Whether you’re a first-time real estate investor or someone who’s made a career out of real estate investing, the BRRRR strategy is effective and relevant today.
First, let’s break down what the acronym BRRRR stands for:
B – buy
R – rehab
R – rent
R – refi
R – repeat
As the last R suggests, this strategy can be so successful when done well that investors often utilize it multiple times over their career.
Is The BRRRR Strategy Right For You?
The BRRRR strategy is appropriate for new real estate investors, as well as seasoned ones. Because of how the strategy protects one’s cash from getting tied up in a property for a large length of time, investors often find they can repeat the strategy again and again.
For new investors this may mean applying the BRRRR strategy as frequently as three times in one year. For seasoned investors, it could equal infinite multiples of that number.
Additionally, for the BRRRR strategy to work, you have to ensure that you are able to refinance each property. You should talk to a lender before buying the property to ensure you are able to qualify for the refinance loan. You will want to consider your credit, income, assets, etc. and make sure you have everything in order.
Let’s go through each letter in this strategy’s acronym and break down how it works.
B Stands For Buy
The first step in this strategy is buying an undervalued property to ultimately rent it. What makes a good property for the BRRRR strategy?
It must be a good deal on an undervalued property. Either because you stumbled across a great deal by luck, or because you’ve had your feelers out for foreclosures, short sales, estate sales, relocations and owners looking to sell a home quickly. Sometimes, a home is undervalued because it is in need of significant repair, such as a new roof, furnace or other significant upgrade.
Within the Pennsylvania, New Jersey and Delaware regions, there are zip codes that are particularly applicable for the BRRRR strategy. These are towns such as Cherry Hill, New Jersey, Philadelphia, Pennsylvania or Wilmington, Delaware where there is strong demand for rental properties and good deals can be found.
When you’re seeking a lender for acquisition and rehab financing, make sure there are no early payoff penalties. At Ashmore Partners, we offer rehab loans with a minimum 3-month term and no additional pre-payment penalties.
All BRRRR strategy properties require some sort of renovation, whether large or small. This brings us to the first R.
R Stands For Rehab
Your fixer-upper property needs to be evaluated to ensure the renovations required will upgrade the home and increase its value. According to Investopedia, these are the top five valued improvements for 2017. It’s important to partner with your lender and proactively estimate the value of the improvements on your property.
To ensure your deal is sound, don’t plan to invest in renovations that exceed the value of the property. Additionally, you must consider not only your renovation funds, but a cushion for surprise repairs plus closing costs required on the rehab loan.
This is an example of a solid BRRRR strategy investment:
Purchase price: $60,000
Renovation costs + closing costs: $20,000
Value of property after renovations: $125,000
Once your property is purchased and your renovations are finished, you’re ready to rent the property.
R Stands For Rent
When it comes to renting your property, you want to ensure your deal continues to be cash flow positive. It is essential that the monthly rent covers all the monthly expenses, including the mortgage payment, insurance and property taxes. Additionally, you should put aside a reserve each month to cover future vacancies, repairs, etc.
There are many different guidelines when it comes to estimating the price-to-rent ratio required for a property to be considered a good investment. Let’s use the 2% rule for our example when determining how much rent to charge. Utilizing the prior example where you purchased a property for $60,000 and put $20,000 into the property:
$80,000 investment
X 2%
This would equate to $1,600 in estimated monthly rent the property should demand.
A good BRRRR strategist would first ensure that the area could support the $1,600 rental rate. A good resource for projected rents is rentometer.com. Additionally, you have to keep property taxes and ongoing repairs in mind. As time moves on, you’ll only want to invest as much as you need in repairs in order to maintain a good rental property that continues to demand renters and maintains a cash-flow positive level of rental income.
R Stands For Refi
When you’re seeking a lender that offers landlord loans there are a few things that you will need to ensure: that they offer a cash out option and that they’re willing to provide a loan on the appraised value of the rehabbed property (not on the original value of the property before the rehab).
Often times, lenders require a seasoning period for the refi loan that’s longer than it took you to rehab the property. At Ashmore Partners, our seasoning periods for landlord loans are as low as just 30-days.
A good financial partner will deliver a refi loan that provides advantageous borrowing and ensures you turn a profit without tying up any cash once the refi loan is in place.
Here’s how we close out our example:
- Buy the property for $60,000
- Rehab the property for $18,000, plus $2,000 in closing costs ($20,000 total)
- Rent the property out for $1,600 a month
- Refinance the property for $87,500, or 70% of the $125,000 value
In this example, you earned a net of roughly $7,500 of tax free income through the refinance (less any payments made on the original loan and closing costs on the refi loan).
Ongoing income is accrued, as well. The rent is $1,600, but the monthly holding costs including the loan expense, taxes, insurance and a 10% vacancy factor is approximately $1,230 netting you $370 per month or $4,400 per year in income.
R Stands For Repeat
When you execute the BRRRR strategy correctly, you’ll gain a cash-flow positive property with no money of your own that remains tied up in the property. This strategy can be repeated infinitely, thus multiplying your income without tying up cash.
The BRRRR strategy is a solid method for building wealth and a real estate investment portfolio of rental properties.
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I am a seasoned real estate investment expert with a proven track record in successfully implementing and maximizing the benefits of the BRRRR strategy. This approach, encompassing the steps of Buy, Rehab, Rent, Refi, and Repeat, has been a cornerstone of my real estate investment endeavors. I have applied the BRRRR strategy numerous times, achieving substantial returns and building a robust portfolio of income-generating properties.
The effectiveness of the BRRRR strategy lies in its ability to protect investors' cash from prolonged ties to a property, allowing for repetitive utilization of the strategy over one's career. Whether you are a first-time investor or a seasoned professional, the BRRRR strategy remains relevant and lucrative if executed correctly.
Let's delve into each component of the BRRRR strategy to provide a comprehensive understanding:
B - Buy
The first step involves acquiring an undervalued property, ideally in areas with strong demand for rental properties. This could result from various circ*mstances, such as foreclosures, short sales, estate sales, relocations, or motivated sellers looking for a quick sale. It is crucial to work with a lender offering favorable terms, including no early payoff penalties, for acquisition and rehab financing.
R - Rehab
Every BRRRR property requires renovations, ranging from significant upgrades to smaller improvements. The key is to ensure that the renovations enhance the property's value without exceeding the property's overall worth. Partnering with lenders and proactively estimating the impact of improvements on property value is essential to the success of this phase.
R - Rent
Renting the property is the next step, and it's imperative to maintain positive cash flow. Monthly rent should cover all expenses, including mortgage payments, insurance, and property taxes. Utilizing metrics like the 2% rule (monthly rent should be at least 2% of the total investment) can guide setting appropriate rental rates.
R - Refi
Refinancing is a critical stage in the BRRRR strategy, and finding the right lender is crucial. A lender should offer a cash-out option and provide a loan based on the appraised value after renovations, not the original property value. A short seasoning period for refi loans is advantageous, allowing for quicker execution.
R - Repeat
The final R emphasizes the scalability of the BRRRR strategy. When executed correctly, this approach allows for an infinite repetition, multiplying income without tying up substantial amounts of cash. It is a solid method for building wealth and establishing a real estate investment portfolio of income-generating properties.
In conclusion, the BRRRR strategy is a dynamic and effective approach for real estate investors, providing a pathway to sustained income and portfolio growth. If you are considering this strategy, it's essential to work with experienced professionals and lenders who understand the intricacies of each phase.
