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BRRRR! A Red Hot Strategy
It may almost be December, but no I’m not complaining about the cold. BRRRR stands for buy, rehab, rent, refinance, repeat. This has become a popular strategy ever since the founders of www.biggerpockets.com coined the term. Here is a really nice article breaking down the basics: https://www.biggerpockets.com/renewsblog/brrrr-buyrehabrentrefinancerepeatprimer/
So why BRRRR? And why is it such a good strategy. The two main reasons, in my opinion, why this strategy is so powerful are the ability to continuously re-deploy your original capital while accruing assets and reliance of forced appreciation instead of market appreciation. To explain succinctly, the BRRRR method allows you to buy an investment property that needs work, fix it up thus raising its value (forced appreciation), and rent the property to a higher quality, higher paying tenant. The next step is to go to your bank for a new loan based on the higher value of the property (refinance). If done correctly, an investor should be able to receive all of their money originally invested back in cash from the bank through the refinancing. Great! Now for the last “R” in BRRRR which is repeat. This is where the concept of being able to recycle your original equity comes into effect. An investor can continuously acquire new properties to add to their portfolio without using any more money than they used to buy the original first investment. This a fantastic way for an investor to grow quickly as they can use additional capital to buy larger and larger investments each time as well as sell some of their assets and 1031 exchange into bigger deals as well. I feel more comfortable trusting this strategy more than simply hoping a market appreciates in value. Forced appreciation (renovating a property and renting it for more) works in an up market, sideways market, and even a down market. The important thing to consider is the leverage used to refinance these properties should be judicious. In our current lending environment, it is difficult to get dangerously risky loans anyway but still many lenders today are willing to loan at an 80% LTV. Of course, all of the properties in your portfolio should cashflow enough to weather an economic down turn which means a DCR of at least 1.25. DCR is an extremely important metric for any type of leveraged investing and is often overlooked. In my next blog, I will take a deeper dive into DCR and break down the mathematics as well as go through a few hypothetical situations.
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