How To Boost Your Passive Income With The BRRRR Method

Key Takeaways

  • BRRRR is a real estate investing acronym that stands for buy, rehab, rent, refinance and repeat.
  • Make sure to uncover the unique advantages of implementing a BRRRR strategy, and determine whether or not it’s the right fit for you.
  • As with any investing strategy, minding your due diligence and running thorough deal analyses are critical factors that influence outcomes.

Imagine yourself attending a real estate investing networking event, and you overhear someone saying ”BRRRR.” Chances are, your colleague is not commenting on the temperature of the room, but rather, is discussing a popular investing strategy. For those wondering how to build wealth in real estate, consider this unique framework that represents a hybrid between active and passive income. Read on to find out more about the BRRRR strategy.


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Brrrr strategy

BRRRR Meaning

BRRRR is an acronym that describes both a strategy and a framework implemented by many investors who wish to build passive income over time. Standing for “buy, rehab, rent, finance, repeat,” the BRRR strategy represents the steps that are implemented in the exact order that they appear. First, an investor purchases a property that they proceed to rehabilitate. The newly revitalized property is then rented out to tenants for an extended period of time, through which the rental income should enable the owner to pay the mortgage, earn profits, and build up equity over time. Once a sizable amount of equity in the property is built up, the investor can then purchase a second property by refinancing the first, and so on.

Buy

The first letter in the BRRRR method is ‘B,’ which stands for buy. When searching through listings, keep in mind that this phase may very well serve as the critical point that determines the outcome of an investment. There exists a complicated intersection between making sure a property represents a sound investment deal, while also promising to perform well as a rental property.

This will require an intensive deal analysis, which includes calculating the cost of renovations, estimating monthly rental expenses, and ensuring that the resulting rental income will provide a sufficient profit margin. Ensuring the strong performance of a rental property may include researching the best rental markets, as well as making sure that the purchase price provides enough of a buffer zone to allow for renovation costs. Many investors rely on the 70 percent rule, which estimates for the cost of repairs and after repair value, which helps to determine a maximum offer to be made on a property. By using this rule of thumb, they can better ensure that a profit margin will remain after renovating a property.

Rehab

At the most basic level, landlords must identify how to make their rental properties both livable and functional for their tenants. Once these requirements are satisfied, updates or renovations that will add value to a property (and thus providing justification for increased rental rates) may be considered. On the other hand, however, investors must be careful not to make any excessive upgrades that will end up costing more than what can be produced through rental income. Representing the first ‘R’ out of four, the rehab phase of BRRRR requires an in-depth cost-benefit analysis every step of the way. Investors are advised to only select home improvement projects that will provide a high return on investment.

Rent

Once the rehabilitation phase of the property is complete, the investor can then execute the rental phase of the process. This might entail screening and selecting tenants, managing turnover, and responding to maintenance and repair requests. After a certain amount of time, an investor will typically figure out whether or not their practice of minding due diligence was satisfactory. Possible things that can go wrong include vacancies, bad tenants, or rental expenses that exceed income produced. All these possible outcomes can quickly drive a property underwater, increasing the risk of foreclosure. This is not intended to scare investors away from becoming a landlord, or from exercising the BRRRR strategy, but merely to emphasize the importance of properly running the numbers before making any investment decision.

Refinance

Once your property has been effectively rehabbed and rented, you can start devising a plan on how to refinance it. Some banks will offer a cash-out refinance, while others will only offer to pay off outstanding debt; of these two options you will want to select the former. You will also want to make note of the required ‘seasoning period,’ which indicates how long you must own a property before the lender will consider refinancing against the appraised value of the property. Although you may encounter some banks that are not willing to refinance single-family rental properties, investors can generally tap into their personal networks to find a lender that fits their refinancing needs.

Repeat

Finally, the investor can use the cash out refinance from their first rental property to fund the acquisition and rehabilitation of their second. A cash out refinance offers additional advantages, such as interest rates that are often favorable when compared to other sources of capital, tax benefits, and having control over your own financial timeline. Facing quite the learning curve, an investor is sure to encounter some difficulties and mistakes from their very first BRRRR cycle. However, they can apply their experience and newly-acquired wisdom when tackling their second, third, or fourth property, and so on.

BRRRR Strategy Pros

It goes without saying that any type of investing strategy will promise certain advantages while bearing some level of risk, and the BRRRR method is no exception. Before executing any type of strategy, make sure to review the pros and cons, and determine for yourself whether or not BRRRR is the right strategy for you:

  • Potential for returns: One of the main benefits is the possibility of a high return on investment. When done right, investors can purchase a distressed property for a relatively low cash investment, fix it up, and rent it out for a strong cash flow.

  • Building equity: One should also account for the amount of equity that is built up during the rehabilitation phase. When pursuing a passive income strategy, many investors are merely creating cash flow off a property worth the price it was paid for.

  • Top-grade tenants: If a property has been properly rehabbed to meet consumer standards in a specific market, it will most likely attract great tenants. Tenants who are willing to pay top-dollar for their rental property in exchange for certain features and amenities are more likely to take better care of the property, and thus help to reduce your expenses. Better tenants often translate directly into improved cash flow.

  • Economies of scale: Once you hit your BRRRR stride, you can achieve something called economies of scale, where owning and operating multiple rental properties at once can help you lower your costs overall, by lowering your average cost per property and spreading out your risk.

BRRRR Strategy Cons

The following list helps to shed some light on potential risks associated with the BRRRR strategy. However, it should be noted that these points are not necessarily cons or disadvantages, rather, they warn investors of what can happen if they are not careful and have not minded their due diligence:

  • Expensive loans: When opting to use a short-term or hard money loan to finance the purchase of a property, high interest rates can prove to be expensive, especially during the rehabilitation phase. Investors should make sure they know how they will make mortgage payments during the time that the property is not producing any income.

  • Rehabilitation: Taking on a large rehabilitation project can prove to be expensive, with many headaches along the way. Rehabbing means dealing with project timelines, managing contractors and sub-contractors, and dealing with unexpected issues. Make sure that you have the right resources and contingency plans in place before tackling a project.

  • Waiting period: BRRRR is a strategy associated with a longer time horizon, which includes at least two waiting periods. The first is during the rehabilitation phase, where the investor must make improvements to a property before they can place tenants and start earning income. The second waiting period is seasoning, a term that describes the period of time an investor must wait before a lender will allow a cash out refinance.

  • Appraisal Risk: Investors typically refinance a property based on the appraisal of the property, rather than how much money they have paid into it. There is always a risk that the property will not be appraised for as much as expected. This should serve as a warning that running the numbers correctly in advance is crucial.

Will You Use The BRRRR Method?

To review, BRRRR is an acronym that describes a strategy that involves buying, rehabbing, renting and refinancing an investment property, all before repeating the process over again. By building equity in a property through a rehabilitation, investors are able to leverage the after repair value to not only improve its cash flow, but to invest in additional rental properties through a cash-out refinance. Although there exists a certain degree of risk, potential downfalls can be mitigated through proper research and minding due diligence. Many investors exercise BRRRR with the goal of owning and operating multiple cash flowing rental properties.

Which phase of the BRRRR phase would you find the most challenging? The most rewarding? Share your thoughts in the comments below:

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Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies