Quick BRRR Takeaways
BRRR is an acronym that real estate investors use to describe a strategy that stands for BUY, REHAB, RENT, REFINANCE
Just because it is a hot topic in REI circles right now does not change the need to make sure you carefully complete due diligence on the investment before you take on the challenge.
The investing method may not be right for all investors or all markets, so taking the time to understand all the tactics involved is vital.
What Is The BRRR Strategy?
The BRRR strategy is gaining popularity with real estate investors right now. You’re hearing it talked about online and in real estate groups everywhere. There are podcasts that talk about it. The strategy is actually older than the term—savvy real estate investors have been employing it for years. So what is it exactly, and even if it is the “latest thing” now is it something that you should consider for your own real estate investing business?
The acronym BRRR refers to the steps that an investor takes to complete this type of transaction. It is not a quick strategy like wholesaling or even flipping. It is one designed to increase cash flow that is more passive than either of those, by combining tactics that result in owning a rental property.
First you buy a property, then you renovate it, rent it to tenants and refinance the original loan so that it is a long term arrangement. Sometimes investors will add on other ‘R’ steps to their own strategies, like repeat or resale, so you may see those steps referred to as part of the tactic. In fact the acronym with four ‘R’s was coined by the founder of Bigger Pockets. For our purposes, we’ll just discuss those first four steps and how best to complete each one once you decide it is a real estate investing methods you want to try.
This is a method that allows investors without the means to qualify for a traditional loan to acquire a rental property to move into the cash flow strategy of buy and hold investing.
Will just any property work for you to implement the BRRR method? To make this strategy work best you need to approach this first step similarly to wholesaling or fix & flip. Why? Because a property that is not distressed will likely qualify for a traditional loan, making the rehab step unnecessary.
Some of the criteria investors consider when looking at a property to flip will be to avoid a property that is in a neighborhood with a higher percentage of rentals, as those are typically harder to sell to someone wanting to buy a home and put down roots. But when looking for a residence to purchase to utilize as a rental that is no longer a major concern. Your due diligence is crucial here, just like for all of your real estate transactions. (The Journal of Real Estate Finance and Economics has a deep-dive here, if you want to become overwhelmed with technical information.)
The 70% rule is still a good one to follow here. Making sure that a profit margin will remain after renovating the property will make securing funding easier.
The BRRR strategy has 2 funding phases or steps, and the type of financing needed in each differs. When purchasing a distressed property a short-term hard money loan is usually the best option. (The Investor's Edge has 100% financing for this part of your transaction for those who enroll in our Find-Fund-Flip System)
This is a step that contains some of the biggest pitfalls that are present with this investing strategy. Just like a fix & flip investment, keeping the rehab on schedule and on budget are crucial. When you are borrowing at higher rates for the renovation getting the property completed and rented should be done as quickly as possible so that you can start getting the rent payments as cash flow and so that you can refinance the loan at lower rates.
Rehabbing a property for a rental is a bit different than when you are renovating so that you can sell a property to someone wanting to make that house their home. Of course, rentals should be functional and livable for the tenants, but renovating so that you can ask for a higher monthly rent is key as well. Excessive upgrades are, of course a bad idea. So how do you strike a balance? Once again, look at the market, but do it as a prospective tenant. What does your competition for those tenants look like? What features are in higher demand in your market? You want to make improvements that will help your ROI.
Once the renovation of the property is complete it is time to move to the rental phase of the process. Before you decided to utilize the BRRR method for this investment you should have completed a thorough analysis of the rent market for the area so that you had a good idea of how much you could obtain in monthly rent for the property and therefore create the necessary cash flow. You should do this again now, because you’ll have a clearer idea of just where your rental will fit in and how potential renters will view it.
If you have never been a landlord before, much of this will be new to you. Learning to properly screen and select the people renting your property is a key skill for BRRR investors. You want to do what you can to safeguard against some of the things that negatively impact the cash flow you get from your rental, like vacancies, bad tenants or even just regular upkeep expenses. Don’t let those risks keep you from implementing this method, but you do want to understand how your cash flow can fluctuate. Having the cash flow in place is necessary to complete that next part of the tactic, refinancing the property.
After getting tenants in the home and cash flow established it is time to get the property refinanced into a long term loan. This funding will have better terms than your short term loan for the property purchases and rehab. You will secure this loan with the property and also most likely with the expected cash flow. Some lenders will want a history of positive cash flow on a property and some will just extend the funding based on the property itself. You will need to find a loan that works well for your specific BRRR investment.
Will BRRR Always Work?
This type of real estate investment is just like any other. Sometimes it will work in your market and sometimes it won’t. You will need to approach each potential deal separately and utilize the real estate strategy that make the most sense for your plans and the particular property.
Is the house you are looking at better suited as a rental or would it be desirable as a home for someone to purchase and set down some roots? What is the surrounding neighborhood like? What is the average rent in this market? What about vacancy rate?
Can you get long term funding for the property to buy and hold it?
Answering these questions will help you determine whether to fix & flip, wholesale or utilize BRRR on a transaction.
Can I Invest Using The BRRR Method With No Money?
Again, this is just like any other real estate investing method. You may be able to accomplish it without using any of your own money if you can find the right type of property and the right hard money lender. But real estate investing ALWAYS takes money, it just does not have to be all of your own money. This is, however, a strategy that takes good credit for most investors. And being a landlord will always require you to have money on hand for both the expected and unexpected, just like you need to have for your own home.
So, how can you make this work?
Approach the first two steps, buy and rehab, much as you would a house flip transaction. If you can make that transaction work with a hard money loan and perhaps some other short term funding, that will take care of the first part of the deal. We even have some great ideas on how to come up with the cash to close and short term funding in our article about that, you can read that here.
For the second part of the investment you will need to obtain a long term loan, similar to a mortgage. You will want to secure this before you start the whole deal. You will need good credit in order to obtain this funding.
Is This Investing Method Right For You?
Do you want or need cash flow each month to accomplish your REI goals?
Are you in the position to be a landlord, or can you hire a property manager?
Do you have good credit so you can obtain the long term funding for the property once you have renovated it?
What Do You Need To Get Started?
The Investor's Edge has great financing options for real estate investments of all types, and the BRRR strategy is just one of them. Members of our Find-Fund-Flip System have all of these resources available to them. We would love to help you get started.
Learn how to make money flipping real estate with us by attending our next webinar.