you may not access traditional mortgage options. This leaves you to work with hard money or short-term loans with higher interest rates and significant risks, especially during the rehab phase where the property isn’t generating any income.
The repairs and renovations on the rental property can be work-intensive and costly, especially if the property is in terrible condition. Also, unexpected issues can arise in the rehabilitation phase, leading to extra costs that were not in the budget, reducing your profits.
It Takes Time
It takes a lot of time to complete renovating a property, renting it for a while, and getting a cash-out to refinance. This lengthy process might be a risk, especially if you had taken a high-interest loan to run the project.
The BRRRR method is a profitable and viable investment option. However, it takes understanding the nitty-gritty of the industry for it to work its magic. If you are wondering where to start, keenly going through the guide above would be perfect. It will equip you with all the relevant information to make the right decisions and succeed in the real estate industry using the BRRRR investment method.