What is the BRRRR Strategy?
The BRRRR strategy has been around for a long time, but has been popularized lately by real estate investment leaders like BiggerPockets (check out their podcast!). Some investors refer to it as a cashout strategy.
What does BRRRR stand for?
Let’s break down how it works:
Whether you’re using financing or not, you’ll need to set a budget for the purchase of the home. Ensure you calculate closing costs, carrying costs and renovation costs when you are analyzing the property. This is the most important step, as the price of the property will determine all of the next steps.
When looking at potential properties, always remember that the goal of the BRRRR strategy is to pull out all of the money you put into the property when you refinance. This means you effectively have no money in the property while still having 20% equity built in.
You’ll want to look for undervalued properties first and foremost. Buying low can help you ‘make money in the buy’ with instant equity.
In your negotiations, it is important to add a few extra viewing times of the property before closing. This will allow you to inspect it thoroughly so you can carefully plan your renovations. Schedule your General Contractor and/or trades for a walk-through of the property and quote you for repairs. Make sure you get multiple quotes so you know the scope of the work needed and so you don’t overpay.
When rehabbing a BRRRR property there are a couple of questions to keep in mind:
- What repairs need to be done to make this house livable and functional?
- What additional renovations can be done that will add more value than their cost?
By keeping these questions are the forefront of your decision making, you will ensure that you not only have an excellent rental property, but that you will also be able to pull out your original investment after you refinance.
Tip: If you are completing any major renovations, make sure to check with your city about getting the proper permits in place for closing so you can get started on the rehab right away.
After renovations are complete, it’s time to get your property rented. Banks generally prefer to refinance a property after it is occupied.
By now, you should have decided whether you are using a property management company or if you will be renting it out yourself.
If you are managing it yourself, consider setting up systems to automate the process. Whether you have an email template, a automated voicemail message or a website, having all of the property information ready and available will save you a lot of headaches. Along with all the property details, include information about scheduling a showing, filling out an application, and how to submit their credit report to you.
A lot of DIY-landlords choose to have “open-house”-style showings. This type of showing allows you to show multiple interested parties the house in a single time slot while creating urgency in the prospective tenants to get you their completed application and credit check.
After the tenant(s) have been selected, you will need to notify them that you will be doing an appraisal. Note that it’s important to have an appraiser who will enter the property as opposed to one that just does a drive-by/runs comps as they may make assumptions and downgrade your property unfairly. Speak to your lender about this as you may have to make a special request.
This is where it gets interesting. While some investors may choose to sell the property at this point as a turnkey rental for other buy and hold investors, BRRRR investors use a different tactic to recover some of their money. By refinancing the rental, you are able to pull out some or all of your original investment.
There are are a few ways to go about this including a cash-out refinance or a home equity line of credit. Either way, your goal is to take out enough cash to start building a down payment for your next property while still maintaining a cash-flowing property. It is in your best interest to talk to your mortgage broker to see what option is right for your situation.
Make sure you ask about the seasoning period required. A seasoning period is how long you have to own a property before the bank will lend on the appraised value. A typical seasoning period for most banks is one year, however, for the BRRRR strategy to work, you’ll need to find a bank that will lend on the appraised value shortly after it has been rehabbed and rented.
Now that you’ve pulled out cash, it’s time to find your next property to BRRRR. As you continue to grow your investment knowledge and skills, it will get easier and easier to find properties that can be 100% financed after using the BRRRR strategy.
This strategy can be repeated over and over, which will increase your income without tying up your cash long-term. You’ll continue to add cash-flowing properties to your portfolio with very little of your own money tied up. This will allow you to build your real estate
empire even quicker when you also take into account the cash-flow and equity growth of your portfolio.
What makes a good BRRRR property?
There are a couple important things to look for in property you are planning to BRRRR. First off, it needs to be undervalued.
You may find undervalued properties because of foreclosures, estate sales, owners needing to move quickly, or simply because they are trying to sell in an off-season.
More than likely, you’ll find an undervalued property because it needs a significant repair that a new homeowner does not want to take on such as a new roof, furnace or other significant upgrade.
If you can’t find undervalued properties in your market, you may need to try another strategy. Consider making (appropriate) low ball offers on multiple properties. Depending on personal circumstances, you may find some sellers are more motivated than others.
Is BRRRR right for you?
The BRRRR strategy is great for both new and seasoned real estate investors. When used properly, the BRRRR strategy will allow you to take your initial investment into the property out. You can then use this capital to purchase your next property. This allows you to keep using the initial investment to purchase new properties.