Make Cold Hard Cash Flow with the BRRRR Method
Updated: Jun 7, 2020
Buy Rehab Rent Refinance Repeat - a classic real estate value creation strategy to build equity and add monthly income to your portfolio
The BRRR or BRRRR (Buy, Rehab, Rent, Refinance, Repeat) method is one of the classic real estate investing strategies. This is an active investment strategy where you will acquire an under-performing residential real estate asset and create the value in the property by renovating it and turning it into a cash flow cow by renting it out.
The BRRRR method is on my favorite strategies and it's what I've used to amass a large portfolio of rentals and grow a strong foundation of cash flow.
What I mean by active investment is that you'll be directly involved in the day to day responsibilities such as selecting a market, analyzing properties, choosing a property, negotiating the purchase price, finding the contractors, managing the rehab, and you can rent it/ manage it yourself or use a 3rd party management company. Of course you can delegate out portions of this work or build teams around aspects of this model.
The BRRRR method is on my favorite strategies and it's what I've used to amass a large portfolio of rentals and grow a strong foundation of cash flow. The reason why this has been so powerful in my investment strategy is because the refinance portion allowed me to re-deploy that original investment and reinvest it multiple times.
Before jumping into the different segments of the strategy, there a few items that is you need to have done:
1- Identify - a market where purchase price is low enough to produce positive net monthly income
2 - Renovate - at a price build equity into the house.
3 - Rent - for net cash flow, usually gross rental incomes exceed the 1% rule ($1000 gross income for every $100,000
A lot of times these markets are Up-and-coming cities with:
Strong job growth
Strong population growth
Increasing median incomes
Great school districts
Keep in mind you may want to buy in areas:
Within two hour driving distance
Where you have friends or family
A city that you would move to retire in in the future
The name of the game is strong cash flow (net monthly income) and finding properties where you can build up sweat equity through renovations.
You want to find properties that are at a discount because they are old and dated, they have a distressed seller, or an off market deal. This gives you room to improve the property to where it can sustain market rents. When you buy right, you have the ability to renovate appropriately and get the rents that you're looking for.
In the current state of economy do you want to renovate just enough and focused on the areas of the house that will draw in a great tenant to your property who pays market rents. Standard rehabs focus on the kitchen, bathroom, flooring and paint.
Finding the right contractor can be a little tricky and many times its trial and error. One big piece of advice NEVER EVER pay in advance for work that hasn't been completed. When you're just learning to work with contractors you need to keep a watchful eye and only paperwork that's being completed.
Recommendations are great so ask for referrals from real estate agents, property managers, friends, or request a contractor list from your local municipality and call down the list.
You can do initial research on what the rental rates are for the area using Zillow, Craigslist, rent-o-meter or calling local property managers. You'll want to do a comparison study to see what the properties look like to obtain the rents that you're trying to achieve.
The rent in portion is critical because the bank will typically not refinance your property unless it's occupied first. So you want to make sure you get a high quality tenant inside the house that takes care of the property. That way when the appraiser evaluates your property the perception is pleasant and they determine a higher value. Make sure to notify the tenant before the appraiser enters the property and make sure it's an interior appraisal versus a drive by.
We're getting towards the fun part, after all the work you've put in renovating the house and you've started to collect rental income with a quality tenant. Now you must find the bank that will lend to you and allow you to refinance the equity out of the property.
Finding the right bank and lender who allows for single-family home rental refinance is as important so if you need some referrals, feel free to message us.
When looking the right bank, you need to ask:
Do they offer cash out or will they only pay off debt? cash out refinance is non negotiable.
What seasoning period do they require? A “seasoning period” is how long you have to own a property before the bank will lend on the appraised value instead of how much you’ve invested. For the optimal BRRRR strategy to work, you want refinance based on the appraised value. Nowadays, there are some banks are willing to lend on the appraised value as soon as a property has been rehabbed and rented.
To truly execute a very successful BRRRR you want to refinance when the appraised value is as high as possible. This will be a combination of the quality of your renovation and how strong your initial comps were. If you put too much money into the deal and aren't able to pull it out, that could lower your returns drastically.
The trick to being successful here is getting as high of an appraised value as you possibly can. A big part of success in this area is a combination of how well you rehabbed your property and how strong your initial comps were.
There is where you want to be, the ability to reinvest your equity from the first deal over and over again. All the experience you've gained, all the lessons you've learned, you can make improvements and better yourself on the next deal.
If you master this craft you have the ability to compound your original investment many times over.
Remember if you're doing the same action over and over again try and create a system around it. Document your process, write out the details, and work on hiring the right person to take on the responsibilities that you are the best at.
Re-deploying your Equity Multiple Times
Loan Principle Pay Down
If you get Low appraisals
Higher Rehab costs
Longer Rehab Times
Adding direct ownership of real estate to your portfolio has a lot income and tax benefits. If you're already a busy professional or business owner and don't want to take on all the work in the BRRRR method, there are real estate firms that can provide this final product to you as a passive investment.
If you have any questions about how this investment strategy works feel free to email us at firstname.lastname@example.org