You might have heard the acronym BRRRR in your real estate investing social circles; but what exactly is this strategy and why is it becoming more and more popular? BRRRR stands for: buy, rehab, rent, refinance, and repeat. It’s different from the traditional fix n’ flip exit strategy because the end goal is to keep the renovated property as a rental instead of selling it.
Essentially, a real estate investor finds a solid property they think they can make a good return on, buys it utilizing a short-term hard money loan for example, renovates the property and then rents it out to tenants instead of selling it. The owner then will refinance out of the hard money lender with a more traditional lender, pay off the short-term loan and maintain the property. This is a great strategy, because the owner is able to secure a long-term, cash-flowing property that will continue to build equity while utilizing the great resources of lending services to cover most of the upfront expenses.
The most important thing about this strategy is that the numbers work out. This is true for all real estate investment deals, but it is especially true here, since you are depending on the ARV estimates to refinance and cover the cost of the initial short-term loan. For example: if you buy a property for $100,000 and plan to put in $50,000 for rehab, you might get a short-term loan to cover the cost of the purchase and put your own cash in to cover the rehab: for an all-in cost of $150,000. If you estimate an ARV of $200,000 on the property and find a lender who loans on 75% of ARV and the lender’s appraisal matches yours, you can likely pull out $140,000. This gives you more than enough capital to pay back the short-term loan ($100,000) cover some of your rehab, out of pocket expenses while knowing that your property has some built in equity from the start!
This method only works if the ARV is high enough to cover the cost of the initial financing, so it’s imperative that the numbers check out when utilizing this method. Here are some other factors to consider with the BRRRR method:
With these types of deals, investors are able to capitalize on high return on investment (ROIs), considering the relatively low out-of-pocket expenses. This is why leveraging lenders is so important in this strategy. An investor can end up with a large amount of equity built during the rehab stage and a long-term, cash-flowing rental property. Additionally, this property should be easier to rent and attractive to ‘better’ renters because of its updates and good condition. The rehab on the property also reduces the maintenance budget, which is a big win for both the owner and tenants. Another great benefit of the BRRRR strategy is the ability to quickly and sustainably scale-up. Once the investor gets the hang of the process and has established a solid team around them, they can easily add to their portfolio of properties and end up with a number of long-term, cash-flowing properties!/p>
While there are many benefits to this method, there are also potential drawbacks. Outside of the to be expected hassles of managing a rehab, trying to stay on budget, and dealing with potentially difficult tenants, there are some financing concerns to look out for. Short-term loans, hard money loans, and private lending can all have high interest rates making the loan very expensive to begin with. This is why it is vital to have the numbers check out, so that you know your ARV will be strong enough to refinance out and pay off this high interest loan. A low appraisal can be devastating for an investor attempting the BRRRR strategy, so make sure to double, triple, quadruple check your math! The seasoning period is also something to consider. Most refinancing banks will require a 6-12 month seasoning period, meaning they will not refinance until that seasoning period is over. This can be tricky with a short-term loan that is only good for say 6 months, so it’s important to make sure you have plenty of time to refinance out. This is why, it’s advised to have a longer, short-term loan that could be paid off earlier if needed.
Overall, the BRRR method is gaining attention and traction for a reason! It’s a great vehicle for investing in real estate and serves many investors well in building long-term, reliable cash flowing properties. The combination of tax benefits, leverage, equity, and cash flow makes for a unique exit strategy that can be repeated over and over again to grow an investor’s portfolio exponentially!
Interested in the BRRRR method? Reach out to The CPL team today to see how you can secure short-term financing to get you on the path to BRRRRing!