The “BRRRR” method stands for Buy, Renovate, Rent, Refinance, Repeat. It involves using a short-term loan to acquire a distressed property, enhancing its value through renovations, generating cash flow through renting, refinancing based on the improved value, and repeating the process. This cyclical investment strategy can rapidly expand an investor’s portfolio.
Step 1: Buy a Distressed Property
The buying stage is foundational in the BRRRR strategy. Investors should focus on properties that are distressed or undervalued, requiring renovations yet offering significant returns. The principle here is to make money when you buy, meaning acquiring properties below their market value. These could include real estate-owned properties, wholesale deals, or properties requiring significant management improvements.
A critical aspect is the BRRRR formula we use for finding deals: (ARV = After Repair Value)
Maximum Purchase Price = (ARV x 75%) – Repair Costs
For instance, lets say you want to buy a home that is currently valued at $100,000. You expect that with some renovations, you can get the home to appraise for $160,000. The renovation costs will be around $30,000. Using our formula, you would do $160,000 x 75% – $30,000 (your repair costs). This would equal $90,000, meaning you should only be willing to offer that much for this home to be a great deal.
This formula provides wiggle room on your expenses. It protects you from unforeseen renovation costs or project delays that increase your interest payment. Some people are fine with using ARV x 80% in this formula, but this exposes you to more risk when it is time to refinance. Using 75% is more conservative, but it is hard not to profit on a deal that meets this criteria.
If we adjusted our formula to 80% in our scenario, lets run the numbers again. $160,000 x 80% – $30,000 = $98,000. This may still work for you, but you’re starting $8,000 behind the 75% benchmark ($90,000). Keep this in mind when running your numbers to be sure you can take on this risk.
Step 2: Renovate the Property
Rehabilitation involves revamping the property to enhance its value and appeal. The goal is to elevate the property’s condition to lease it out at the highest rent possible. Renovations should focus on safety, functionality, and aesthetics, balancing the renovation level with the potential rental income. Safety includes addressing structural and mechanical repairs, while functionality and aesthetics involve making the property habitable and visually appealing, respectively. This phase is complex and unpredictable, often presenting challenges like unforeseen costs and project delays.
Step 3: Rent to a Quality Tenant
Once renovated, the property is ready for tenants. The renting phase requires professional marketing, rigorous tenant screening, setting fair rental rates, and drafting solid lease agreements. High-quality photos and listings on popular rental platforms are essential. Rent should cover all property expenses and generate positive cash flow. Freshly renovated properties attract quality tenants and reduce maintenance costs, making property management more manageable.
Step 4: Complete a Cash-Out Refinance
After rehabbing and renting, refinance the property based on its new value. Obtain a property appraisal to determine the ARV. Find lenders offering cash-out refinancing, which allows borrowing more than the owed amount based on the property’s appraised value. Lenders typically lend up to 70-80% of the appraised value. Meeting criteria like credit score, debt-to-income ratio, and property equity is essential. Refinancing can be a complex phase, involving finding the right bank, considering loan terms, and understanding the impact of interest rates on the investment.
Step 5: Repeat Steps 1-4
Utilize the funds from refinancing for your next investment. Reinvest the capital in buying and rehabilitating another property, expanding your portfolio. Continuous cash flow from previous investments can support new projects, while lessons learned from each cycle improve efficiency and decision-making in subsequent investments.
Financing the BRRRR Strategy
Various financing options include using personal savings, private money lenders, hard money loans, HELOCs, cash-out refinancing, seller financing, and Subject To financing. Each option has its pros and cons, and it’s important to consider factors like interest rates, repayment schedules, and personal investment capabilities.
- Cash: Using personal savings for investments offers freedom from interest rates and loan repayment schedules. However, it ties up your personal funds in the property, and the risk is entirely yours.
- Private Money Lenders: These are individuals or small companies willing to invest in real estate ventures. They could be friends, family, or acquaintances. The terms can be favorable, but it’s vital to treat these as professional relationships with clear contract terms.
- Hard Money Lenders: Companies that loan money based on the property’s value, rather than the borrower’s credit. These loans have higher interest rates and shorter terms but can be obtained quickly, crucial for securing a good deal.
- Home Equity Line of Credit (HELOC): If you already own property with substantial equity, a HELOC allows you to borrow against this equity at a lower interest rate than hard money loans. It’s a cost-effective way to access capital.
- Cash-Out Refinance: Similar to a HELOC, this method allows you to tap into your property’s equity by refinancing for more than you owe. The excess is given as cash, which can be used to fund BRRRR projects.
- Seller Financing: Here, the seller acts as the lender, providing the buyer the funds to purchase the property. Payments are then made to the seller instead of a traditional mortgage lender. This can be beneficial for both parties but typically requires a seller who owns the property outright.
- Subject-To Financing: This involves taking over the seller’s existing mortgage payments. The property title transfers to the buyer, but the loan remains in the seller’s name. The advantage is avoiding a new mortgage, but the risk includes the lender potentially calling the loan due.
Pros and Cons of the BRRRR Method
The BRRRR strategy offers high ROI and immediate equity gain in properties. However, it also involves challenges like managing rehab projects, dealing with high-interest short-term loans, potential for low appraisals, and the seasoning period requirement. Here is a more detailed list of the pros and cons of this real estate investment method:
Pros
- Forced Appreciation: Renovations and improvements create equity in the property.
- Cash Flow and Passive Income: Rental income provides a steady cash flow and can cover expenses and reinvestment into new properties.
- Wealth Accumulation: Repeating the BRRRR strategy with multiple properties builds a portfolio of appreciating assets for long-term wealth.
- Learning Experience: Each cycle offers insights, improving efficiency and decision-making in future projects.
Cons
- Market Volatility: Fluctuating real estate markets can affect property values and anticipated appreciation.
- Rehab Challenges: Renovations can be complex, time-consuming, and costly.
- Financing and Cash Reserves: The strategy requires access to diverse financing options and sufficient cash reserves.
- Tenant Risks: Finding and managing tenants involves risks such as non-payment and property damage.
Is the BRRRR right for you?
The BRRRR method is a powerful investment strategy, especially in the dynamic market of New Smyrna Beach. It demands thorough market research, strategic financial planning, and effective property management. With each cycle, investors gain experience, knowledge, and the potential to expand their real estate portfolio.
Connect with a New Smyrna Beach Realtor
Looking to try out the BRRRR method in New Smyrna Beach? Partner with a seasoned realtor who specializes in investment properties. Our 20 years of market knowledge and experience can guide you in finding suitable properties for a BRRRR investment.