The BRRRR Investing Strategy: What’s the Hype About?
TL;DR - The BRRRR method involves Buying a property, Rehabbing it, Renting it, Refinancing it, and then Repeating the steps over and over again. But it’s a strategy that only advanced real estate investors should use.
So you’re new to real estate investing.
You’re trying to figure out the best strategy to make money as quickly as possible.
Without a doubt, you’ve heard of the BRRRR investing method. It’s popular because it can be a really effective buy-and-hold strategy. A perfectly executed BRRRR has the promise of adding a rental to your portfolio without you spending any money.
And while this is great news for a beginner, it isn’t the right strategy for you.
Woah woah woah woah, don’t get mad yet! Before you do, let’s cover what the BRRRR method is, as well as its benefits and downsides. Then you’ll understand why you should pick another strategy.
Let’s dive in.
BRRRR Investing Strategy
How Does the BRRRR Method Work?
The goal of the BRRRR method is to create passive income through rental properties. And it can be a great way to build long-term wealth!
But it’s not the best strategy for beginners. Why?
Because each step requires a significant amount of time, money, and knowledge. Let’s take a look at each step in more detail.
A Quick Rundown
The first step of the BRRRR method is to buy a property.
This might sound easy, but it’s actually the most difficult and time-consuming part of the process.
A perfect BRRRR property is one that’s worse for wear and needs some major rehabbing.
You’ll have to navigate the different real estate markets, figure out which type of property you want to buy, and learn how to close on a property.
On top of all that, you need to find a good deal on a property that will be profitable after you rehab it. This can take months and months of searching.
The general advice to follow is the 70% rule. You shouldn’t invest (purchase price + rehab cost) more than 70% of a property’s ARV (after repair value).
To know what that 70% is, you need to be an expert at determining the ARV of the property.
That means being an expert at comparing properties and being able to know what your fully rehabbed property will be worth when it’s time to refinance.
As a beginner, how many dilapidated homes have you comped?
The second step is to rehab the property.
This involves fixing up the property so it’s in good condition, renter-ready, and loanable (banks do not lend on properties that require significant work).
As a beginner, you likely do not (yet) have access to trusted plumbers, electricians, roofers, painters, floorers, heating and cooling specialists, kitchen specialists, foundation specialists…
You get the point.
Without that team, you’re exposing yourself to rehab cost and timeline errors, potential thievery, and building code violations.
Now, imagine doing that remotely.
After the home is in good condition, you’ll want to make improvements that’ll boost the value of the property.
This can be expensive, depending on the extent of the repairs that need to be done. And it can take a lot of time to complete.
The third step is to rent out the property.
This step is relatively easy, but it can be time-consuming and exhausting to do the work yourself. That’s why we recommend hiring a property manager.
You need to find good tenants and screen them carefully. You’ll also need to handle maintenance and repair issues that come up if you decide to self-manage.
The most important thing is that you find a renter who rents for a long time and pays on time. This plays big into the next step.
The fourth step is to do a cash-out refinance on the property. This is where you replace your purchase loan (usually expensive, hard money) or the cash you used to purchase and rehab with a new 30-year mortgage.
The BRRRR “promise” is that this step will get you back at least as much money as it cost you to buy and rehab the property. Essentially leaving zero of your money in the deal.
Who wouldn’t want a “free” property?!
Other than botching the rehab budget, some of the biggest mistakes happen in this step. Refinance rates are typically higher than purchase rates and refinance appraisals are typically stricter than purchase.
You’ll also want to get access to cash — which you’ll use for the next step.
The bank or lender you work with will check for a few things, including how long your tenant has been renting for, your credit score, the remaining equity on your property, and the cash flow of your property.
The fifth and final step is to use the funds from the refinance to buy a new property. This is where you start the process all over again.
The goal is to use the BRRRR method to continually add new properties to your real estate portfolio.
By refinancing each new property (after a set time period), you gain access to capital that you wouldn’t otherwise have.
But… It Sounds So Great
The BRRRR method is a great strategy for advanced investors. But for a new real estate investor, it can be a real headache.
There are other, simpler strategies that you can use to make money in real estate.
These strategies will be less time-consuming and less expensive. And they’ll help you get started on the right foot.
Once you begin to learn the real estate business and start generating consistent month-to-month cash flow on a property, you’ll build some confidence. You can slowly learn more and more until you’re truly ready for the BRRRR process.
The bottom line is that the BRRRR method is a great buy-and-hold strategy. But it’s not something that you should try as a beginner. It’s best to leave this strategy to the advanced investors.
If you need help exploring simpler investing plans, we have plenty of resources for you. Check out the link below or visit our blog.
Until next time, happy hunting!
How We Can Help You
Does investing in real estate sound intriguing to you? Would you like to learn more? We’d love to be of value!
At Undoor, we pride ourselves on teaching new and experienced investors how to maximize their gains with minimal stress. Our goal is to help you fall in love with real estate and real estate investing. What we’re most passionate about is maximizing investment gains for people like you.
Do you want to get key insights and advice that’ll help you get ahead of the game? Don’t hesitate to contact us for any and all real estate wants or needs.
