- by Andrew Syrios
- Comment Off
- 3,667 views
The BRRRR approach isn’t sexy or quick, but it does provide a clear path for building wealth consistently and with lower risk.
The BRRRR—Buy, Rehab, Rent, Refinance, Repeat—strategyis all the rage today in real estate investment.
Essentially, the BRRRR strategy is just buy and hold,but it approaches real estate as a flipper would. The big difference is, ofcourse, that instead of selling to convert the built-in equity into profit, theBRRRR investor refinances at the end of the process and uses that built-inequity as a down payment.
Here are key points of the BRRRR strategy (and how itdiffers from flipping) to keep in mind.
B – Buy
“You make your money when you buy” is an old realestate adage. The BRRRR strategy is no different.
Flippers like to use the “70% rule” for determining astrike price. This rule states that the most an investor should pay for aproperty is 70% of the After Repair Value minus the estimated rehab cost. Theidea is that the remaining 30% will cover the real estate commission, closingcosts and so forth while still leaving a healthy profit.
For BRRRR properties, the 70% rule is also a prettygood rule of thumb. Since most banks will only go up to 75% on a refinance,aiming for 70% of the ARV leaves enough equity for the down payment, loan costsand a little wiggle room to spare.
Although the goal of both BRRRR and flipping is to getabout a 30% equity margin, that doesn’t mean you will be looking for the samekinds of properties. For flips, it’s generally better to aim at a higher classof property. For example, on a $100,000 house, a 30% margin doesn’t cover muchextra. One unexpected expense will take a big chunk out of your profit margin.
On the other hand, as properties get more expensive,they generally don’t cash flow nearly as well because there are fewer investorslooking at such properties and more homeowners who don’t care about cash flowpotential. Thus, they will bid up the property above the price it will cashflow. So, a $500,000 home, for example, will rarely cash flow if it has debt onit.
R – Rehab
The BRRRR strategy and flipping also differ in theirapproach to the way rehabs should be done. Namely, don’t overspend.
With flipping, the goal should be to make the houseshine. It should be something you would want to live in, given the opportunity.With the BRRRR strategy, however, the end user is a renter, not a homeowner.The house simply needs to be nice and functional. It shouldn’t amaze you, butyou should at least be willing to live there if need be. So, think Formicacountertops instead of granite countertops and similar materials for otherupgrades.
The only exception to this would be for luxuryrentals, which is another topic entirely.
R – Rent
When it comes to management, the BRRRR strategy islike any other buy-and-hold strategy. But before you can refinance the propertywith a bank and get long-term debt on it, you will need the property to berented and performing. Whether you choose to manage it yourself or hire athird-party management company is a topic for another article. What’s importantto note is that this point cannot be overlooked. Many attempts at buy-and-holdhave been ruined by insufficient tenant screening or poor property managementin general.
R – Refinance
The final step, refinance, might mean paying offshort-term debt or pulling out the money you put into purchase the property atthe beginning.
You may obtain upfront loans to purchase theseproperties. Others buy for cash. It is possible to get a bank loan, but no bankwill lend more than 75% (or 80%, if you are lucky) of the cost you have intothe property upon purchase. This means that if you buy the property correctly(for 70% of its market value), you will only have what amounts to a 52.5% LTVloan (75% loan X 70% market value). You will also have to pay the down paymentin cash.
As a result, you will want to refinance again on theback end. If you got a bank loan on the front, that will require two sets ofloan origination fees, which is why we prefer private loans or buying for cash.
Typically, community banks have the most interest inrefinancing single-family investment properties, although larger banks may bean option too. Further, there are lending institutions that have opened in thelast five years for the specific purpose of financing such properties. You mayhave to look through quite a few banks to find one that will do these types ofloans, but there are plenty that will. In our experience, the best way to findsuch banks is to ask other successful investors who they have used.
Finally, make sure to verify the “seasoning period” abank requires. This period is how long the bank demands you have owned theproperty before it will lend on the appraised value versus your cost into theproperty. This period may range anywhere from as soon as the property is rentedto two years. The goal should be a seasoning period of six months or less.
R – Repeat
Now that you’ve pulled all your money out and have acash-flowing investment property with none of your own money in it, why not doit again?
Important Considerations
While, as noted, it is certainly possible to “BRRRRout” of any individual property and have no money left over, it should not betaken for granted. “No money down” investment strategies are highly difficultand preclude many investments as well as any room for mistakes. And, evenseasoned investors make mistakes.
So, while the BRRRR strategy has proven to be a greatway to build a portfolio of rental properties with limited cash out of pocket,it should not be a panacea. An investor planning to use the BRRRR strategyshould have at least some savings on hand or consider bringing on a moneypartner.
Real estate investment is the “ultimate get-rich-slowscheme.” The BRRRR strategy is probably the best example of this mindset. It’snot sexy or quick, but it does provide a clear path to build wealth in aconsistent, low-risk manner. It’s no wonder it has become so popular with realestate investors.
-
Andrew Syrios is a partner in the real estate investment firm Stewardship Properties. He graduated from the University of Oregon with a degree in business administration and received his master’s degree in entrepreneurial real estate from the University of Missouri-Kansas City. He also writes for BiggerPockets.com and blogs at AndrewSyrios.com
Share
