In real estate, there are many investment strategies to compare. One of the most common is the BRRRR method, as it’s been proven successful by investors time and time again.
Let’s start with a basic overview of the BRRRR method.
BRRRR stands for “buy, rehab, rent, refinance, and repeat.” In short, you purchase a distressed property, rent it out for income, and then use a cash-out refinance to fund additional real estate investments. Then, you rinse and repeat as many times as you’d like.
Now that you know the basics, let’s dive into the finer details of how this method works.
1. Buy a property
Search for distressed properties that require work before renting to a tenant. Because of the home’s condition, it’s more likely to be priced below the area’s market average.
2. Rehab the property
Some distressed properties require more work than others, but you should expect to put time into this step. This is when you renovate the property to make it safer, structurally sound, and more visually appealing to potential tenants.
3. Rent the property
Calculate the rental price based on similar properties in the area. From there, advertise the property for rent.
4. Complete a cash-out refinance on the property
Use a cash-out refinance to convert your equity into cash. Once you have access to the cash, it can be used for various expenses.
5. Repeat by using the funds from the refinance to reinvest
With the BRRRR method, use the funds from your cash-out refinance to purchase another distressed property. You will then rehab that one, rent it, and refinance once again.
You can repeat the process as few or as many times as you want.
Does the BRRRR method work with foreclosures?
Since the first step in the process is buying a distressed property, the BRRRR method aligns perfectly with foreclosures. You can often purchase foreclosures (and pre-foreclosures) at a massive discount.
You can get started with a foreclosure by purchasing with cash or making a cash down payment alongside a loan.
Take for example a property in which you have 70 percent equity. For the sake of this calculation, let’s assume that works out to $100,000.
You can use the entire amount as a down payment on a second foreclosure or to purchase a property outright.
The benefit of targeting foreclosures is your ability to purchase them at a discount when compared to similar homes in the area. This puts you at an advantage from the start, as you’re able to generate more equity in a shorter period of time.
Pros and cons of the BRRRR method
It’s important to compare the pros and cons of the BRRRR method before putting it into action. This will help you make an informed decision on the best path forward.
Pros
Some of the primary benefits of the BRRRR method include:
- The opportunity to generate passive income
- Consistent increase in your rental income
- Grow the size of your rental portfolio
- Build equity
Cons
When done properly, the benefits of the BRRRR method outweigh the potential cons. However, you must still account for the following.
- The cost to rehab the property
- The time and manpower to rehab the property
- A higher-cost loan
- Less equity than you originally believed you would have
- It can take longer than expected to complete renovations, find a tenant, and secure a cash-out refinance
Summary
If you’re searching for a new approach to real estate investing, take a closer look at the BRRRR. Consider how it fits into your current strategy, along with the impact it’ll have on your short and long-term finances.
As with any type of investing strategy, tread carefully as you ramp up. Doing so will allow you to immediately deal with any issues while minimizing the potential risks detailed above. Conversely, you maximize your chance of success.