Sell for More Trivia is a weekly blog series that playfully presents a trivia question about commercial real estate.
What is the BRRRR Method?
BRRRR stands for:
Buy: Get a great deal on a rental property that you can add value to through making repairs.
Rehab: Once you buy the property you need to fix it up so you can easily rent it.
Rent: Once the property is fixed up you will rent it and start making money.
Refinance: Once you rent the property it’s much easier to refinance it than if the property was vacant. By refinancing it you can take most or all of your money back out to invest in more properties.
Repeat: Once you get your money back out, you can find another great deal to buy and repeat the process.
Properties that work for BRRRR
The first step to using the BRRRR method is to find a property that is priced well below market value. When you refinance an investment property the bank will usually only refinance 75% of the value. If you buy a property at full retail value and then try to refinance it, you won’t get much money back out. If you get a great deal, you could get most, all, or even more money back than you spent to buy and fix up the property.
BRRRR financing options
One of the trickiest parts of completing the BRRRR method is financing the properties. You actually have to finance the property twice…once when you buy it and once when you refinance it after making the repairs. If you have the cash to buy the property and repair it without taking out a loan, great. However, most people do not have that much cash. You can use a number of ways to finance it: conventional bank loan, local bank loan, hard money lenders and private money.
Rehabbing a BRRRR property
Once you have bought the property you will need to repair it. A lot of beginners like to repair properties themselves, but forget that time is money. It’s also not easy to fix up a property. If you think you’re going to save $10,000 by working a few weekends you will be sorely mistaken. I would suggest using a contractor, handyman, or subcontractors to make the repairs on the property. It will save you money and time in the end. The longer it takes to repair the property, the longer it is before you get money back from the refinance and start collecting rent. Remember that you may not have to make the property as nice as you would if you were flipping it.
Renting a BRRRR property
Once the repairs are made you need to get the property rented. A lot of new landlords will try to rent a property themselves to save money as well. If you don’t think you have what it takes to be a landlord, get a property manager. They find tenants, collect rent, take care of maintenance issues and are fairly cheap for what they do.
Refinancing using the BRRRR strategy
The final step to completing the BRRRR process is refinancing the property. Many banks will require a 6 month or year-long seasoning period to complete a cash-out refinance.
That means they will not lend you more money than the most recent appraisal or sale of the house, whichever is lower, within their seasoning period. Make sure you have a lender who will refinance when you need them to before you start the BRRRR process. Another issue is a low appraisal. When the bank is deciding how much to refinance the property for they will have an appraisal completed. The appraisal will determine what the property is worth in the bank’s eyes. You may think your property is worth $200,000, but if the appraisal comes in at $175,000, the bank is going to use the $175,000 value.
If you are going to use the BRRRR method make sure you have a backup plan if you don’t get your refinance done right away or don’t get all the money back you were hoping for.
Buying another rental using the BRRRR strategy
The last step in the BRRRR method is to repeat the process again and again. As you can see it may take some time to get your money back out of the property. I would not count on doing a BRRRR every three months unless you have an amazing bank. Every rental you buy needs to be a great rental and have great cash flow. The more money the rental makes every month, the more likely the banks will be to keep lending to you. If you are having problems finding banks that will refinance rental properties for you, there are national rental property lenders. They have slightly higher rates but can be easier to work with regarding debt to income ratios, seasoning periods and other challenges.
Summary
Disadvantages
- You may not have as much cash flow on your rental because you have a larger loan amount.
- The financing costs of the two loans will add to the bottom line and cost you more money.
- There are risks that the appraisal could come in low or you cannot find a bank to refinance.
- There could be other hiccups along the way with repairing the property or renting it.
Advantages
- You have much less money investing in each rental when you use the BRRRR method.
- You can buy more rentals because you have more capital to invest with.
- Your cash on cash returns may be higher because you have less money invested in each property.
- Having more properties means more tax benefits, more equity from getting a good deal, more cash flow, more appreciation, and more diversification.
If you’re getting great rental properties that have a lot of cash flow, it makes sense to use the BRRRR method. If you’re buying mediocre rentals with tight numbers, you may be taking some big risks.
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About Beau Beach, MBA CCIM
Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee and South Florida markets.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau can be reached at 800-721-3287, click to schedule a call or Beau@soldbybeachwood.com