Invest The Right Way | BRRRR Method for Real Estate Investing
Brandon Turner of Bigger Pockets coined the term BRRRR.
The BiggerPockets community has increased the popularity of the term tremendously.
The acronym refers to gaining income through rental properties by leveraging other people’s money so that you have the least amount of money in the deal possible.
This allows for you to get incredible returns on your money and also have more money to complete more deals. The process is relatively simple.
• B – Buy a property.
• R – Rehab the property to improve your initial purchase.
• R – Rent out the property for cash flow every month.
• R – Refinance the property to get as much of your own money in the property back in your pocket.
• R – Repeat the process to grow your real estate portfolio.
This is the process we have used countless times to assist in scaling quickly, so we figured it would be wise to educate those in our area on opportunities that exist out there to build long-term wealth!
So let's go into more detail on each piece of the BRRRR process.
The case study above uses percentages we have found to be a little high during our research and own real estate endeavors. But, always overcompensate when it comes to expenses and undercompensate when it comes to revenues. The case study assumes the following.
• A hard money loan at 10% interest only payments will be used to purchase the home and for the first six months of the process.
• It will take 2 months to get a tenant, so the rental income year 1 is for only 10 months.
• After six months the home will be refinanced with a 6% interest rate. Property taxes are $3,000 a year and insurance is $1200 a year.
BRRRR Method – Buying a Property
The first step is searching for the right home. Well...you're in the right place!
The home you are purchasing will be a rental property so you must consider the following when you purchase the home.
• A home in a rentable market. If the home will be difficult to rent, then this will increase your vacancy percentage and total money in the project.
• Find a home that will allow you to refinance and get most of your money out of the project. Having equity in the home right off the bat is crucial to getting a lender to let you refinance.
• A quick rule of thumb is to multiply the after repair value by 70%, subtract your estimated repairs and you will have your purchase price.
When you start looking for properties keep a note card with quick number calculations handy until you get used to doing quick calculations in your head. It makes the process easier when quickly analyzing properties.
We have a custom built spreadsheet that we use to calculate whether or not a potential property is a good deal. The spreadsheet runs a properties numbers for both a rental or a flip. Reach out to us directly if you'd like for us to share that with you!
BRRRR Method – Rehabbing a Property
There are two parts to rehabbing a property for the BRRRR method.
1.Make repairs that are required to make the property livable.
2. Choose repairs that will increase the value of the property.
When you go to refinance the property, the appraiser will be the deciding factor on whether or not you get most of your money out of the property.
Choose renovations that will increase the properties value and not drain your budget. Our price points and rental amounts allow us to do repairs in the $15k-$20k range for a rental property.
The most critical portion of the BRRRR method is refinancing. If you are renovating the home the same way you would if you were flipping the property, you could severely limit the amount of cash you get during the refinance.
Landscaping should always be in your budget for any project but for a BRRRR property it is often overlooked. The appraisal must come in high enough to get most of your money out of the property and a human does the appraisal.
Humans are biased and first impressions are everything. Sprucing up the curb appeal of the property can go a long way. If the appraiser is in a good mood from the minute they see the home, you have a better chance of their enthusiasm to carry throughout the entire appraisal.
BRRRR Method – Renting a Property
The renovation is complete and it is time to make some money! Getting a tenant in the property is the way to make money in a rental but it can be tricky. When we put our first rental property online, we had over 50 applicants apply from Thursday to Monday!!
We require all applicants who are serious about the property to pay for a background and credit check on a free, local, property management software - called ZenLord Pro. They are required to pay the $40 fee for the process. If they are chosen as the tenant, we refund the $40 fee from the first month’s rent.
Before you refinance, a bank will want income coming in from the property in determining their decision.
BRRRR Method – Refinancing a Property
Refinancing is the process of getting a higher loan to cover the costs you incurred during the rehab and purchasing of the property. Shop around for a loan the same way you would for a car loan or insurance policy.
Different lenders have different rules when it comes to refinancing a property. The following can vary from the lender.
• Whether or not they will let you cash out the difference of your higher loan.
• Seasoning period from purchasing the property to refinancing.
• Percentage of the appraised value you can refinance. Generally between 70-75%.
If a lender will not allow you to do a cash-out refinance, look for another lender. The entire purpose of the BRRRR method is to get your ALL of your money out of the property. If you can only get a loan for the debt you owe, your refinanced loan will generally be almost the same as your old loan.
An appraiser will assess the value of the property. They are human and first impressions are crucial. Be upfront with your tenant and let them know of the appraisal and any other disruptions as soon as possible. This will allow for your tenants to clean up any messes they may have made in the meantime.
BRRRR Method – Repeat, Repeat, Repeat
If you did it right, you could get all of your money out of the home and repeat the process ASAP. There are plenty of real estate investors who use the BRRRR method to grow their real estate empire. It is undoubtedly a method we plan to use to grow our wealth in real estate.
You may only have 10 mortgages under your name so using a spouse or partner is beneficial in creating an extensive portfolio of rental properties. In our case, my sister and I will take turns in putting mortgages in our names.
We hope that this article has simplified the BRRRR method for you! If you have any questions, reach out to our team to learn more!