What is the BRRRR method in real estate?

If you are interested in investing in residential real estate, you may have heard of the BRRRR method. The acronym stands for Buy, Rehab, Rent, Refinance, Repeat. Similar to house flipping, this investment strategy focuses on buying properties that are in poor condition and repairing them. But instead of reselling them for a one-time profit, you rent them out, generating income while building up equity that you can use towards your next purchase.

What is the BRRRR method?

The BRRRR method is a way of investing in real estate. The name describes the steps an investor must take to make money using this method. With this investment strategy, investors focus on buying properties that need work. Then they rehabilitate it, rent it out to cover their mortgage, refinance with a payout, and use their profit to do it all over again with another property. It’s not for beginners – BRRRR is complex and requires experience, knowledge and finesse.

Buying a home at a bargain price is key to making a profit using the BRRRR method. “All the money you make, you get when you buy it,” says Todd Baldwin, a veteran real estate investor who teaches finance courses online. “Rehab, renting, refinancing and even selling the property is great, but the money is made when you buy it. If you can get a property on terms or below market value, do great.”

What BRRRR stands for

This acronym describes each step the method requires, in order: Buy, Rehab, Rent, Refinance, and Repeat.

Obtain

Investors using this method should not buy just any property. It’s important to focus on properties that need work but are also a solid investment – in other words, it has to be a good deal. Do your research and make sure you know exactly how much work a property will require. Make a schedule of when the renovations will be complete and when you can start renting out the property. You should fully understand what you are signing up for.

rehab

Determine your method of renovating the property. Will you do the work yourself or hire professionals? Identify the best ways to make your property livable and attractive to tenants within an efficient timeframe.

“Specifically for BRRRR, you should have a clear understanding of the amount of work that rehab requires,” says Baldwin. “They want to know your exact costs and how long it will take to complete the work. You can lose money very quickly if you don’t manage these two aspects.”

Investors should focus on home renovations that offer the highest return on investment. This usually means updating kitchens and bathrooms as needed and of course ensuring all hazards are eliminated. Keep your budget in mind when planning: According to HomeAdvisor, a kitchen remodel can cost anywhere from $13,471 to $38,252.

Rent

When rehab is complete and the property is habitable, rent it out as soon as possible. The idea is to set a monthly price that will cover your mortgage payment – or hopefully more. You must also determine whether you will manage the rent yourself or hire a property management company. The sooner you rent it out, the sooner the passive income will move in.

refinance

Once you’ve found a solid tenant, it becomes a waiting game as you build your equity in the property. Because the next step is refinancing, and BRRRR focuses specifically on cash-out refinancing. A withdrawal refi allows you to tap into your home’s equity to withdraw cash for any purpose. Different lenders have different policies about how long you must own a property or how much equity you must have accumulated to qualify for this type of refinance. The cash you withdraw in this case is also the final step in the process.

To repeat

This last step is what makes BRRRR so attractive — and potentially lucrative. With the money from your refinance, you invest in a new property and start the whole process over. Hypothetically, investors can repeat the process over and over again and continuously make money from each new property.

Who is the BRRRR method most suitable for?

“No investment is without risk,” says Baldwin. The BRRRR method isn’t for everyone – it’s best for those who have solid real estate knowledge and experience and can accurately assess market values, renovation costs, and more. Miscalculation of price or budget, or failure to find a tenant at the right time and price can result in major financial losses.

A BRRRR investor must also have enough time to devote to the process. Finding properties, renovating them and renting them out (possibly for multiple units) is a large investment of time.

BRRRR pros and cons

This investment method offers great advantages, but also significant disadvantages.

advantages

  • You Earn Passive Income: BRRRR investors can create a system that allows them to earn passive income, either as an additional source of income or to live on.
  • You build up equity: If you buy and hold several properties, your equity increases continuously.
  • It’s Repeatable: Unlike flipping a house, the BRRRR method isn’t one-off – you can repeat the strategy over and over again, building wealth exponentially in the process.

Disadvantages

  • Rehab can be expensive and time-consuming: Quality renovations don’t usually come cheap or quickly. Supervising work can be stressful. And depending on the extent of the repairs needed, you may need to take out a rehab loan. These loans usually have higher interest rates and can be expensive.
  • It takes time to turn a profit: BRRRR does not offer a quick buck. It’s a slow and steady type of strategy. You have to put in work and time before you start making money.
  • Being a landlord is a lot of work: Finding and managing tenants can be difficult. And the more times you repeat the process, the more tenants you’ll have.
  • There is a financial risk: there is a lot of educated guesswork in BRRRR. Whether you misjudge the value of a home after rehab, overestimate the rent you can charge, or underestimate the renovation budget, there’s always a chance of losing money.

bottom line

Before you decide to jump into BRRRR real estate investing, do some thorough research and talk to other people who have done so. Baldwin even suggests finding a mentor if you can. The method can be very lucrative, but you need to know what you’re doing – inexperienced investors might be overwhelmed.

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