The rental industry is continually evolving, and there are many potentially lucrative real estate investment strategies. One of those comes from Brandon Turner from BiggerPockets. The BRRRR strategy encourages investors to buy, rehab, rent, refinance, and repeat, but will this work for you? Join us below as we break down each step along with the practical considerations every investor should weigh before taking the plunge.
What Type of Investor is the BRRRR Method Best For?
As with many real estate investment strategies, it is not for everyone. Each investor must decide which method fits their individual financial goals the best. So, before we begin, let’s review what types of investors may get the most benefit from the BRRRR method below.
Who is the BRRRR Method For?
- Investors experienced in project management
- Those who do not shy away from a challenge
- Individuals who enjoy seeing a project through to completion
- Landlords willing to accept some degree of uncertainty surrounding budget and construction completion
- Investors looking to grow their portfolio quickly
- Those willing to jump in and learn every aspect of real estate investing
Who Should Not Consider the BRRRR Method?
- Anyone looking for a predictable investment journey
- Individuals who want a passive investment experience
- Investors interested in a turnkey property
- Those not excited by the prospect of a challenge for higher reward
BRRRR – One of the Next Big Real Estate Investment Strategies
So, as we mentioned above, BRRRR stands for buy, rehab, rent, refinance, and repeat. These types of real estate investment strategies help landlords focus on buying undervalued units, learning how to make smart rehab choices, and get cash out in the end. Ideally, investors will increase property value, so they may then refinance and cash out the equity. Essentially, landlords are flipping houses but without selling them in the end.
Let’s take a closer look at each of these steps below before moving on to decide if this is one of the many real estate investment strategies that will work for you.
Buying Real Estate
Simply put, buy an investment property. However, a lot of due diligence and consideration needs to go into such a purchase. It is important that the property an investor chooses has the right combination of neighborhood, rental value, low estimated expenses, and ROI potential. One of the most important factors to real estate investing is realistic expectations based on real numbers. So, take a look at our top tips to consider before adding a rental property to your portfolio.
Tips for Smart Real Estate Investing
- Pay Down Debt – Some debt is expected, but investment property mortgages carry higher standards. Therefore, pay down personal debts first before approaching banks.
- Prepare a Down Payment – Investment property requires more from potential investors. So, plan for at least 20% down to meet basic approval requirements. If you have the capital to invest, consider the pros and cons of a cash purchase. Depending on your goals, it may help achieve a more positive monthly cashflow.
- Location, Location – Search for a property with low taxes, low crime, good schools, ample amenities, a thriving job market, and a growing population. This is your best chance for attracting a large and quality pool of potential renters.
- Run the Numbers – After all costs, including maintenance, mortgage, taxes, and insurance, investors should aim for a return of at least 10%. For more information on how to calculate ROI, check out this free online ROI calculator. Calculate operating expenses using the 50% rule and factor in saving for emergencies as well as regular maintenance.
- Choose Wisely – The goal of the BRRRR method is to purchase properties that are undervalued. Then, through the process of renovation, landlords increase the value of the property. However, this must be done with a discerning Extensive home improvement background is a huge plus, as these investors can recognize a diamond in the rough and are more confident in their ability to complete a quick turnaround.
Helpful Hints: Looking for more information on choosing the right investment property? Check out our blog.
Rehab Your Investment Property
While not every property will need a gut renovation, most investment properties will need at least some work. Generally, a property easily improved with some cosmetic fixes or typical upgrades is ideal for savvy investors. That said, the most important factor is to choose improvements that add value.
For landlords, the goal is to appeal to a wide variety of potential renters. So, this is no place for bold or overstated design choices that may narrow the field. Instead, stick to classic finishes in durable materials so that anyone could easily call your property home. Researching the local market and competition also offers great insight into what standard of property fetches various rental rates.
So, carefully performing renovations on your investment property can increase your overall ROI. Thus, you pocket more profits, and in turn, possibly pay off the mortgage quicker.
Helpful Hints: Unsure which renovations are best for your investment property? Check out these top 5 rental property improvements that boost ROI.
Renting Out the Home
Every investment property needs a source of consistent income, and that is where renting becomes vital. Once the property has been purchased and renovations complete, it is time to market to tenants. So, begin with an in-depth look at the local market. Comprehensive marketing strategies and dynamic ads are essential, but more importantly, price drives the success of your rental. Setting the right price from the start goes a long way to drawing in interest from local renters. Below are a few things to consider:
- Vacancy Costs Money – The number one reason units sit on the market too long is the price. Therefore, conduct extensive research on local comps and price accordingly.
- Maximum Rent Does Not Equal Maximum Profit – Maximum rent is ideal, but not when it drives away potential tenants. Renting to tenants who pay fair value and take care of the property is very important. When tenants take care of your investment, landlords have lower maintenance costs and fewer headaches. So, negotiating some on the monthly rent to obtain a tenant that pays on time and respects the property will decrease costs and, in turn, increase profits.
- The Price-Value Relationship – An investment property is worth what a great tenant is willing to pay for it. Therefore, tenants evaluate the perceived value they receive for the price they pay. Most rental markets are competitive, so setting your rental apart with great value at an acceptable rate is crucial.
Helpful Hints: Marketing a rental property effectively is a task every landlord must get right. Need some help? Check out our rental property marketing tips!
Refinance and Cash Out
Refinancing a mortgage can often offer better rates than the original loan. However, the goal of refinancing a rental property with the BRRRR method is to get cash out of the property while still maintaining ownership. You are simply pulling the equity out of the property to use in additional rental property investment deals. However, some lenders require the property to be rented for a specific time before they let investors do a cash-out refinance.
If an investor has a consistently paying renter and pulls 100% or more of the initial investment as a cash-out refinance, the returns can be infinite. That said, the overall success of this method depends on a couple of factors. Continue reading as we look at how appraisals and tenants affect your investment potential.
Understanding the Importance of Appraisals
- Refinancing requires a new appraisal to be done on the property. So, a high appraisal compared to the initial cost is essential to the investment’s success. While each lender has its own criteria, appraisers look at two basic factors: material improvements and comparable numbers. As an investor, take the time to research local comps yourself and gauge where your property stands in the numbers. Also, provide evidence and costs of the improvements or upgrades you made to the property. Although there is no surefire way to predict the appraisal process’s outcome, being prepared will not hurt.
Why Positive Rental Cash Flow Matters
- With this method, do not attempt a refinance unless the property has a positive cash flow. Before taking out anything, it is important to check and recheck that the numbers are in your favor. Then, only pull as much capital as you can comfortably cash out while still maintaining the unit as a great rental investment. Thus, do not ruin a potentially great investment property by attempting to cash out too early. Additionally, ensure the rental payments can cover the mortgage payments.
Repeat the Process
The idea is to use real estate investment strategies like BRRRR to further your portfolio. Therefore, use the cash from refinancing to invest in more rental ventures or something that will achieve returns that meet your goals.
So, unlike flipping a property to a new owner, investors are flipping it to the lender. Thus, allowing investors to get cash without paying the taxes they would have on a sale. The big benefit here is the owner retains the property as well as the passive rental income that comes along with it.
The Pros and Cons of BRRRR
BRRRR can be one of the most effective real estate investment strategies when approached the right way. As with anything, there are pros and cons to weigh in deciding if this method is the right one for you. Continue reading below as we outline a few advantages and disadvantages for landlords.
Advantages of the BRRRR Real Estate Investment Method
- Cash Back – Refinancing based on the AVR or after repair value means landlords can pull cash of up to 100% or more of the property’s value.
- Finance Renovations – Many hard money lenders will help investors by financing 100% of the renovation cost. However, research carefully as investors may need to pay the money upfront and then be reimbursed on a lender’s draw schedule.
- Appreciation and Equity – Taking on renovations means that investors can often get the property at a discount. Once renovations are complete, appreciation and added equity follow.
- Improved Condition – The good news is that owners are intimately aware of the property’s condition once renovations are complete. This helps investors anticipate maintenance needs, and therefore costs, much easier.
Disadvantages of the BRRRR Real Estate Investment Method
- Added Cost – Refinancing means a new loan, new lender, and new fees. If you know refinancing is part of your long-term plan, shop around and plan for these added costs as much as possible.
- Overleveraging – Property equity is both a blessing and a curse for investors prone to overleveraging property. Beware of taking out too much from a property as it may threaten your positive cash flow.
- Rushed Decisions – The promise of lucrative refinancing can push some landlords to cut corners in leasing. Remember, a leased property is only good if the tenant pays consistently and cares for the unit. Therefore, do not rush through screening and always complete your due diligence to find the best fit for your rental property.
- Risky Business – Banking on the property appraising high enough to secure refinancing is a risk. Short-term financing is expensive and even more so if the loan comes due before long-term options are secured. Thus, investors may want to take advantage of the many online options for investment lenders.
Every investor, every property, and every deal are different. So, before settling on a strategy, make sure you weigh the risks and rewards. Running the numbers and understanding all of the loan options available and renovation timelines is absolutely critical.
Real estate investment strategies all come with some degree of risk and measured reward. Investors must decide what their comfort level is with the amount of risk related to their overall goals. However, keep in mind that being a landlord does not stop at buying and leasing the property. If you are an investor who plans on using the BRRRR method or other means to grow your portfolio, you will need support.
Chasing deals takes time, so why not leave the stressful rental management processes to the professionals? Bay Property Management Group handles the day to day tasks that weigh property owners down. Our dedicated team manages rent collection, maintenance needs, tenant inquiries, and even marketing, which frees up the owner’s time for more pressing matters. Give us a call today to learn more about how top-notch rental property managers can take your rental business to the next level.