BRRRR Method: The Secret to Building a Real Estate Portfolio: DLE

by Abdul Aziz Mondal 02nd Dec, 2021 Last Updated on: 10th Dec, 2024

As you pursue your education in real estate, you should have come across the BRRRR method. The initials BRRRR represent Buy, Rehab, Rent, Refinance, and Repeat. We can refer to this as an intelligent investment cycle for investors.

When you traditionally buy a rental property, you will get financing like a mortgage, rehab, rent, and then repeat the whole process.

You can refer to this as BRRRR: Buy, Finance, Rehab, Rent, and Repeat. However, no one calls it that way, yet several people use that approach to purchase a property.

The traditional method of buying a property is popular because of its high level of convenience. In this case, you get a bank loan to purchase a property. With financing, you don’t have to work hard to save for the purchase.

You can buy your home easily through the BRRRR method. However, easy things are not always the best in life.

Through this method, you will quickly purchase homes, use rehab to add value, rent to build cash flow, and refinance for a better financial position and then repeat the entire process. It will help you make a real estate portfolio that will envy your fellow investors in the long run.

Below is a breakdown of the BRRRR method:

Here, we have broken down the BRRRR method into its different elements and have given significant descriptions regarding those elements.

1. Buy

Investors believe that they make money when they buy, and this is a fact. However, the best deals involve good purchases, even though all deals have their own wrong sides. Most lenders finance 75% of the value of the property.

Therefore, you should be ready to finance the other portion of the home. You will have to meet refinancing costs like the loan processing fees, title work, and appraisal, and all these will eat away at your margin.

When you aim for 75%, it will not offer any contingency. Most of the time, people go over the budget and not under it, and hence, building a bit more of a margin is the best idea unless you are going for volume.

Several options will help you buy the BRRRR property, like

A private loan
Seller financing
A hard money loan
Or even cash

Each financing option comes with varied holding and acquisition costs. It would help if you accounted for all these to analyze a deal to be able to hit the 75% goal.

Thus, the key to the success of the BRRR method is to buy a property under the market value. You should invest at most 75% of the after-repair value (ARV) of the property.

It will make sure that you don’t run out of capital, and hence, you will continue purchasing forever.

An experienced lender or agent will give you a conservative value for the ARV. If you pay so much for the property, there is little that you can do to recover from the associated problems or surprises.

2. Rehab

When rehabbing a rental property, there are two essential things that you need to keep in mind. The first is the thing you need to do to make the house functional and livable.

Secondly, look at the rehab decisions that you can make that will add more value than the cost.

Rehabbing properly means adding more value to the property, and hence, you will recover the money.

Unless you are dealing with luxury rentals, there is no need for chandeliers, hot tubs, skylights, bay windows, high-end stainless-steel appliances, Brazilian hardwood floors, and granite countertops, among others. Make changes that will add value to your property without compromising the quality of life.

No one will rent your property if it is in bad shape. Some of the common problem areas include the roofs, unfinished kitchen, drywall damage, horrific landscaping, outdated bathrooms, and too few bedrooms.

You can target such properties and make relevant repairs at the market value below to add significant equity to the deals. Here are a few changes that you can make in the rehab phase-

Roof Repairing: You must repair the roof before selling the property. If you think about their expenditure, the prospects are likely to return the repairing cost while purchasing.

Backdated Kitchen: An old kitchen will work just fine. But you should know that women have a large portion of say when purchasing a house, and women know their kitchens better than you do. So try updating the kitchen with the latest equipment to ensure financing for the property.

Update The Bathrooms: No one wants to buy a house with a damaged and backdated bathroom. However, a backdated bathroom may decrease the chance of your property selling out.

3. Rent

Banks are rarely willing to give a refinance to a project that is not yet occupied. Therefore, renting the house comes as a priority.

You need to screen carefully so that the tenants that you get will pay monthly. However, it is also crucial on the side of financing.

The appraiser should not pay so much attention to how pleasant or clean the appraiser appears to be because everyone is human. However, the first impression makes a big difference.

You should notify the tenant early before the appraisal. Don’t choose an appraiser who will downgrade your property unfairly. You must follow local laws during the appraisal process.

Tenants are not supposed to be present but inform them to keep the house clean during the appraisal period. Therefore, rent is a critical component of the BRRRR method.

4. Refinance

A few years ago, it was nearly impossible to get a bank that was willing to refinance rental properties for single families.

Currently, it is easier to refinance your rental property. However, there are a few things that you need to consider when looking for such a bank.

Check if they will only pay off the debt or if they offer cash out. If the bank does not offer cash out, it is more advisable to move on.

The next thing to look at is the seasoning period that they need. This is the period that you will own the property before the bank lends on the appraised value instead of how much you have invested. You must borrow on the appraised value for the BRRRR method to work.

Nowadays, there are banks that lend on the appraised value immediately after a property is rented or rehabbed. It is good to look for such banks. You can ask around, especially from investors, for the best BRRR banks.

There is a high possibility that a bank that is lending to another investor will also lend to you.

But you must give the lender clear and thorough information. Remember, you are dealing with human beings and not machines, and this information will help them make quick decisions.

The secret here is to get the highest possible appraisal value. The success factors are how strong your initial comps are and how you rehabilitated your property.

You should put less money into a deal and then fail to pull it out. It is wise to get a loan pre-approval before you can make a purchase.

5. Repeat

The most fun part of the BRRR cycle is the repeat section. Take everything that you have gained, learned, and improved upon, and then put it back into action. The other thing that you need to do is work on building the systems.

Systems will help you accomplish your goals by repeating the process. Systems cut down on stress and mistakes.

If you have systems that are more documented, you will miss about missing out, forgetting, or overseeing something.

BRRRR Method Pros & Cons

Every method or strategy has its advantages and disadvantages. You must consider both the advantages and disadvantages of any technique before applying it to your use.

The BRRRR method also has its pros and cons.

Pros

Return Potential: Utilizing this method has return potential. Investors would be interested in buying these properties at relatively low cost and repairing and renting it for a higher price.

Top-paying Tenants: If you make substantial rehabilitation to the property, some high-paying tenants may choose it for specific features they find interesting.

Economies of Scale: Once you utilize the Brrrr strategy, you will achieve ‘economies of scale.’ In this case, owning multiple properties of the same category will help you lower the cost per property and lighten the risk.

Cons

Expensive loans: Financing such properties requires short-term loans that sometimes make the investors feel over-leveraged, and these loans are often expensive.

Rehabilitation project: Taking up a large property for rehabilitation is expensive and comes with extra headaches and worries.

Time intensive: Brrrr method is a time-intensive strategy. The rehab phase takes a lot of time for a property to get ready for potential tenants or buyers. First, you have to wait for the rehab and then wait for a tenant or a buyer to purchase the property finally.

Case study on a BRRRR:

To Wrap It Up

The most efficient way to invest in real estate is through BRRRR investment. It is so powerful that most investors can only buy a property by considering the BRRRR method. It is something that will have a significant impact on your wealth and change your investment life.

Read Also:

The “Buy, Rehab, Rent, Refinance, Repeat” (BRRRR) Method:

Abdul Aziz Mondal

Abdul Aziz Mondol is a professional blogger who is having a colossal interest in writing blogs and other jones of calligraphies. In terms of his professional commitments, he loves to share content related to business, finance, technology, and the gaming niche.

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BRRRR Method: The Secret to Building a Real Estate Portfolio: DLE