What Is the BRRRR Method in Real Estate Investing?
What is the BRRRR method? The BRRRR method stands for (B): Buy, (R): Rehab, (R): Rent, (R): Refinance, (R): Repeat. This method will teach you how to become a black belt in real estate investing while maximizing your time, effort, and resources. Mastering this method is mastering Real Estate Investing 101. This strategy has become a familiar and popular term in real estate investing. Let's break down and go more in-depth about what each pillar means.
Buy:
Buying your first rental property will always be the most challenging investment since everything is new. Although you and everyone start from somewhere, the best time to buy a property is now! When it comes to making money, buying is the most critical aspect of any deal. The deal will only succeed if you purchase a discounted rental property in a good location with favorable purchasing conditions. Buying at a discounted price is essential to get the most out of your investment. Doing so will ensure your property adds and appreciates its value and generates positive cash flow. If you pay too much for a property, recovering from surprises such as extended vacancies, problematic tenants, or unexpected costly repairs will be incredibly challenging. With the BRRRR method, you add value before financing anything, but buying this property at a discount and buying it as a fixer-upper is essential.
When buying a property, you must stick to the criteria you have established for yourself and the deal. These criteria may include location, property type, financing options and sources, desired returns, investment metrics, and exit strategy. Your list of criteria can be as short or as long as you deem necessary. Straying away from your established criteria is essential, which can lead to financial losses and missed opportunities. Careful consideration and proper due diligence will minimize risk and maximize your returns. Buying no deal is better than buying a bad deal. That's why the "Buy" step is the first and most crucial step in the BRRRR strategy.
Rehab:
Getting the rehab right is the second most crucial part of the BRRRR strategy. For the rehab process, I highly recommend hiring a rockstar contractor who is investor-friendly and has worked with several other investors who are in your shoes. You do not want to act as a jack of all trades and try to do everything yourself in this whole process. This will result in wasted time and wasted money. You and your contractor will develop a scope of work and strategies to add the most value to your investment property that makes the most sense.
A few tips when working with a new contractor is never paying a contractor for the entire job upfront. I would also recommend paying for materials yourself the first time you use a contractor to be sure you aren’t overpaying until you build that trust.
Here are some tips on how to add value through rehabbing your property. You can add square footage by adding bedrooms and bathrooms if permitted. You can also improve the light cosmetic pieces of the house, like replacing the flooring, countertops, cabinets, appliances, lighting, interior trim, paint, etc. You can also improve the home's exterior, like siding, a roof (if needed), trim, paint, windows, etc. Curb appeal can also improve value by adding new landscaping, fixing the driveway and walkway, etc. Overall, there are many creative ways to add value to a property by rehabbing it.
Rent:
As mentioned in the “Buy” section, location is crucial. If you choose the right area to invest in, and rents continue to increase yearly, you are almost guaranteed to make money. An excellent way to find rents is to find comparable properties with similar rent and average rent rates. You can also find the fair market rent value. I would also apply the one percent rule, which is multiplying a property's sales price by one percent and comparing that rate to the average rent rate in the area that suits your property. You can also ask a real estate agent and property managers who manage the property class you are investing in and located in your area to get your property's most accurate rental rate. It’s always best to have multiple professionals looking over your deal.
The quality of your tenants will play a huge role when making money. Besides buying a property wrong, a vacancy will kill a deal. Eviction will hurt your cash flow substantially. If you cannot rent your property or lose a tenant, you will be in the negative super fast. For example, if you own a duplex and do not have both sides rented out, you lose fifty percent of your potential income each month.
Refinance:
Finding a rockstar lender will play a massive role in the refinance process. Whether buying an investment or personal property, you will always want to get pre-approved for a loan before writing offers. This will pay off in the end and the long run. Finding a lender to give you good terms and approve you to borrow money is a massive part of correctly pulling the trigger on a property. I can recommend my favorite lenders if you decide to work with me! Lenders will often review your tax returns, W2 statements (if you are a W2 employee), pay stubs, and credit scores to issue a pre-approval. With my clients, I will only show them properties once they are pre-approved, and most real estate agents operate the same way in that regard. Also, being pre-approved makes your offer to the seller a lot stronger. It shows them you are serious and have the funds to purchase their property.
When contacting a lender for pre-approval, create a file in your email and save all the electronic copies of the forms you will send to the lender. Sometimes, one lender might turn you down, and you must reach out to another lender. This way, you will have all the necessary files saved in this folder, and forwarding them to the new lender’s email address can be simple.
When everything goes well, your lender will send you a pre-approval letter stating what you can borrow. You need to ensure and cover several things with your lender before you move forward with your investment property purchase:
Pre-approval amount
What current interest rates are
How long the seasoning period is before you can borrow money against the property. (How long do you need to own it to do a refinance.)
What your LTV (Loan to value) will be?
What your closing costs will be?
How much will it cost to buy down the rate given?
What your “cash out” refinance rate will be?
Will the lender work with out-of-state investors?
A seasoning period is the period after you buy a property before you can take a loan out on it. This is where the term refinance plays in. The seasoning period will affect the timeline on your investment property when you can use the equity to buy another property and start this process all over again, and the ability to scale rapidly with your rental property portfolio. A shorter seasoning period is better for you.
Another advice I would recommend is to get two different quotes from lenders to compare each loan’s terms and conditions. Not all lenders are based on equal requirements; each lender will differ. It’s like shopping for a car; you likely do not want to buy the first car you see on the lot without shopping around for the best car and price. A source to look up mortgage interest rates is the Wall Street Journal.
When building a relationship with lenders, you should understand the point of the relationship. What are you trying to get from the relationship? Also, understand the lender’s position. What do you bring to the table that will benefit them? Once you build a strong relationship with a lender and earn their trust, they will lend you money in a heartbeat. This will make financing your future deals incredibly easy and eliminate stress! I would also become familiar with different loan products like conventional, FHA, VA, USDA, jumbo, portfolio, private and hard money financing, and HELOC. Your lender will determine if a conventional, FHA, VA, USDA, jumbo, portfolio, USDA, or HELOC is best.
Repeat:
Up to this point, you have mastered the BRRRR strategy! With the capital you have gained from your refinance, you can apply that capital to a brand new deal and repeat this cycle and process! This strategy will grow your wealth substantially faster and with less stress. Just like with anything else, this will take time, sweat, pain, and frustration to achieve mastery. The best time to take action is now! Staying persistent and remembering your end goal of why you want to invest in real estate in the first place will take you to the finish line! There are so many things you are going to learn in real estate that this strategy will provide.
