I’m not cold…what is BRRRR?
The BRRRR method is a real estate investing strategy that stands for Buy, Rehab, Rent, Refinance, and Repeat. It is an approach to help investors acquire and build a portfolio of rental properties, using the cash flow from previously purchased properties to fund the acquisition of new properties.
Here’s how the BRRRR method works:
- Buy: The first step is to purchase a property that has potential for renovation and improvement, ideally at a discounted price. This might be a distressed property, a foreclosure, or a property that simply needs some cosmetic updates. Don’t rush this step. It is important, especially early on, to be sure that the property in question really doest have the potential to be a great rental within your budget for purchasing and remodeling.
- Rehab: Once the property has been purchased, you will start making repairs and improvements to both increase its value and make it attractive to potential renters. This might include updating the kitchen and bathrooms, replacing flooring, updating the landscaping and painting. Remember that you are updating this to be both appealing to renters and to increase the value of the property.
- Rent: Once the property has been renovated, you’ll need to find a tenant and start generating rental income. You might do this by working with a real estate broker to list the property on the MLS, listing it yourself online or even just putting a “For Rent” sign in the yard. Keep in mind that the rent should ideally cover the cost of the mortgage, taxes, and insurance, as well as provide some cash flow.
- Refinance: After the property has been rented and is generating income, you should look to refinance to pull out equity and use it to purchase your next property. This is where rehabbing to increase the value of the property comes in to play. Ideally, the refinance will cover the initial purchase price of the property and the cost of the renovations.
- Repeat: Now you repeat the process. With cash in hand from the refinance, you will have money for a down payment and hopefully some more for at least part of the next rehab. You can use the cash flow from the first property to make mortgage payments and renovations on the 2nd property. And so on.
Overall, the BRRRR method can be an effective way for real estate investors to build long-term wealth and financial freedom by using the cash flow from rental properties to fund the acquisition of additional properties. Over time, the process can snowball and allow you to take on bigger projects or even move into multi-unit properties.
Seems easy…what are the risks?
The steps above sound easy, and in many ways, they are. But there are some risks you need to be aware of.
- In my mind, the biggest risk is that the renovation costs are far higher than you estimated. This has happened to more than one investor. It is important that you have a team that includes someone qualified to objectively assess each property for the level of effort (ie, cost) required for a remodel. There will always be surprises, but you want to minimize them.
- There is also a risk that your new property won’t rent at all, or will only rent well below what you expect. Again, having someone on your team who can give you an an accurate rent estimate for the property and the area will be invaluable.
As I’ve said before, real estate investing isn’t for everyone. Like all investments, it has risks that you need to consider. The BRRRR method of real estate investing has worked for many people and could be a good approach for you, depending on your situation.
Thanks for reading. Remember, I don’t know you or your specific situation. Nothing in this article should be taken as advice specific to your situation. If you have any questions, though, please get in touch – you can find my contact form here. Also, feel free to sign up here for my monthly “Neighborhood News” newsletter for real estate information on your local area.