What's your go-to strategy when looking for a new property to invest in?
Have you tried anything else other than the classic buy-and-hold to maximize your rental income?
Whether you're a new short-term shopper or a seasoned investor with multiple rental properties and long-term tenants, there are many different ways you can kickstart or scale your real estate investing journey if you're willing to put in the time.
BRRRR investing is one of the most misunderstood real estate investing strategies out there, and while it's certainly become more popular in the last few years, first-time real estate investors are often put off by the amount of work and planning this method requires before you can start reaping the benefits.
But if you're an ambitious investor looking to generate plenty of passive income over time and build an impressive portfolio to take up bigger projects sooner, well, the BRRRR method might be just what you need for your next real estate investment!
So, let's take a peek behind the curtain and see what exactly this up-and-coming real estate investing strategy entails, answering the most common questions investors might have before employing this method and looking for financing.
Spoiler alert: It has nothing to do with the weather!
What’s the Meaning of BRRRR?
If you're one to often attend real estate investing events and networking conferences, you've certainly heard the term BRRRR before: Ever since the acronym was coined by Brandon Turner at BiggerPockets, the BRRRR strategy has become one of the most talked-about and polarizing investment strategies in the industry.
But what does it actually mean?
BRRRR stands for "buy, rehab, rent, refinance, repeat" and it is a fairly straightforward investment strategy that aims to grow one's rental portfolio a lot faster than traditional rental methods, using a mix of active and passive income strategies to guarantee high risk, high reward success.
If you follow the acronym, you'll see exactly how each step of the process should be implemented, and at what time: You purchase a promising rental property in need of serious renovations, rehabilitate it for future tenants, rent it out for a number of years, refinance it to purchase a second investment property, and repeat the cycle all over again.
In a way, owning rental property through the BRRRR method means playing the long game, accruing profits and more equity over time to reap the benefits of an impressive real estate portfolio and financial independence a few properties down the line.
It's the perfect strategy for real estate investors who don't just want to get by but rather want to build an empire.
Let's take a closer look at how each step of the process works:
BRRRR Strategy Explained
When you choose to "buy, rehab, rent, refinance" a property, the process can work for both long-term and short-term rental investments, though most investors end up investing in long-term rentals when they first start BRRRR-ing.
This method can often work for new investors who don't have much capital to spare and are looking to invest in a property with low money down or even no money down. Research and due diligence when looking for a profitable property will help you find incredible deals for low prices.
You're dealing with a distressed property after all!
Now, while the BRRRR acronym is pretty self-explanatory, understanding how each step of the process works will help you figure out how much work and resources are needed to make it work — which is especially important for first-time investors looking to BRRRR their first-ever property!
Here's how the journey goes...
B - for Buy
First, you buy a distressed property in a promising neighborhood and market, maximizing the chances of a profitable outcome by researching all options extensively and getting in touch with a local real estate agent to get to know the market from the inside out.
This will allow you to predict your return on investment and inform whether you'll take the deal or not: How much will renovations be and how much rent could you charge for the area the property is in? What would be your net profit and what purchase price would you be able to accept?
As a general rule of thumb, most investors use the 70% rule for vetting potential properties, meaning that paying for 70% of the After Repair Value, minus the estimated rehab cost for the home, is the most they can afford to ensure a good profit margin.
These questions need to be answered in full before you go ahead with the deal, ensuring that the rinse and repeat process can continue making profits for years to come!
R - for Rehab
Once you have purchased your distressed property, you'll move on to the key step of BRRRR'ing: Rehabilitating it before you start renting it out for the long or short term.
If you really want to maximize your rental income, rehabilitating a property usually requires a lot more than just making it livable and functional. You'll want to make sure that all the upgrades and renovations you're making are going to drive up the property value, so that you can not only charge a higher rent fee but also boost your profits in case you decide to sell further down the line.
Just like the first step, the rehab part of the BRRRR method will require an in-depth cost-benefit analysis to make sure the investment remains profitable, so only choosing the upgrades that will drive up your home's value the most is generally the recommended route.
These high ROI rehab investments include kitchen and bathroom updates, roof repairs, landscaping, and drywall repairs. Investors can also choose to add more bedrooms if the property's square footage allows for it, as this will set your rental apart from other residential options in the area and allow you to increase your rental price.
R - for Rent
Once you have fully rehabilitated your property, it's finally time to find tenants (or in the case of short-term rentals, get your vacation home booked for the first time).
This stage of the process follows the same principles of any rental business: You'll want to take time to thoroughly screen potential tenants, keep up with repairs and property management, reduce the risk of expensive vacancy periods as much as possible, and deal with bad tenants promptly in accordance with your state's laws.
If you're managing a long-term, single-family rental, you'll have to be prepared for any possible fallout, including tenants defaulting on payments and extensive property damage, so make sure you're fully ready to embrace the role of the landlord before going ahead.
Keep in mind that, if your budget allows, you can always enlist the help of a property management company to help you deal with property turnover and listings!
Short-term rental owners will have to face a different set of challenges, such as marketing their vacation rental right and setting the right prices according to the season and demand.
R - for Refinance
Further down the line, you'll want to start planning how to refinance your property to move on to the next investment and repeat the cycle once more.
There are plenty of creative ways you can refinance your investment property: You might be able to get conventional financing from some banks if you fit the requirements, or you could get in touch with a commercial lender instead, incurring higher interest rates.
Cash-out refinance is usually the most popular option for BRRRR rental owners, as it allows you to convert your equity into cash as you take on a larger loan. Unlike when you take out a second mortgage, getting a cash-out refinance won't add another monthly payment to your bills, as you're going to be paying off your first mortgage and replacing it with your new one.
This is arguably the hardest part of BRRRR-ing, especially at the very start of your journey, as you'll have to do plenty of research to find a bank that will allow you to refinance a single-family home, and stretch your connections as far as they can go to find an appropriate lender for your needs.
But once you have repeated the process enough times and built more equity, it will become a whole lot easier!
R - for Repeat
Finally, there's the repeat stage where you'll invest your cash-out refinance money in a new property, renovate it, rent it out to new tenants or guests, and refinance once again after you have made enough mortgage payments and built additional equity.
Your cash-out refinance can be used to not only purchase a new investment property but also to rehabilitate it, driving the cost of each cycle down every time it's repeated.
The Benefits of Implementing the BRRRR Method for your Rental Property
Looking at each step of the BRRRR method in-depth, there's no denying that this strategy is considerably more complex, risky, and time-consuming than the traditional buy and hold route. If you're looking for a quick, hands-off scheme to generate wealth in a very short period of time, BRRRR-ing might not be the best choice.
On the other hand, the complex nature of the BRRRR method comes with an impressive list of benefits to more than make up for it, with higher positive cash flow and faster portfolio-building, topping the list.
So, if you're still undecided, here are the biggest benefits of implementing a BRRRR strategy for your next investment cycle, or even your very first one.
There's plenty of money to be made in BRRRR real estate as long as you approach each cycle right.
High return on investment is, in fact, one of the main draws of this system, as you won't need to have hefty investment capital to get started building a successful business. This ensures that the money you're not putting down stays in your pocket adding to your cash flow.
On top of that, investing in high-potential distressed properties will ensure you're getting the best deal on each property you purchase, reaping the benefits of both house flipping and buy-and-holding.
Rehabbed homes can charge much higher rent prices while requiring little to no money down. As long as you are analyzing each step carefully and planning everything in advance, you'll be able to have infinite ROI!
Impressive equity in a short period of time
Ambitious investors need equity to expand their portfolios and make financing more accessible, and BRRRR-ing is one of the best, fastest ways to build up equity.
Rehabilitating homes that need major fixes will help you build up equity quickly, and as you continue investing in new properties, that equity will carry over and increase, boosting your net worth in return.
Cheaper properties and better tenants
On top of being a lot cheaper to purchase (both in terms of net price and deposit), BRRRR properties also tend to attract better tenants, reducing the risk of defaults and expensive vacancy periods.
In fact, you might be able to improve your property class, to as much as Class A, by carrying out smart repairs and upgrades. This can drive up the value of your home and attract high-paying, top-quality tenants without spending a fortune on a Class A property right off the bat.
Lower risks over time
Finally, you should keep in mind that even though there's a chance you'll make a bad call with your first, second, or even tenth investment, you can be guaranteed that with each new cash-out refinance and purchase, you'll be reducing all the risks that come with being an investor or landlord.
The reason for this is quite simple: The more properties you own and the more tenants and guests you have, the more you'll be able to offset any defaults on the monthly rent or expensive repairs.
Putting all your eggs in one basket, on the other hand, can break a new investor if their initial investment doesn't turn out to be as profitable as they expected.
The Cons of BRRRR Investing
After all the research, the cost-return analyses, and the shopping around for the best refinancing deal on the market, most investors will reap incredible benefits from BRRRR-ing.
This strategy is perfect for those who want to dedicate their time to growing their portfolio full-time, as well as for those who enjoy property and project management.
On the other hand, however, the BRRRR method might not be the best fit for your investment goals if...
You don’t do well with uncertainty
Many factors come together in making a BRRRR investment profitable: You have to invest in a cheap property with plenty of potential to uncover, manage your repairs in a way that will maximize rental fees and profit, and find the right lender for refinancing without paying too much out of pocket.
It can be quite easy to get any of these steps wrong and before you know it, you might end up with an expensive property on your hands and negative cash flow, rather than the high ROI that makes BRRRR-ing so appealing in the first place.
If you are inexperienced and tend to not do too well with uncertainty, investing in your next property through traditional means may lead to better results and a lot more peace of mind.
You’re looking to generate 100% passive income
While there is no real estate investment strategy that can guarantee 100% passive income and zero time investment, the BRRRR method is generally considered one of the most time-consuming and hands-on strategies to employ.
You'll have to spend time analyzing the pros and cons of each investment option, spend even more rehabilitating it for future guests and tenants, manage your property, and find refinancing options all at the same time.
You'll need to wear many hats and likely need to make real estate your full-time job, so if this doesn't appeal to you and you're looking for something a little less challenging and passive, standard investing strategies may give you a lot more satisfaction.
You are looking for quick results
The BRRRR method revolves around repeating the same cycle to build equity and boost profits in the long term, so if you're looking for a quicker option to generate a more modest cash flow, this strategy might not be for you.
While you'll see results with your initial investment, the true power of BRRRR-ing lies in scaling, so you'll have to play the long game for a while to reap all of the best benefits.
Those looking for quicker results and a more passive style of investing will probably fare better with traditional short-term rental investing, which is exactly what we excel in!
Kickstart your Real Estate Investor Journey!
The BRRRR method is just one of the many strategies you can employ to scale your business and generate reliable cash flow through real estate investing.
We can help you to figure out what method would work best for your financial situation, experience, and goals, so you can go ahead and find your next vacation rental with confidence — get in touch today to see what we can do for you, from finding the best investment properties for short-term renting to giving you a sneak peek into all the latest industry trends.
And if you want to learn more about BRRRR-ing as a short-term rental investor, why not give our latest podcast episode a listen to get the best insights straight from one of the biggest authorities in the game?