BRRRR (Buy, REHAB, Rent, Refinance, Repeat) Strategy

Thinking about doing the BRRRR investing strategy? 

You as an investor will buy a property and then rehab the property. After the rehab, the investor will rent to tenants and the income generated from renting to tenants will pay the mortgage, generate cashflow, and build equity. Eventually the investor can refinance this property and buy a second property and do this repeatedly.

1. BUY

This of course is the first stage. In my opinion…this is where you make your money. You are searching for listings, working with wholesalers, agents, and other investors to find your first or next sound investment.

It is important to understand how to complete deal analysis. This means calculating your costs to rehab the property, add up your monthly rental expenses, and make sure you make a profit for the asking rent in the area you are getting the property.

There are investors that will use the 70% rule, this rule allows for the estimates for the cost of repairs and the after-repair value (ARV), this can help give you an idea of a maximum allowable offer.

Example:

Asking Price: $100,000

Using 70% Rule: $70,000

Repairs: $15,000

Offer Price: $55,000

The higher the property is selling for, you may have to go as high as using am 80%-85% rule, depends on the market.

2. REHAB

During the REHAB, this is where the investor needs to make the investment property livable and functional for the tenants. It is important not to fall in love with the property and over REHAB the property for what the market is demanding. Do only what will allow you to get a maximum return on rental income.

Example:

• Roof: Make sure the roof is in good condition.
• Is the kitchen Updated?: When you want to charge the premium rental price, you need an updated kitchen, don’t go over-board on the improvements.
• Repairs to Drywall: If renters go into a home seeing damaged drywall, this will open their eyes to look for what else is wrong with the home.
• Bathroom Updates: These are typically not expensive and can pay dividends in updating.
• Add Bedrooms: For a Bedroom to be counted as a bedroom, there must be a window and a closet, it usually can be a free-standing closet.

3. RENT

Hopefully you already have renters lined up as soon as the REHAB is complete! This is where you will complete the screening of your new tenants. I recommend my clients to not just look at the credit report. With COVID many people have taken some dings on their credit, give them the opportunity to use alternative credit (Verification of Rent (VOR) from previous landlord, utility bills, phone, and cable bills etc.)

Other things to consider as a landlord:

• The property sitting vacant: if you did your due diligence in the beginning, this should not be an issue.
• Bad Tenants: Ok, you have horrible tenants and eviction can be a pain in the A$$ and cost more money than it’s worth. In most cases, when you see the first signs of being a bad tenant, before it starts getting worse, approach the tenants and offer them “cash for keys”. This is where you offer the tenant money to move out of the property by a certain date and leave the home in broom swept condition. I used this method many times with great success!
• Property Repairs: You may have repairs that pop up that are more than what the rental income is. Welcome to being an investor!

4. REFINANCE

After all of this, it is time to start considering refinancing and doing it again. Using a hard money lender, you can roll your Fix & Flip short term loan into a loan with more favorable terms with low to no documentation programs using 75% of the APPRAISED value after 3-6 months of seasoning. Conventional banks require 12-months seasoning to go off the appraised value.

5. REPEAT

This is where you use the money from your cash-out refinance in the previous step and repeat steps 1-5. When you get your cash-out refinance, the terms will be more favorable that the Fix & Flip financing you got to obtain the property. Important to understand…you will make mistakes, eventually for the most part, the more you do it will become very systematic.

Here is a BRRRR Example on How It Works

• You find a property for $250,000
• Your Down Payment is 20% or $50,000
• You loan amount is $200,000
• You REHAB costs will be $15,000

When you complete the REHAB, the property ARV (After Repaired Value) is $315,000 and you can rent it for $2,850. In a year, you decide to do the cash-out refi, you do 75% of the appraised value of $315,000 (could be more, could be less…depending on the market) which is $236,250. You have your original loan amount of $200,000, this will leave you approximately $36,250 less refinance fees + you will have your current rental income on the first property to use to get your next BRRRR.