What is the BRRRR Method? Maximize Real Estate Leverage

Lots of people are trying to get into real estate investing these days, and for good reason. It’s one of the best ways to secure long-term passive income and financial independence for you and your loved ones for decades to come. But getting started with real estate investment can be tricky if you don't have the cash to purchase lots of big properties at once or don't have a lot of investment experience. Let's break down one of the most accessible real estate rental investment methods – the BRRRR method – and see how it might work for your investment goals.

What is the BRRRR Method?

The BRRRR method is a real estate investment method that allows investors to build cash flow and financial independence efficiently, provided they have the startup capital necessary to get the ball rolling. There are lots of other real estate investment methods, but the BRRRR method is one of the most straightforward and easy to grasp. This makes a good choice for folks looking to transition into house flipping and real estate development as a career or as a side focus. Furthermore, the BRRRR method is an ideal real estate investment method for anyone who wants to grow a larger rental property portfolio more quickly than otherwise. This, in turn, could help you develop your real estate empire more extensively in the future. Let’s break down the different aspects of the BRRRR method one by one. “BRRRR” stands for buy, rehab, rent, refinance, and repeat.

Buy

Naturally, the “buy” part of the BRRRR method gets everything going by having you purchase a property that you’ll rent out to other people later. However, you can’t just buy any property; you need to buy a property that will work for the other stages of the method. For BRRRR investing, this usually translates to cheap, oftentimes distressed or broken-down homes that most other people aren’t looking to purchase and/or live in. Since they’re commonly in states of disrepair, prices are typically much lower, even for properties that are comparable in terms of square footage or potential looks to other properties. However, the key defining factor of any good BRRRR property is this: after it's fixed up, you'll be able to rent it for a significant profit. This does mean you’ll need to be able to calculate (at least roughly) the cost of any potential renovations and the possible profits you’ll get before making a purchase.

Rehab

The rehab phase of the BRRRR method is one you'll get to work fixing up the property you've purchased. The faster you can get through this phase, the better, since you'll then be able to rent the property out to people for relatively higher prices compared to what the property would have been worth previously. At a bare minimum, you’ll need to make any home livable and usable for tenants to begin to move in. But in most cases, BRRRR investors will make significant improvements to properties in order to maximize their long-term income. Rehab involves:

• Planning out the full rehab job
• Hiring contractors to get the work done
• Possibly putting in work yourself to accomplish small tasks or chores depending on your experience

Note that you can keep rehabbing your property after tenants move in. But this becomes progressively more difficult and you’ll have to spend more of your time managing your tenants. So it’s often best to get as many fixes in before you start renting if possible.

Rent

Now it’s finally time to rent your rehabbed property. This is an extensive process in and of itself, involving:

• Putting the house on the market
• Marketing the home across websites and paper publications
• Screening potential tenants who applied to the property
• Conducting background checks and collecting rent deposits

Even after you find tenants to live in your fixed home, you’ll still need to manage moving, maintenance, and any facility repairs that could arise at any time. Real estate investors with lots of rental properties under their belts may hire property managers or teams to take care of these issues for them. But this is another expense since you’ll need to pay the property management teams a regular salary, as well as get an employer identification number. As you rent, you’ll also need to make sure that you can charge enough rent to cover your own mortgage and expenses. Mortgage and expenses, at this point, encompasses more than just the costs for your own home. It also includes the mortgage and expenses for all your properties! At the end of the day, you want to make sure your rental property has positive cash flow. This means you’ll effectively make a profit by having a chunk of money left over after all expenses and payments are made. You can then use this profit for savings or use it to purchase a new rental property and begin the process all over again.

Refinance

The refinancing stage of the BRRRR method only kicks in after you finish renting one or more tenants for at least a few months. Refinancing involves taking out any equity you’ve borrowed against and exchanging it for a traditional mortgage for the property. By refinancing, you’ll end up paying less on things like mortgage and other expenses and, thus, likely have more take-home cash at the end of every month. Note that your refinancing is based on your property’s after repair value or ARV as opposed to the original purchase price.

Repeat

Lastly, you can repeat the process and continue with the BRRRR method for as long as you like. If you’ve completed the other stages successfully, you’ll have a little extra income at the end of every month that you can either save up or use to purchase another property and begin the cycle anew. Many real estate investors love this method since it provides them with a constant outlet for development and new investment. Furthermore, no home purchasing and rehab process is exactly the same, so there’s always something new to do with your time.

Benefits of the BRRRR Method

BRRRR investing is a preferred method for real estate investors for a variety of reasons:

• Since it’s focused on securing you some cash flow at the end of every month, it’s quite possible to quickly build up a large portfolio of rental properties without having to have huge cash sums at once
• Furthermore, the BRRRR method uses cash-out refinancing as one of its steps. This allows you to pull out your money for reinvestment in a new property since (provided refinancing goes well) the first property will then have a long-term mortgage. This means you won't have to have lots of your money invested in the first property for too long
• With enough properties under your belt, you’ll get passive income through your rental income and ultimately achieve financial independence

Drawbacks to the BRRRR Method

However, for all its strengths, the BRRRR method for investing does have a few drawbacks.

• All of your investments rely on estimates of future value. If you end up getting a dud property that, even after fixing it up, doesn’t bring in good income, you’ve essentially wasted some of your cash.
• Furthermore, the refinancing step could have a bad property appraisal. If this occurs, you might not be able to refinance your rental property for your full or desired amount.
• Lastly, renovations can and do take longer than expected from time to time. This can seriously mess with your schedule or make it difficult to get started on the BRRRR cycle when first starting out.

Financing BRRRR Method Properties

There are a number of ways you can get the financing you need to start your BRRRR journey:

• You might consider going with conventional bank loans. Note that down payments will require about 20% of 25% of the initial asking price. You’ll also need good credit or a solid history with a bank to get such a loan.
• Local bank loans might be a more flexible option, as they typically offer a wider range of terms and conditions when lending for rental properties.
• Private lenders are a third option if you know business partners or friends and family members with additional income they might be willing to invest.
• Hard money lenders specifically focus on lending to house flippers or real estate rental investors. These loans can be quite costly, but they often include coverage for improvements/repairs.

Summary

All in all, the BRRRR method is just one more way that you can get started on your path to financial independence through real estate investing. It’s a great method if you don’t have a lot of cash to purchase multiple properties at the same time and are interested in progressive success as well as long term passive income generation. Be sure to contact Seek Capital for additional financial advice and don’t hesitate to look at our other guides regarding real estate investment . Sources https://www.fool.com/millionacres/real-estate-investing/rental-properties/the-brrrr-method-explained-getting-started-in-real-estate-investing/ https://www.bankofamerica.com/mortgage/learn/cash-out-refinance/ https://www.biggerpockets.com/blog/estimate-arv