The BRRRR real estate investing strategy is exploding in popularity, and rightfully so. The phrase stands for “Buy, Rehab, Rent, Refinance, Repeat” and was coined by BiggerPockets.com.
If a BRRRR deal is done correctly, you can build wealth quickly and get your cash out of the deal to re-invest. But there are some key risks to be aware of, too.
Here is a detailed overview of the BRRRR strategy, including pros and cons, and a look at my own BRRRR deal in Fayetteville, N.C.
What exactly is the BRRRR Strategy?
B – Buy. As the saying goes, your money is made on the buy! Arguably the most important aspect of any BRRRR deal, you need to get a great deal on an undervalued property for this to work, whether it’s a foreclosure or pre-foreclosure, motivated seller or purchased through a wholesaler. Aim for properties that need cosmetic repairs (“TLC”) rather than extensive repairs. The dirtier the house, the better!
The house should meet the 70% rule, meaning you pay a max of 70% of the after-repair value of a home. It should also meet the 1% rule as a rental, meaning the monthly rent is at least 1% of the total investment ($800 for an $80,000 home).
R – Rehab. This is also a super important part of the strategy. One of the keys to BRRRR-ing is coming up with a conservative repair estimate before you close on the property. Get a contractor or home inspector to take a look and give you estimates or bids.
You can do this either before putting an offer in, or when you’re in the due diligence period of a contract. I think it’s a good idea to be conservative and add 10% – 20% to the original estimate.
R – Rent. After the house is rehabbed and cleaned up, it’s ready to rent. This may take some time, although it will depend on your market and the time of year (homes usually rent quicker in the Summer). It may be smart to hire a property manager to handle this for you, especially if you’ve never done this before.
R – Refinance. The bank or lender requires an appraisal on the home to access its current value. This is a huge part in the process, as you’ll need the home to appraise high in order to get your money out of it via a 30-year fixed mortgage. Lenders typically let you borrow up to 75% of the appraised value of the home.
To refinance, banks may require a seasoning period of 6 months from when you bought the property (although some banks do delayed financing, where you can get it back sooner).
R – Repeat. If the process went smoothly, you’ll have yourself a cash-flowing rental property with significant “free equity” and you’ll get you money out of the deal…so you can do it all over again!
Here is an example of what a good BRRRR deal may look like. I’ve used basic numbers and assumed the buyer has used cash for the purchase and repairs. The numbers would be a bit tighter if you used a private loan or a hard money loan.
Purchase price: $50,000 (CASH)
Repairs: $25,000 (CASH)
After-repair value: $100,000
Loan for 75% ARV (6% APR): $75,000
Money left in deal: $0
You’ll see above that by buying a very undervalued property, the investor can put money into value-add repairs (such as cosmetic improvements: carpet, flooring, kitchen, etc.) potentially get all of their money back out via a refinance (30-year fixed mortgage).
Based on the above numbers, you’ve just made $25,000 in equity. Again, since you invested $75,000 in the purchase plus repairs, but refinanced the house with a conventional loan, you’ve got your entire cash investment back out of the deal.
From a rental standpoint, it also looks like a great deal.
Mortgage: $449 (6% APR)
50% rule for expenses: $475
Monthly cash flow: $25
This may not seem like a ton of monthly cash flow, however, you’d have no money invested in the deal so your returns are technically infinite! You can always choose to leave some money in the deal to lower your mortgage payments and improve the cash flow.
The best part about this deal is you’d have instant equity of $25,000 and zero cash invested once you refinanced. Another plus: since you’ve just made repairs and improvements to the house, your capital expenditures and maintenance costs will likely be very low in the beginning.
Using super conservative numbers (.50% appreciation per year, .50% rental income growth) by year 5, your equity will have grown to $32,140 and you’ll have earned nearly $10,000 in net cash flow from the property. Again, you have no money left in the deal, so it’s all gravy. You can sell the house if you want and perhaps trade up to a bigger property via a 1031 tax deferred exchange.
Now you can see why BRRRR has become so popular with investors.
BRRRR Pros and Cons
- Buy a rental property again and again – with the same cash: Unlike traditional methods of purchasing rental real estate, BRRRR allows you to buy more properties, and faster, since you get your money back after the deal is done. If you do it right, you can invest the same amount of money to purchase rentals every 3-6 months or so (depending on the bank you refinance with).
- Built-in equity: You can build significant equity in a property if you purchase it at the right price and make value-add repairs. You can use that equity to purchase more properties (via a home equity loan or line of credit), or you can sell the house and trade up down the line.
- Infinite returns: If the deal is done correctly like the example above, your cash-on-cash returns or return on investment is technically infinite (since you have no money in the deal).
Of course, BRRRR is not without its risks.
- You need to find a deal: Truly good deals in real estate are becoming harder and harder to find these days! You may really need to search hard to find the right property to BRRRR. This strategy is tough in a down market.
- Potential repair delays: It is best to go with houses that need cosmetic repairs to avoid major issues and delays! The house needs to be in decent shape. I would only look to buy properties with a solid foundation and no major issues like plumbing, asbestos or black mold. This strategy will go a lot smoother if you’re using reliable, trustworthy contractors.
- The house needs to appraise well: This is why buying a house at a great price is so important. If the house doesn’t appraise for the price you want it to, you may not be able to get your money out.
- Refinancing costs: Lenders will most likely charge you closing costs and other fees to refinance your rental property. The lender I am currently working with charges $2,500 for a $85,000 mortgage. Some lenders may require you to wait 6 or even 12 months to refinance, depending on their seasoning requirements.
BRRRR case study: My deal in Fayetteville, N.C.
I’m in the middle of my first BRRRR deal in Fayetteville, N.C. The house is a VA-owned foreclosure that was sent from my real estate agent. The house needs a new roof, some flooring, painting and cleaning and some other minor work.
The rehab timeline is estimated to take up to 6-8 weeks. After that, my plan is to rent it out for $950/mo.
Here are the numbers on my deal:
Purchase price: $75,000
Estimated repairs: $10,000
After-repair value: $117,000
Rent estimate: $900-$950
Loan amount: $87,500 (includes closing costs/fees)
Total initial equity: $29,500
Monthly cash flow: $34
Cash-on-cash return: Inf%
Potential cash invested: $0!
Final thoughts on BRRRR
BRRRR’ing is a very attractive way to get into real estate investment. But perfecting this strategy will likely take some time, practice and strong relationships with realtors, contractors and property managers.
What do you think about BRRRR investing?