In real estate, BRRRR is a very popular investment strategy
The strategy is a combination of active and passive income. It can provide short term gains and, at the same time, create long-term passive income.
So, what is it?
And how does it work?
BRRRR is a highly effective investment method. It is great for creating rental income and building long-term wealth through a property portfolio.
It’s one of the best ways to own real estate with little upfront cost. And, you end up with something close to new – ensuring you get great rents!
Want to know more?
Here’s a brief guide on how this strategy works and how you can use it effectively!
What is BRRRR?
This strategy allows you to get into the property business with little to no money, while still getting very big returns!
You may need some capital for your first few projects. This is to cover the initial down payment and renovation costs. But, the idea of this strategy is to be able to pull all of your money back from the deal once it’s completed.
A BRRRR investment is, essentially, purchasing cheap properties requiring repairs or renovation. After this, you would rent out the property and refinance it to release funds for your next project.
One of the best things about this strategy is that, even if you have to borrow capital with high interest rates, you can get a great deal on a property in a short time frame.
When I’ve used this strategy, it typically takes 90-120 days.
Plus, if you’re getting the property for below market value, it’s usually easy to get private lending from an investor focused mortgage broker.
How does it work?
The BRRRR strategy stands for:
To use this strategy effectively, you should follow these steps
The first letter in “BRRRR” stands for buy. This step is key, as you need to find a suitable property if you want your project to have a positive outcome.
When searching through listings, always carry out thorough research to make sure you find a good investment deal – for both potential property value and rental income.
In addition, you should ensure you factor in the costs involved. This would include realistic figures for the renovations, and estimated rental expenses and profit margins
It’s also important to do your homework so you fully understand the cost of renovations and the potential resale value. You need to make sure you have the right budget before making a deal.
I can provide you with reliable, experienced contractors to make sure everything’s covered!
The first “R” in this strategy stands for renovate. Once you’ve found a property, this is the process of carrying out all the repairs and making it suitable for tenants.
When making updates or changes to the property, always consider the value it will add first and whether it will add to its rental value – excessive upgrades may cost more than they’re worth!
A lot of people make this mistake! It’s easy to get carried away in this department. Each little item can add up. But, remember, it’s a rental property and the costs need to be worth the rent.
Always prepare for the costs in advance, and make sure you’re realistic about funding. After this, find reliable, high-quality contractors if needed and get started!
It’s best to try and stick to the same materials for every home. I buy all my own materials and just pay for the labour.
If you’re able to self-manage, you can always find labourers at a local hiring firm for jobs. This is typically less expensive – as long as you’re careful to keep to your deadlines!
After the renovation is complete, the next stage in the strategy is to rent out the property. This might mean finding a property management company.
Or, if you plan to do everything yourself, it includes finding and screening potential tenants, making a tenancy agreement, and managing the property.
We can provide you a step by step process on how to get great tenants and screen properly.
It’s important to note that becoming a landlord is a big responsibility. This shouldn’t put you off, though. You just need to consider all the different aspects of this stage before diving in.
After successfully renovating and renting out the property, next, you can start thinking about refinancing options. It’s important to plan carefully at this stage and consider your options.
Each lender is different, so it’s important to do your research. It’s particularly important to note that not all banks allow refinances within the first year – so make sure you check this in advance!
Look at what different banks can offer, and how much you can borrow against the new value of the property – some lenders may not offer additional borrowing on rental properties.
Once you know what your options are and what your total budget would be, you can start to devise a strategy for your next property.
Lastly, you can repeat this process by refinancing your second property to finance the next one – and so on. This is a learning curve, and you will gain wisdom as you go along.
Make sure you carefully plan each stage of this strategy, and continue planning as you acquire your additional properties.
This is the best stage, because you are basically recycling the same money over and over! We bought millions in real estate last year with this strategy!
BRRRR strategy – example
To give you a clearer picture of how this would work, let’s look at an example of how BRRRR works.
Let’s say, for example, that Anna wants to purchase a house and rent it out.
She finds a property for $300,000 and can afford a down payment of $60,000. She takes out a loan for the remaining $240,000.
After carefully assessing the house, and with the advice of an independent contractor, she calculates that the renovations will cost $50,000
- Original sale price: $300,000
- Down payment: $60,000
- Loan amount $240,000
- Renovation costs $50,000
After completing the renovations, the property is revalued at $475,000. She then refinances the property for 80% of its new value – $380,000. After deducting renovation costs and the original loan amount, this gives her an additional $30,000.
She gets her $60,000 down and she uses the rental income from the first property to pay off the first mortgage, and uses the $30,000 to buy a second property and go through the process again. Then she repeats.
Now, let’s say that this BRRRR is only worth $425,000 at the end. Since you cannot borrow back more than 80% of the value, your new mortgage will be $340,000. So, you are out of pocket of $10,000.
But, even if this is the case, you have still acquired an asset of almost a half a million for $10,000! It does not get better than that!
BRRRR pros and cons
Like any investment, BRRRR has advantages and risks.
Some of the pros of this strategy are:
- Potential for very high return on investment
- Relatively low up front cash investment
- Can rent out and increase cash flow
- You can build equity in renovation stage
- Newly renovated properties attract quality tenants
- Owning multiple properties lowers average cost (economies of scale)
However, there are some risks, such as:
- Short-term loans can be more expensive
- The renovation may be time-consuming and costly
- There’s a waiting period before property can be tenanted
- The new value of the property can be hard to predict
The BRRRR method isn’t for everyone. But, if you’re an investor looking to build a portfolio from scratch, this is a perfect choice.
The process can be demanding, but the potential rewards are much higher – as long as you’re comfortable with a certain level of risk.
You also need to consider if you have the cash or funding and expertise to carry out this strategy successfully.
Overall, this strategy provides an opportunity to build equity through innovations, and to increase cash flow through rental income. This is good for long and short-term income.
Although there are risks, these can be mitigated by carrying out thorough research and careful planning. It’s perfect for investors that are prepared to do this.