What is the BRRRR Method?

Last updated: August 5, 2024

The acronym stands for Buy, Rehab, Rent, Refinance. The BRRRR method involves purchasing a distressed property, rehabilitating it, renting it out, and then refinancing it to extract equity or cash out. This strategy has the potential to generate high returns and create passive income streams for investors however the successful repeatability of this strategy lies in the precise execution of each of the step, a challenging feat even for most experienced operators. In this article, we will take a closer look at the BRRRR method and explore its rewards, its risks, and its

BRRRR Method

The BRRRR method is a comprehensive real estate investment strategy that involves four distinct steps: Buy, Rehab, Rent, and Refinance. Each of these steps has its own set of risks and challenges that must be carefully considered. In the Buy phase, investors must be able to identify distressed properties that are undervalued and have the potential to be rehabilitated. The Rehab phase requires a solid understanding of construction, renovation, and design, along with a comprehensive plan and budget for the project. The Rent phase requires effective marketing and advertising to find tenants, and then proper property management to ensure a steady flow of rental income. Finally, the Refinance phase requires knowledge of financing and banking to secure a favorable mortgage and extract equity or cash out.

Buy

The first step of the BRRRR method is crucial, as identifying a distressed property that is below market value can lead to substantial profits for the investor.

Distressed properties are those that have been neglected, are in need of repair, or are facing financial difficulties such as foreclosure or short sale. These properties can often be purchased below market value, presenting a unique opportunity for investors to acquire assets that have the potential for appreciation.

However, in today's competitive real estate market, the increased demand for distressed properties has led to wholesalers sending out thousands of mailers and making low-ball offers to potential sellers of these properties. This has created a situation where even distressed property owners are aware of the demand for their properties and have increased their asking prices, making it more challenging to find a property that is truly below market value.

Despite these challenges, it is still possible to find distressed properties that are priced below market value. To do so, investors must be vigilant and thorough in their search, utilizing various resources such as online listings, real estate agents, and networking within the real estate community. It is also essential to conduct thorough due diligence to ensure that the property has the potential for rehabilitation and appreciation before making a purchase.

Rehab

After purchasing a distressed property that has the potential to be rehabilitated and increased in value, the next step in the BRRRR method is to renovate and upgrade it. This step is critical in achieving the goal of making the property attractive to renters and increasing its rental income potential.

However, this step also carries a significant amount of risk, as many factors can impact the success of the rehabilitation process. One of the most significant risks is underestimating the cost of rehab from the beginning, which can happen due to various factors such as unexpected costs of materials or higher labor costs in the local market.

Another risk is finding reliable and competent contractors to take on the job, and issues that may arise with contractors during the job. This can include delays, substandard work, or unexpected expenses, which can increase the overall cost of the rehabilitation process.

In addition to contractor-related risks, there are also potential issues with permits and communication with the city, as well as financing and draw issues if an investor is using a lender for the rehab. These risks can create significant challenges during the rehabilitation process, potentially delaying the project and increasing costs to the point of making a deal unprofitable even if it was purchased at significant discount to prevailing market values.

To mitigate these risks, investors should conduct thorough due diligence on contractors, obtain all necessary permits and approvals, and maintain effective communication with city officials throughout the rehab process. Additionally, it is important to budget for unexpected expenses and to work with experienced lenders who can provide guidance on the financing process. By taking these steps, investors can minimize the risks associated with rehabilitating a distressed property and increase the chances of a successful outcome.

Rent

Once the property has been rehabilitated, the next step in the BRRRR method is to find tenants and start generating rental income. This is arguably the most important phase of the process, as the rental income will help to cover the expenses of the property, including the mortgage payment, property taxes, insurance, and maintenance costs. In addition, spread from the rental income can provide a passive income stream for the investor, making it an attractive investment option.

To ensure that the property generates optimal rental income, it is essential to conduct thorough research on the local market and market rents. This involves analyzing comparable properties in the area and their rental rates, as well as understanding the local rental market trends and factors that can impact rental rates, such as vacancy rates, location, amenities, and demand.

By researching the local market, investors can determine the optimal rental rate for the property that will attract tenants while also ensuring profitability. Setting the rental rate too high can result in longer vacancy periods, while setting it too low can result in lower cash flow and reduced profitability. Therefore, it is important to strike a balance between attracting tenants and generating sufficient rental income to cover expenses and provide a return on investment.

Once the optimal rental rate has been determined, investors should focus on marketing the property to attract tenants. This can involve creating online listings, advertising through social media, and working with local real estate agents. It is also essential to conduct thorough tenant screening to ensure that tenants have a good credit history, stable income, and a reliable rental history.

After tenants have been secured, investors should focus on maintaining the property and managing the rental process. This involves regular maintenance and repairs to keep the property in good condition, responding promptly to tenant requests and issues, and managing rental payments and leases.

In conclusion, finding tenants and generating rental income is a critical phase of the BRRRR method, and it requires careful research, effective marketing, and diligent management. By following these steps and maintaining a focus on profitability, investors can achieve long-term success in real estate investing.

Refinance

Refinancing at the end of the BRRRR method is a crucial step that "completes the loop" and turns this approach into a repeatable method. By refinancing, investors can take advantage of the increased equity in the property at a higher after repair value (ARV) and potentially lower interest rates, reducing their monthly mortgage payments and freeing up cash flow. This involves obtaining a new mortgage with better terms at higher property value. The new mortgage will be based on the increased value of the property, allowing the investor to extract equity or cash out. Refinancing is a critical step for BRRRR investors because it allows them to pull out their initial investment and repeat the process again. Without refinancing, the investor's cash would be locked into the property, making it difficult to continue to invest in other properties.

To successfully refinance the property, investors should first ensure that the property is in good condition and has been rented out for a sufficient period to establish a stable rental history. This will help to demonstrate to lenders that the property is a reliable source of income and a good investment.

Additionally, investors should work with a lender who specializes in refinancing investment properties and understands the unique challenges and opportunities of real estate investing. The lender can help to identify the best loan options and terms for the investor's specific needs and goals, such as cash-out refinancing or rate term refinance.

It is also important to have a solid understanding of the refinancing process, including the costs and fees associated with refinancing, such as appraisal fees, title search fees, and loan origination fees. These costs should be factored into the overall financial analysis of the investment to ensure that refinancing is a financially viable option.

By refinancing, investors can access the equity they have built up in the property and use it to purchase additional cash-flowing properties, essentially leveraging their investment to grow their portfolio. This is particularly important for investors who want to scale their real estate investing business and build long-term wealth.

Repeat

The final R, of BRRRR Method. Once you get your cash out and refinance, time to repeat the whole process from the start. Time to start scouring the market for the next Buy!

Pros and Cons of BRRRR Method

While the BRRRR method has the potential to generate high returns, it is not without its risks. One of the main challenges of the BRRRR method is finding the right property at the right price. It can be difficult to find a distressed property that is below market value and has the potential to be rehabilitated. Due to current market conditions, competition between retail buyers has spilled over to wholesalers which has made many dilapidated properties to be 'in demand'. Some homeowners report receiving tenths of mailers a month regarding their home. Due to this demand the margin for run down homes has compressed. Its vital to have an edge during property acquisition to get the best deals. Most experienced investors, when lacking an edge in a deal such as being the only bidder when giving direct offers, just use a cash offer as a tool to close expediently, hence accumulating a large cash pile and waiting for an incredible opportunity might be a boring yet winning strategy.

One of the biggest challenges of the BRRRR method is the rehabilitation process. While the buy and rent phases require a certain level of market knowledge and management expertise, the rehab phase requires specific technical knowledge and expertise in construction, renovation, and design. In many cases, the cost of repairs, upgrades, and renovations can sink a deal with even the most attractive purchase terms. If the investor underestimates these costs, it can result in losing the deal to the lender at the least and filing for personal bankruptcy at the most.

To stay safe and succeed with the BRRRR method, investors need to have a deep understanding of their renovation costs. There are several strategies that can be used to better understand these costs even if the investor is not a general contractor or construction professional. One strategy is to work with a trusted contractor or construction professional who can provide an accurate estimate of the cost of repairs and renovations. Another strategy is to use online tools and resources to estimate the cost of materials and labor for specific projects. Some popular tools include HomeAdvisor, Thumbtack, and Angie's List.

Investors can also consult with local building codes and regulations to ensure that their renovation plans are compliant with the law and avoid costly fines and delays. In addition, it's essential to conduct a thorough inspection of the property to identify any hidden issues or structural problems that may require extensive repairs. Sometime investors that can identify costly problems during the inspection phase can use it as a negotiation tool to amend their offer price.

Finally, it's critical to have a comprehensive renovation plan and budget in place before starting the rehab phase. The plan should outline all necessary repairs and upgrades, along with estimated costs and timelines. A detailed budget will help investors stay on track and avoid unexpected expenses that can derail the project. While this step seems like the least 'hand-on', its the most vital one to complete. Lets say you start a project without a complete paper trail, then at which point do you know that something is going 'off-rails'. Is it when it completely stalls? Is it when your bank account runs dry? An explicit plan with clear criteria for success at each step will allow you to control the project add transparency (for your benefit) and hold your contractors accountable. Additionally, its incredibly effective to unite a completion of a rehab step with a payout of a portion of funds to your contractor after an inspection. This is an incredible mechanism for aligning incentives and is used by leading capital providers in the US real estate.

But without question, the largest risk of a rehab project is the 'contractor-you-choose-risk'. In the end this is your project and successful outcome is your responsibility. You need to vet your contractors to the highest degree to understand if they are correct fit for the job at hand. Its your duty to evaluate whomever you hire to ensure successful completion of the job, on time and on budget.

In summary, the rehabilitation phase is a critical component of the BRRRR method, and understanding renovation costs is essential to the success of the investment. Investors can use a combination of strategies to estimate costs, including working with trusted contractors, using online tools, consulting with building codes and regulations, and conducting a thorough inspection of the property. Additionally, having a detailed renovation plan and budget in place will help investors stay on track and avoid unexpected expenses.

How can I stay safe while using BRRRR method?

To stay safe while using the BRRRR method, it is important to do your due diligence before investing in a property. This includes researching the neighborhood, property values, and rental rates in the area.

It is also important to have a solid plan in place for the rehabilitation process. This includes creating a detailed budget and timeline for repairs, upgrades, and renovations.

Additionally, it is important to have a good understanding of the rental market in the area and to have a plan for finding tenants and managing the property.

Finally, it is important to work with a team of professionals who can help guide you through the BRRRR process. This includes a real estate agent, a contractor, and a property manager.

Who should start using BRRRR method?

The BRRRR method is a great strategy for real estate investors who are looking to generate high returns and create passive income streams. However, certain professions have an edge when it comes to using the BRRRR method.

Certain professions have an edge when it comes to the BRRRR method. Real estate professionals such as real estate agents, brokers, and property managers have a deep understanding of the market and can help identify potential investments. They also have a network of contacts in the industry that can be leveraged to find properties, contractors, and lenders. Additionally, professionals in the construction and renovation trades have the expertise to estimate costs accurately and manage the rehab phase efficiently. Finally, finance professionals and bankers have the knowledge and experience to secure favorable mortgage rates and terms.

Ultimately, the success of the BRRRR method depends on ensuring that all the ducks are in a row. This means having a comprehensive understanding of the market, the property, the rehab process, and the rental market. It also means having a solid team of professionals in place to manage the project from start to finish. The BRRRR method is not for everyone, and it requires a certain level of experience, knowledge, and risk tolerance. However, for those who are willing to put in the work and take on the challenges, the BRRRR method can be an effective way to generate high returns and create passive income streams.