The BRRRR method is a strategy used by \u201cBuy & Hold\u201d investors. The overall idea with the BRRRR method is that an investor would be able to recoup their initial investment (i.e., down payment, rehab expenses) and put it towards another property.<\/p>\n\n\n\n
This strategy is what I strive to accomplish every time I look for a potential investment property. Honestly, I call my first investment an accidental <\/em>BRRRR.<\/p>\n\n\n\n My initial plan was to put a <\/strong>20% down payment<\/em><\/strong> on a property and continue to save with hopes of buying the next property two years later.<\/p>\n\n\n\n When we met with our banker, she used many financing terminologies we were not familiar with. For example, she was using terms like \u201cLine of Credit,\u201d<\/em> \u201cInterest Only Loan,\u201d<\/em> and \u201cCash-Out Refinance.\u201d<\/em><\/p>\n\n\n\n All of those terms went over my head!<\/p>\n\n\n\n She has many real estate investor<\/a> clients; So, we trusted <\/em>that she knew what she was doing.<\/p>\n\n\n\n I tried asking questions via email, but I tried to avoid asking too many questions. I was concerned I would be annoying and that our banker would no longer want to work with me.<\/p>\n\n\n\n After I made improvements to the property, my banker scheduled an appraiser. She then refinanced my loan and gave me back my initial down payment<\/em><\/strong>.<\/em><\/p>\n\n\n\n That\u2019s when I realized I did a BRRRR!<\/p>\n\n\n\n Looking back on it, I would have been too impatient<\/em> to wait for two years to buy my next property. However, with the BRRRR method, I could buy two properties within my first six months of investing!<\/strong><\/p>\n\n\n\n BRRRR is an acronym that stands for Buy, Repair, Rent, Refinance, and Repeat <\/strong>(others call it Buy, Rehab, Rent, Refinance, Repeat). Though not all investors may be familiar with the acronym, the BRRRR method is a common strategy among investors. <\/p>\n\n\n\n Undervalued<\/a> or distressed properties are ideal for this strategy. However, the process requires that an investor add value<\/em><\/strong> to the property through improvements to increase the property\u2019s market value.<\/p>\n\n\n\n Therefore, turnkey properties<\/em> are not suited for this strategy because sellers list them at their maximum market value. <\/p>\n\n\n\n I am NOT saying that <\/em>turnkey properties are bad investments. I am saying that turnkey properties do not<\/em><\/strong> allow investors to recoup their initial investment to increase the property\u2019s after repair value (ARV)<\/a>.<\/p>\n\n\n\n Also, check out <\/em><\/strong>Roofstock.com<\/em><\/strong><\/a>. It\u2019s an online real estate marketplace for buyers of investment properties. Receive alerts on properties that match your crystal clear criteria and make an offer online.<\/p>\n\n\n\n Below I will walk through an example to help explain the method. Therefore, all the numbers are relative to one another. Although there are different ways to implement each phase, in general, the strategy is always the same.<\/p>\n\n\n\n I\u2019ve included a BRRRR calculator at the end of this post. You can use this to analyze future potential investments!<\/p>\n\n\n\n Here are the details of the property:<\/strong><\/p>\n\n\n\n If you don\u2019t have enough cash to make a full cash offer, there are several ways to still invest with no money<\/a>. After all, capital is required when purchasing a property. This strategy is accomplished by leveraging other people\u2019s money in the form of a short term loan.<\/p>\n\n\n\n Here are a few no money options:<\/strong><\/p>\n\n\n\n However, making full cash offers does <\/em>provide more advantages<\/em> compared to bank financing.<\/p>\n\n\n\n Banks have specific requirements before approving a purchase. For instance, some banks require that the property\u2019s appraisal value<\/em> meet or exceed the purchase price<\/em>.<\/p>\n\n\n\n With cash offers, there are no restrictions<\/em><\/strong> that allow the buyer to close on the property sooner. Furthermore, I\u2019ve seen cash offers get accepted below the <\/em>asking price!<\/p>\n\n\n\n In this example, a seller lists a house for $100,000<\/em><\/strong>. Therefore, we\u2019ll use a bank to finance 80% of the purchase price while making a 20% down payment<\/em><\/strong> with $1,000 <\/em><\/strong>in closing costs.<\/p>\n\n\n\n In this phase, our banker creates a 6-month interest-only loan.<\/em> We have six months to improve the property before <\/em>we had to pay back the loan entirely. We were only required to make interest payments<\/em> for the loan. <\/p>\n\n\n\n In this example, we\u2019ll also assume an interest-only loan with an interest rate of 5.25%<\/em><\/strong>.<\/p>\n\n\n\n In this phase, improvements are made to the property to increase <\/em>the market value of the property.<\/p>\n\n\n\n However, it\u2019s straightforward <\/em><\/strong>to go over budget<\/strong><\/a> <\/strong>and schedule! I recommend visiting a property with a trusted contractor<\/a> who can give you an accurate estimate of the rehab project.<\/p>\n\n\n\n Furthermore, since you are making improvements to the property, this reduces <\/em>the chance there are any significant repairs within the first couple of years.<\/p>\n\n\n\n Be conservative <\/em><\/strong>with your rehab budget by adding a buffer for unexpected expenses<\/em>.<\/p>\n\n\n\n Also, be mindful of how long the project will take. If you are financing the project, then monthly interest payments also need to be accounted for.<\/p>\n\n\n\n In this example, we\u2019ll convert a space in the house into a legal bedroom. Therefore, the house converts from a 2-bedroom 1-bathroom<\/em><\/strong> to a 3-bedroom 1-bathroom!<\/em><\/strong><\/p>\n\n\n\n The rehab cost to create this additional bedroom is $8,000<\/strong> and only took one month<\/em><\/strong> to complete:<\/p>\n\n\n\n After an investor makes improvements, they can market the property to potential tenants.<\/p>\n\n\n\n For this example, the rent for a 3-bedrooms 1-bathroom for the area is $1,400<\/em><\/strong>.<\/p>\n\n\n\n Some banks require that you hold a property for at least a couple of months before you can refinance with them. This waiting period is also known as a seasoning period<\/em><\/strong>.<\/p>\n\n\n\n During that time, the market value of comparable houses could change!<\/em><\/p>\n\n\n\n In this phase, the initial loan will be refinanced into a term loan via a cash-out refinance<\/em><\/strong>. You will then use the cash to pay off the first interest-only loan and your out-of-pocket expenses.<\/p>\n\n\n\n First, the bank will hire an appraiser to do an independent valuation of the property. The appraiser will look at recently sold comparable properties in the area.<\/p>\n\n\n\n Depending on the market, that valuation could be high or low. <\/p>\n\n\n\n Therefore, when trying to estimate a property\u2019s potential valuation. I would recommend using the lowest <\/em>purchase price of the recently sold properties. <\/p>\n\n\n\n This selection will avoid <\/em>the surprise and emotion that comes with receiving a low valuation. <\/p>\n\n\n\n In this example, the appraiser will value the property for $160,000<\/strong>. We made $8,700<\/strong> worth of improvements and increased its value by $60,000!<\/em><\/strong><\/p>\n\n\n\n The bank will then create a new long term loan<\/em><\/strong> based on a percentage of the appraisal valuation. This percentage is known as loan-to-value<\/em> (LTV). Usually, the LTV ranges from 75-80%.<\/p>\n\n\n\n Fun fact: Banks use to give LTVs for 125%! However, this was in 2008. The market crashed, and people were <\/em>over-leveraged.<\/em><\/strong><\/p>\n\n\n\n In this example, the bank will give us an LTV of 75%<\/em><\/strong>. Therefore, the bank will create a loan for $120,000<\/strong>. The loan will be a 30-year term with a 5.25%<\/strong> interest rate.<\/p>\n\n\n\n Term Loan Details:<\/strong><\/p>\n\n\n\n Let\u2019s review all the numbers:<\/p>\n\n\n\n The cash from the term loan will first pay off the interest-only loan<\/em> of $80,000 and refinancing closing costs, such as total loan fees, term loan origination fee, title search, title search, etc. In this example, the closing cost is $2,000, leaving $38,000 available.<\/p>\n\n\n\n Next, the cash will pay off the total initially invested amount<\/em> of $21,000, leaving $17,000 available.<\/p>\n\n\n\n Lastly, the cash will pay off the total rehab cost<\/em> of $8,700, leaving $8,300 available.<\/p>\n\n\n\n After paying off the interest-only loan and recouping our initial down payment and rehab costs, there is still cash available!<\/p>\n\n\n\n Having a lower LTV<\/em><\/strong> <\/em>allows you to keep more equity<\/em> and have a lower mortgage payment<\/em>. A lower mortgage payment means more cash flow!<\/em><\/strong><\/p>\n\n\n\n Another option is to reduce the term length<\/em><\/strong> to a 15-year loan. The monthly mortgage payment with the same term loan interest rate would be $965.<\/p>\n\n\n\n In our example, the rental income of $1,400 can still support that mortgage payment. Having a lower term can also qualify you for a lower interest rate<\/em> lowering mortgage payment!<\/p>\n\n\n\n You could also use the extra <\/em>$8,300 towards another investment property (and repeat)!<\/p>\n\n\n\n The last phase of the BRRRR method is \u201cRepeat.\u201d<\/p>\n\n\n\n Based on our example, we were able to recoup the entire <\/em>out-of-pocket expense of $29,700. Also, there is an additional <\/em>$8,300 available from the cash-out refinance.<\/p>\n\n\n\nWhat Does BRRRR Method Stand For?<\/strong><\/h2>\n\n\n\n
What Kind Of Properties Are Best For The BRRRR Method?<\/strong><\/h2>\n\n\n\n
How To Do The BRRRR Method<\/strong><\/h2>\n\n\n\n
First Step: Buy Rehab Property<\/strong><\/h3>\n\n\n\n
Second Step: Rehab Property<\/strong><\/h3>\n\n\n\n
Third Step: Rent Property<\/strong><\/h3>\n\n\n\n
Fourth Step: Refinance Property<\/strong><\/h3>\n\n\n\n
Appraisal<\/strong><\/h4>\n\n\n\n
New Term Loan<\/strong><\/h4>\n\n\n\n
There are a few things to consider in this scenario:<\/strong><\/h4>\n\n\n\n
Step Five: Repeat<\/strong><\/h3>\n\n\n\n