The BRRRR Strategy for Beginners in Real Estate Investing
The BRRRR strategy of investing has become increasingly popular over the last decade, especially among first time real estate investors. It’s an all encompassing method of investing that can start slow and ramp up as quickly or as steady as the investor wants. From renovation to property management, BRRRR investing offers a crash course into the multifaceted world of investing in real estate and maintaining the asset over a long period of time.
BRRRR Method for Beginners
We’ll start with the most basic question- what is the BRRRR method? The acronym stands for buy, rehab, rent refinance, and repeat. It sounds simple, and with enough experience and trial & error it’ll become second nature, but obtaining your first property and making cost effective renovations takes some strategizing. Let’s break down each step of the process:
Buy- Purchase your property, whether its single family or multifamily. Make sure the property fits your budget, scope of work, and investment strategy. We have tips on the best properties to buy and how to calculate a profitable deal in the next section.
Rehab- Complete the value-add renovation to the property to increase the potential rent roll and improve the property’s ARV for your eventual refinance. Focus on the most impactful and cost effective rehab for your project. Kitchen and bathroom improvements typically add the most value for the money spent, but properties in decent shape may simply need cosmetic facelifts and updates to the electrical or plumbing.
Rent- Lease the property’s units to reputable tenants and begin to generate passive monthly income. Make sure to do your due diligence! You want a quality tenant that can reliably pay every month without causing issues. Renting to the first person that applies without a proper screening can lead to more headaches and money loss, so take the necessary precautions here.
Refinance- Now that you’re finished with the rehab loan portion of the process, its time to refinance to your long term hold. Work with your lender to refinance your bridge loan into a favorable fixed rate rental loan that allows you to hold the property as an income-producing asset.
Repeat- Reaching this step is the best part, because it means you successfully completed the rehab and refinance of the first property. Now its time to repeat the process and make more money! Use the capital gained from the first deal to acquire your next property and repeat these investment steps, working towards a rental portfolio.
Unlike fix and flips or new construction investments, the BRRRR method isn’t about receiving a large sum of profit after one transaction. Instead, this is focused on building your net worth over time by growing a rental portfolio that holds multiple income-producing assets. As you grow, you begin generating passive monthly income that covers your property maintenance costs while fueling your next investment opportunities and paying yourself a healthy profit. With passive income as the goal, there’s a few different approaches compared to other investment strategies.
Before we move on, let’s tackle a common misconception right away- starting the BRRRR strategy with no money isn’t a real thing. Its possible to use only a minimal amount of your capital for your projects, but real estate investors need some skin in the game by providing an initial down payment towards any of their investments. The good news is that investors can get started with the BRRRR method with minimal money down, and the aggressive money-making approach can lead to fast scaling for investors of any experience level. Starting with 20% down towards your first investment property is a great way to begin your real estate business and work with reputable lenders.
Best Properties For The BRRRR Method
Depending on your overall investment strategy and starting capital, the best type of investment property for you will differ. For BRRRR investing, multifamily properties tend to work best as you’re able to increase the monthly rent value for multiple units instead of just one. This strategy works with single family homes, but the more units you can rent out, the better the value in the long-term.
The most important trait to look for in your investment property should be a property in decent shape but needing rehab, or value-add. Scout a value-add property, one that fits your level of experience in regards to the scope of work needed. Taking on a project that requires renovation beyond your skillset will be taxing and costly, so be realistic with your ability to take on the project at hand. The after-repair value, or ARV, will play an important role in your investment strategy. Your eventual loan refinance will be focused on the ARV, therefore your contribution to the property and its new added value will be beneficial to your refinancing and your long term profit.
Turnkey properties, or rent-ready properties, may be fine for bolstering your current rental portfolio, but buying a lesser property for a low price and putting in enough renovation to boost its value and its monthly asking price is how money is really made with the BRRRR method. Plus, properties that don’t require any kind of repairs or renovation are usually sold at a premium, requiring a larger down payment from the investor instead of using lender financing towards the rehab costs.
When looking at properties and assessing whether it’ll be a good financial investment, try to follow the 1% rule. This rule aims to have your rental property cover 1% of your purchase price per month. It’s a good baseline for understanding whether you can afford the rental property you’re looking at, and more importantly whether you can make profit on the property while accounting for costs such as regular property maintenance.
Calculating the 1% is simple- take the total purchase price of the rental property and multiply it by 1% or .01. That number should be the minimum monthly rent you look for to eventually cash flow on the property. For example, if you’re looking at a property valued at $300,000, then the total monthly rent return from the property should be at least $3,000. Remember that this rule is a guideline and won’t work in every area or for every property but is a great starting point for new BRRRR investors. You can use our BRRRR calculator to help crunch numbers and determine if the deal works for you.
Finding the right deal is sometimes the hardest part about investing in real estate. Talk with your network or real estate agents about how to find BRRRR properties if you’re feeling stuck. The more you grow your network and reach out for assistance, the easier it will be to find your ideal investment property.
BRRRR Method Examples
We want to highlight BRRRR investments that ABL has funded throughout the country for real estate investors of varying experience levels. Property examples are one thing but having a BRRRR example with numbers is the best way to learn the strategies behind these investments and understand the math that made these deals successful.
Work Description: Cosmetic Renovation — Multifamily 4
Purchase Price: $485,000
Renovation Budget: $120,000
Loan Amount: $464,000
Loan Purpose: Property Purchase & Rehabilitation
Work Description: BRRRR — Triplex
Purchase Price: $85,000
Renovation Budget: $32,760
Loan Amount: $98,000
Loan Purpose: Property Purchase & Rehabilitation
Work Description: Gut Renovation — Multifamily 6
Purchase Price: $296,000
Renovation Budget: $445,000
Loan Amount: $703,000
Loan Purpose: Property Purchase & Rehabilitation
BRRRR Mistakes to Avoid
- Avoid HOA properties- These HOA properties will increase your costs and eat into your profits with their monthly or large annual payments, and there’s plenty of multifamily properties that have zero or negligible HOA fees attached with them.
- Cover your bases in your lease agreement- Lease agreements are legally binding and can either protect you or put you at risk. Especially if you’re new to property management, you’ll want to work with someone experienced to make sure you’re drafting a lease that protects yourself and your properties. You don’t want to be on the hook legally for any issues or problems that arise, do your due diligence and triple check your lease agreement before you’re ready for tenants to sign.
- Consistency across tenants & units- It’s important to treat all tenants and units the same. As your portfolio grows, it’s important to keep that consistency of care across your multiple properties. Problems may arise but treat your rental properties as a business that you’re managing and focus on the money-making aspect.
- Using two different lenders- Some lenders can only handle the fix and flip portion of the loan while others can only handle the long term rental loan portion. Make sure you work with a lender that can handle both parts of the loan to make it a smooth process for yourself.
Using Hard Money For BRRRR Loans
With multifamily investing being so popular these days with rising rents and inventory shortage, its important to partner with a lender that can move quickly and guarantee funding. The ability for hard money lenders to close loans quickly allows real estate investors to take advantage of time sensitive opportunities, which means the difference of securing a deal or watching it be sold to someone else. Hard money BRRRR loans require less documentation and have more flexible terms compared to banks or other private money lenders, making them a great choice for investors of all experience levels.
As the premier lender for BRRRR investors, Asset Based Lending can complete the rehab loan and refinance into the rental loan under one roof, offering a one-stop-shop for your investment needs. That’s why real estate investors choose ABL hard money for BRRRR loans, allowing them to complete their financing quickly and simply with the same trusted team. Since the entire loan process occurs in-house, we’re able to guarantee a five-star experience from your first phone call through your final payoff. By assessing the property and the income-producing viability, our team can write a BRRRR loan to match your specific project and needs, whether you’re looking for maximum leverage or lowest possible interest rate.
BRRRR real estate investing is a path towards long-term passive income and one of the best strategies for taking advantage of today’s hot rental markets. The low housing supply and increased average rents across the country is perfect for investors looking to start or scale their rental portfolios. By partnering with a lender that can quickly and reliably handle each part of the loan process, investors can make aggressive moves and secure deals backed by hard money financing.
Asset Based Lending can finance your next success. With thousands of investors helped and over $1.4 billion of deals funded, we understand the speed and reliability needed to help real estate investors make their dreams into a reality. If you’re an investor looking to start their first BRRRR investment or grow your current portfolio, give us a call at 201-942-9090 or pre-qualify today.