BRRRR is probably my favorite real estate strategy. It has allowed me to recycle my capital, and even grow it while investing in rental properties.
The reason why I love this method so much is, not only do I get the monthly cashflow from the rental, but I get my principal back as well. It really is having your cake and eating it too!
What is BRRRR
You may have heard of the BRRRR strategy before, and it has a pretty crazy acronym. It is a real estate investment strategy primarily for single family properties. BRRRR stands for:
In a nutshell, BRRRRR is a system for real estate investing that allows you to redeploy your capital from one rental into another.
The primary difference between BRRRR and traditional buy and hold rental property is that your principal does not sit in a single property with BRRRR.
Why Would I BRRRR
The BRRRR method takes advantage of the equity created from turning a vacant distressed property into a well ran rental property. In effect, it increases your rate of return on equity. This makes your money work harder for you.
BRRRR builds your portfolio faster. The slowest, most conservative, investment strategy would be to buy a house, work on paying it off, then saving enough to buy a second property. That way, every maybe 7 years you end up buying another rental. With BRRRR, you are able to buy a new rental with the same principal every year, or even faster in some cases.
In traditional rental property investing, your equity just sits in the house. It is not cash, and is fairly inert. Sure, the property is earning you income, so it is getting a return for you. To contrast, with BRRRR, your capital does not stay tied up. With every refinance, you are able to push your principal into another investment.
Isn't it Over Leveraged?
I get it, by refinancing out 100% of the cash you have into a property, it seems dangerous. It feels like you will be at 100% leverage.
This is not the case though.
Because with the renovation, you are adding value with forced appreciation. Your job with purchasing a distressed property and renovating it is to be able to make the new value of the property more than 20% greater than what you have into it.
So you are still borrowing at 80% Debt to Equity.
What is the Catch?
The catch is that it is a pretty large departure from a "passive investment." The biggest part that is not passive is the renovation portion.
Every letter in this strategy implies action, and repeating it loops it over and over again. It is not the same thing as buying an apartment building and hiring a property manager to rent it to collect checks over time, or investing in real estate syndications.
Don't let that get you too down though. There are many successful BRRRR investors who are able to manage their investments while working full-time.
How Often Should I Repeat?
The more often you repeat the process, the larger your investment portfolio grows. It also means you have to go through the whole process of finding a property and getting it rent ready. It also means you have to go through the process of renting it out. This takes time.
The question sort of becomes how often can you repeat. Many lenders require "seasoning" before they allow a cash out refinance. This means they require you to own the property for a minimum amount of time before refinancing. Usually this requirement is 1 year. There are lenders who will do 6 months seasoning, and some that have no seasoning requirements. The loans with a seasoning shorter than one year are not conventional loans and will have either higher rates or will not be fixed 30 year products.
So with financing you pointing towards a year minimum per repeat, what about the other constraints?
The other constraints are how fast you can renovate, get a tenant in, and go through the loan process.
Some properties will require a minimal timeline to get renovated. Perhaps only a few weeks. Others may take up to 6 months to renovate. Most will be somewhere in the middle, about 2-3 months.
After renovations, it may take a few weeks to fill the vacancy. If you do some pre-marketing, you may have a waiting list which will speed things up.
I do not like showing the unit before it is ready. It just leaves the wrong impression on potential tenants. Often driving the well qualified tenants away and leaving boarder line or unqualified prospects.
Once you have it rented, the process of refinancing with most banks will take 30-45 days.
So with banks preferring 1 year hold, and the rehab/rent/refinance parts physically taking 3-8 months, a typical BRRRR cycle will be at least a year. Though if you are very aggressive you could shorten it down to maybe 6 months each. Over the course of 10 years, you could transform the initial capital that purchased one house into 10-20 houses. Quite an accomplishment if I say so myself!
This does not mean you can only have one property going through the BRRRR process at a time. You could have multiple chunks of capital moving at any given time. Operating in parallel with each other.
Is BRRRR New?
While Brandon Turner from BiggerPockets coined the term BRRRR and put it into an easy to digest format. Later, David Green from BiggerPockets wrote a book on it. The concept behind the BRRRR strategy has been around for a long time and has been deployed by many successful investors.
At the core of the concept is the idea of buying low and selling high. Instead of directly selling though, you are refinancing and holding. Cash out refinance loans are not a new product.
How do I get Started?
Borrowing from Steven Covey's "Beginning with the end in mind," it is a good strategy to work backwards.
Starting with the refinance. The first step is calling local banks and see what kind of cash out refinance loans they offer.
If you do not know which local banks have good programs for real estate investors, it would be a good time to join your local REIA or find some facebook groups with local real estate investors. You can ask questions, and search the history as funding questions are frequent topics in most of these groups.
Once you have an idea of the costs of the loan when you have renovated a property, you can start to build a model showing what the cash flow will be once it is refinanced.
Now it is time to start evaluating individual properties and opportunities.
The other aspect of the refinance that will be important is making sure the properties that you are looking at will be worth enough when you are done with the rehab. You can calculate the After Repair Value or ARV by doing competitive analysis. That is, looking at recent house sales in the .5 mile radius for houses that have been fixed up and have sold. It would be a good idea to check out Common Mistakes when Calculating ARV.
This is a good time to look into what it will rent for in that area. I have found a few tools to be helpful for this.
- Facebook Marketplace
- Zillow Rent Zestimate
Once you know how much the property will be worth after it is repaired, and you know how much it will rent for, it is time to estimate the renovation costs.
Add up all these costs:
- Transaction costs
- Renovation costs
- Holding Costs
- Margin of safety
- Refinance costs
Then you subtract the sum from the ARV. This should be the maximum you are willing to pay for this rental property.
As you are evaluating properties, you can then see how realistic you think it would be to actually purchase the property for that price. You can also compare how the property will cashflow once it is refinanced with other properties you are looking at. This will be how you start to develop your criteria on what is a good deal and what is not.
I recomend you go through the process for a few dry runs until you become confident enough to start making offers.
Wrapping it up
If you have looked into the buy and hold strategy for single family homes, but were concerned that after you saved enough for a down payment for your first property it would take years to save up for another one, then the BRRRR strategy might be for you.
BRRRR offers benefits of:
- Redeploying capital
- Increasing your total equity
The BRRRR strategy is not for someone who wants to deploy their capital and sit around doing nothing. It is for a slightly more active investor. Though the activity requirements are not out of reach to someone who has a full time job.
If you are looking to establish financial freedom, the BRRRR strategy could be a perfect addition to your investing portfolio.