Understanding the BRRRR Method
If you have ever participated in a real estate investing (REI) network group on Facebook or attended an in-person networking event, odds are you have heard someone talking about “BRRRR.” At first, you may have thought, “What does the temperature have to do with real estate investing?” The short answer is, it doesn’t. The lengthier explanation is that the world loves acronyms, and the real estate industry is no different.
An Introduction to BRRRR
BRRRR Steps Explained
Buy
The first letter in the BRRRR method is ‘B,’ which stands for buy. As you search for qualifying properties, you may be looking at on-market listings, off-market listings, as well as reaching out to sellers that haven’t even considered listing their property for sale. This first step is absolutely critical as it will determine how realistic (or unrealistic) your investment goals are. You will not only be looking to determine if a property is viable for rehab but you will also be looking at the property to determine if it is a sound investment for a performing rental property.
Rehab
Congratulations! You just acquired your first property! Now what?
Investors should focus on home renovations that offer the highest return on investment. Well, prior to settlement and acquisition, you should have established a rehab plan for the property. In this plan, you should identify a few key items:
Who?
Who will be renovating the property? Will you be doing the work yourself or hiring a qualified professional. A lot of these questions depend on the scope of work, local laws, and whether or not the task requires a licensed professional.
What?
What needs to be renovated? How much will these renovations cost? Identify what is necessary to make the property habitable. Then, consider what improvements may make the property more attractive to prospective tenants. Look at what other nearby properties in the area offer to ensure your property is offering similar features and amenities.
When?
When will the renovation work be completed? Outside of the renovation costs, what costs are associated with the holding the property during this timeframe?
Where?
Where will your team work? Although it seems like a simple answer, I’ve seen many rehabs fail to meet aggressive timelines because of mismanagement. If you are acquiring a property that requires a full rehab, you will also be buying material to rebuild the entire house. Consider where this is being stored. Do you need to rent a storage unit or adjust your timeline so you can properly manage the rehab in stages?
How?
How will you manage the project? This question is a great segue from previous question we discussed. It isn’t uncommon for investors, both first-time and seasoned, to hire a project manager to manage their project – the budget, timelines, coordination, etc. At the very least, you should consider implementing a system to assist with project management.
Rent
Once your property’s renovation is complete, you’ll need to find a qualified tenant to rent your property as soon as possible. Prior to renovation, you should have run the numbers to ensure that the property can cash flow. In other words, after you pay the mortgage, taxes, insurance, and other related expenses, are you making a profit?
Since many BRRRR investors are looking to implement a scalable business framework that generates passive income, they look to outsource the management of the rental property to a management company. You’ll need to decide if a management company fits into your budget and business plan, but the implementation of this team can free up your time to analyze more deals and take on more projects.
Refinance
Now that you have a tenant in place, your long-term strategy has really kicked into gear. You are now looking to build equity into the property. The next step is refinancing – specifically cash-out refinancing. A cash-out refinance allows you to tap into your property’s equity to withdraw cash. This cash can be used to fund your next acquisition.
Repeat
This last step is the one that makes BRRRR method appealing to so many investors. With the cash from your refinance, you can invest in a new property and start the whole process over again. In theory, this process can be continuously repeated, allowing an investor to start with a small portfolio of one or two properties and build an empire of rental properties that generate passive income and grow in equity over time.
Summary
In conclusion, the BRRRR method can be very lucrative for first-time and seasoned investors alike because you can grow a rental portfolio that can generate income for decades. Since the BRRRR method allows you to acquire properties that are distressed and in need of renovation, you are able to build equity sooner than buying a seasoned rental property. That equity allows you to do a cash-out refinance that can help you scale your business quickly. With that said, it does no absolve you from risk. All investments include risk, and the implementation of the BRRRR method does exempt you from that risk. All investors are cautioned to perform their own due diligence and consult with qualified professionals prior to investing.