Over the last few years, the BRRRR strategy for Real Estate investing has become increasingly popular. The term “BRRRR” is currently a trending buzz word among Real Estate enthusiasts. I love this investing strategy because it is a very “holistic” approach. This strategy combines the strengths of both “passive” and “active” Real Estate endeavors. Meaning, it combines the benefits of passively “buying and holding” rental properties, with the benefits derived from active “house-flipping” efforts.
I cannot overstate the power this “hybrid” strategy has! It has helped me scale my Real Estate investment portfolio into several rental properties. I have also seen firsthand how much it has helped several other Real Estate investors (like my sister). To understand what the famous BRRRR strategy consists of, let’s evaluate what each of the letters entails.
The BRRRR strategy simply stands for Buy, Rehab, Rent, Refinance, Repeat. Each of these letters constitutes the five steps you need to execute to reap the complete benefits of this strategy.
1.) Buy
The idea of this initial step of the strategy is that you have to find a property on the market that meets your criteria. Typically, you look for a property within your budget — where you can provide 20% of the down payment. So you don’t throw away money on PMI (Private Mortgage Insurance). Additionally, your acquisition should be a property that needs some fixing/rehab. This is important for the “Rehab” step of the strategy.
If you purchase a brand-new property you wouldn’t have the opportunity to perform repairs to boost property value. An alternative to “repairs” could be “enhancements.” Certain enhancements could also boost the market value of the property. For example, adding a pool to a brand-new house could increase the market value of the property.
During the property selection, you should evaluate comparable properties in the area. The goal is to confirm if your repairs and/or enhancements are actually desired. Executing them should increase the value of your property.
2.) Rehab
The idea here is to perform repairs or enhancements on the property. This creates “forced appreciation” since you’re technically “flipping the property.” Executing repairs or enhancements on the current property, inherently boosts the property’s value. To accomplish the Rehab, you have to set aside additional funds in your budget. Think of fixing the flooring, remodeling kitchen and/or the bathrooms, etc.
Do not get discouraged if you do not currently possess the technical skills or expertise to execute the rehab. You can effortlessly hire a third-party team to execute the repairs for you. My favorite websites to find licensed contractors are HomeAdvisor and Houzz. These companies are FREE platforms where you can easily find home improvement contractors in your area (more details about them at the end of the article). The contractors on these platforms are competing with each other so prices tend to be very affordable!
Conversely, if you do possess the skills required to efficiently execute the rehab endeavors, that is even better for your profits. Because you can keep a bigger portion of the margins the BRRRR strategy will yield. In the industry these investors are called “vertically integrated” investors.
3.) Rent
The basic idea is to rent out the property on favorable terms, to profit from your newly purchased asset. To be successful you must think long term. You must use your property to generate money over a reasonable period of time (generally 5 to 10 years). The main premise is that you are “buying and holding” rental property and reaping the benefits. This approach will revolve around two key principles/benefits:
- Generate healthy monthly cash flow. You can use those funds pay off your mortgage and associated costs. So you won’t have to pay for this out of pocket.
- Capitalize on the appreciation the property will have over the years. Similar to “buying and holding” a stock long term.
Cash Flow: The goal here is to try to rent the property for approximately 1% of the total cost of the property (including rehab costs). If you purchased the property for $100,000 and paid $20,000 on the rehab, your monthly rent should be at least $1,200 (ideally).
Appreciation: The property should be in a market where comparable properties are appreciating between 3% to 7% year-over-year. Meaning the TOTAL price of similar properties in the neighborhood is increasing every single year. This will ensure that after 5 or 10 years your investment will be worth considerably more.
Obviously, the higher the rent you can collect, the better. The higher the appreciation, the better. However, the above metrics are realistic tangible goals you should aim for in a healthy Real Estate market.
4.) Refinance
The term “refinance” might sound intimidating. Don’t be scared! It simply consists of obtaining a new mortgage, and paying off your previous mortgage in the process. You can think of this step as selling your previous mortgage to another lender. Effectively replacing the previous mortgage with a new mortgage. The main advantage of the Refinance step is cashing out on the forced appreciation from the “Rehab” step.
Additionally, you are also going to cash out on some potential long term appreciation as well as amortization gained during the “Rent” step. This will depend on how long you have rented out the property. The longer the timeframe you held the original mortgage, the larger your equity share will be.
Also, the new mortgage typically has better terms. Perhaps interest rates are lower. Or maybe your credit has improved thanks to the home-ownership. This will enable you to take advantage of a lower interest rate on your new mortgage. This means that you will have to pay less money to the bank every month, which will increase your monthly cash flow. (Please keep in mind, that banks typically want you to own the property for a year before they refinance.)
5.) Repeat
The idea here is to repeat the same strategy and continue acquiring additional properties. You’re enabled to do this since you have the equity you “took out” of the original property in the “Refinance” step. The goal here is to “scale” into not just one or two properties but to buy a large portfolio of properties.
Benefits begin to add up: your goal is to scale your cash flow, scale your appreciation, and also diversify your risk among many assets. You could, for example, buy properties in different cities throughout the country. Reducing the risk of having all your assets in one single market. For example, Detroit’s Real Estate market was specifically impacted during the 2008 financial crisis. (With scale, you’re not putting all your eggs in one basket, or one neighborhood).
Let’s go over a BRRRR Strategy example with actual numbers to help illustrate the strategy:
Imagine you buy a property for $100k (that needs some fixing). You make a down payment of $20k, financing the remaining $80k with a lender. You invest an extra $20k to perform some repairs/enhancements.
After the rehab is executed (hopefully within a couple of months), you put your newly improved property on the market and rent it out.
After a year, you refinance the house. Lets say that the new bank appraises the house to be worth $160k after comparing it to similar properties in that area. (The comparable properties a.k.a. “comps” have similar features and are in similar condition to yours).
Banks in this situation will give you roughly 70% of the appraised value of the house. Meaning approximately 30% of the value of the house remains as your equity. You could consider that 30% as the new “down payment” on your new “refinanced” loan. The other 70% equates to $112k.
What happens with those $112k?
- Roughly $80k dollars goes off to pay off your original loan completely. At this point you don’t really owe $80k. You actually owe a little less since you have made monthly mortgage payments on that original loan for a year now. But, let’s call it 80K due to the associated refinance fees (Yes, refinancing costs money).
- You can pocket an additional $20k to completely pay back “yourself” for the money you had to pitch in to execute for the repairs. Or you can use the $20k to continue acquiring new properties.
- This leaves you with $12k free and clear to repeat the process and use those funds as a down payment on a next house you will buy with the BRRRR strategy.
Furthermore, you now have 30% equity in the original house for roughly $48k. Meaning one year later you have $48k in equity! Not $20k in equity as you originally had on the property when you first purchased it. In other words, your equity has more than doubled! This is a drastic net worth increase for only one year of ownership.
The BRRRR Strategy 2.0:
There is an “innovation” to the BRRRR strategy that you can perform right before you execute the final step of the process (a.k.a. the “Repeat” step). The concept is to establish a “Business Line Of Credit” before purchasing the next property. For this, you would have to set up an LLC (Limited Liability Company).
Establishing an LLC might seem complicated but don’t worry! There is a great company named ZenBusiness that can help you through the technicalities of that process (more details about them at the end of this article). They charge a very reasonable fee for their services.
The key advantage of forming an LLC is you can vastly leverage your money. Generally you can leverage it in a 10-to-1 fashion. This means lenders will give you substantially more funds if you ask for a loan as an “established Company” vs. “natural person.” This is extremely beneficial because you need money to “Repeat” the process.
The extra funds give you the capability of buying multiple houses simultaneously. Instead of one house after the other. (In engineering, this is called flowing in parallel vs. flowing in series.)
Let’s quickly revisit our example to illustrate this “Business Line of Credit” approach of the BRRRR Strategy 2.0:
You are in the “Repeat” step and you have the $12k to use as a down payment on the loan for the next property acquisition. Let’s assume you also combine the $12k with the 20k you could’ve used to “pay yourself” for the “Rehab” money of the original house.
This $32k could be used for a nice down payment and repair funds on the next property. Or with the “Business Line of Credit” approach, those $32k could secure a $320k business loan (10-to-1 leverage). Enabling you to buy several properties right away (not just one). With that $320k you could pay multiple down payments on multiple properties. You will also have the money to repair multiple properties simultaneously.
As you can see, forming the LLC will accelerate the rate at which you could scale. I know it involves the process of establishing an LLC and formally becoming a company. But at the end of the day, the “Repeat” step is all about growing from one or two properties into a portfolio of properties. The goal is to turn this from a little “side gig” into an actual business. Because of this, the sooner a formal business approach is taken, the better.
BRRRR Strategy Conclusion:
You can modify, adapt, improvise the BRRRR strategy in any way that suits you best. For example, if you do not want to Refinance then you can remove that particular “R”. If you do not want to execute the Rehab then you can remove that “R”. Maybe you don’t want to “scale up” so you simply avoid the “Repeat” step of the process. Any of those modifications to the strategy are completely fine.
The BRRRR strategy can drop whatever “R” you want, depending on your personal circumstances and needs. You could even go as far as executing a “BR Strategy” in which you simply “Buy” and “Rent” one property. The strategy will then become a typical “buy and hold” strategy explained in this article. However, if you wish to reap ALL the benefits you need to apply all the four “R’s”.
For banks to lend you money for your real estate investments, you need to establish good credit. Here is an insightful article on how I obtained my 834 credit score, with easy tips for you to do it too!
If for whatever reason the BRRRR Strategy is not for you (low on funds, bad credit, etc.) but you STILL want to invest in Real Estate, I got a great solution! Check out my article about Investing in REITs. You can learn how to invest in Real Estate digitally, without the typical entry barriers.
My ACTIONABLE BRRRR Strategy Tips:
If your business revolves around Real Estate, do yourself a favor and check out the tools below. It doesn’t matter if you’re a Real Estate Agent, Broker, or Investor. These products and services are designed to make your Real Estate life easier. For example, they can help you find investment properties or manage them. There is something for everyone, regardless of where you currently stand in your Real Estate journey.
How to evaluate potential investments:
Dealcheck is considered the leading investment property analysis platform. Which is a great tool for both Real Estate investors and agents. The platform makes it easy to analyze all types of potential ventures like rental properties, flips, multi-family buildings. It also estimates cash flow and helps you find and compare/contrast potential deals.
Click HERE to visit Dealcheck! Additionally, I have obtained a great discount for MoneyTipsCoach.com readers. If you use promo code: VIP25OFF you will get 25% off!
Real Estate Property Search Engine (how to find cheap properties):
Foreclosure.com is the largest provider of distressed properties currently available in the United States. This information is extremely beneficial when you’re trying to find a good discount on investment properties. Distressed properties are “on-sale”. Foreclosure.com info is always accurate and up to date. (I used to look for these types of properties in places like Zillow, Trulia. Unfortunately, their information for distressed properties is highly inaccurate.)
Foreclosure.com platform is extremely easy to use and provides the most comprehensive residential foreclosure listings. They are regarded as the national expert on reporting the status of defaulted Real Estate. Click HERE to visit Foreclosure.com!
Property Management Software:
Buildium is a software designed to help property managers and real estate investors become more efficient. It is a great tool for individuals looking to scale their business or portfolio. Their property management software is extremely powerful. With Buildium you can easily track budgets, manage rental listings, pay vendors, and run comprehensive tenant screenings. It can also help you communicate with tenants, vendors, and owners more efficiently.
Click HERE to visit Buildium!
Real Estate Education & Community:
Property MOB offers a bunch of tools and services. For example, they have training courses, online coaching, virtual assistants. In this platform you can also obtain advice from their resourceful community of Real Estate investors.
The also offer very detailed tutorials like their “How To Wholesale Real Estate Step By Step“.
Last but not least, they provide the #1 Bestselling CRM Platform (Customer Relationship Management). A great tool for both Real Estate investors and agents!
Help establishing your LLC:
ZenBusiness is a great company that helps you with the process of establishing your LLC for very low fees. They provide extremely valuable help, which will make the process smooth and efficient. If you’re serious about scaling your Real Estate Investments, forming your LLC is a great investment. If you want to scale, I highly recommend you to establish your own LLC as soon as possible. The advantages and protection that this offers you are massive.
ZenBusiness offers three different formation packages starting at $49 to fit your specific needs and budget. Their services include Business Domain Name, Business Website, Business Email Address, DBA name registration, securing your Employer ID Number (EIN).
Click HERE to visit ZenBusiness!
Licensed Home Improvement Contractors:
You should take a look at these 2 great platforms, whenever you have any Rehab need. They are both FREE to use, so you can conveniently compare and contrast pricing, local availability, etc:
HomeAdvisor is one of the industry leaders for Home Improvement platforms. You can find highly ranked licensed Contractors in your area that could tackle any home improvement project you desire.
The trades include kitchen and bathroom remodeling, heating, cooling, flooring, roofing, gutters, landscape, plumbing, painting, swimming pools, concrete, siding, decks, porches, handyman services. HomeAdvisor also rigorously screen their contractors from multiple perspectives. They perform criminal background checks as well as licensing verification.
Click HERE to visit HomeAdvisor!
Houzz is another industry leader for home improvement platforms. Their platform provides everything you might need to update any property from start to finish. It connects homeowners, brands, and professional contractors together. You can find products and services that adjust to your personal style as well as budget. Their Houzz platform is used by a fantastic global community.
The platform has helped over 40 million homeowners connect with over 1.5 million design professionals worldwide.
Click HERE to visit Houzz!