The BRRRR Strategy: Pros, Cons & What Rental Investors Should Know

Infinite Return

The BRRR strategy allows you to keep real estate with little to no money in the deal. We’ll start talking about cash-on-cash returns and the different types of investments. This is one of the strategies that allow you to get an infinite return. An infinite return is you're getting a cash return each month, and you didn't invest any money in the deal. That's what an infinite return is. Let's go!

How I Used BRRR Strategy To Build a Portfolio of $10+M In Value

I’m Johnny Lynum been investing for over 17 years now and have just done it all. Between a little bit of wholesaling, with deals that we don't like to buy, to our primary strategy of fixing and flipping to executing the BRRR strategy to keep and add single-family houses to our rental portfolio. We buy apartment buildings as well, too. We run our investment company virtually, which is a little bit unique. We do deals all across the southeast and in different cities over a 10-hour drive away. Some of our rentals we actually lived in before as the Air Force moves us around every so often. Overall, it worked out really, really well. Thus, I wrote a book last year “Millionaire Real Estate Success Strategies: What They Forgot To Teach In School.” It goes without saying that I'm all about real estate!

What it stands for

B - buy — Find, underwrite, and close on a great deal.

R - renovate or rehab — Put all the work in to make it liveable and rent-ready

R - rent — Find a good paying tenant.

R - refinance — Have enough equity in the deal where you can pull all your money out.

R - repeat — and do it all over again

Pros and Cons

There are always pros and cons. So let's talk about some…

Buy at the right price

In real estate, you make money when you buy not when you sell. If you don't buy at the right price, then it's gonna take you a long time to correct. You can actually be profitable in the deal if you're gonna sell in the near term. So you got to make money by underwriting and buying the deal at the right price upfront.

Cash flow is king

The second one, cash flow is king. Especially in this market, as a correction happens, you might lose 10-20% of the value of your property. But if you're buying and cashing out at 75%, you got 25% equity from day one. If you don't sell, then it's not a problem. You're not going to have to worry about that. People right now, millennials, are more inclined to rent. We’ve turned into more of a renter nation. As interest rates go up, more people can't buy single-family homes. If you're creative, you know how to put deals together, then there's gonna be plenty of people to buy from. If you're in the right market, you’ll be renting out your property for a long time.

Building wealth

The third one is building wealth. Let’s say in about five years, you're doing four deals per year. Next thing, you know, you got five years with $5,000 a month coming passively. Do this for a whole decade, for 4 properties a year, now you got $10,000 of passive income, that was at a conservative at $250 a deal. You're going to be in a great position to build wealth and building a portfolio over time by leveraging this BRRR strategy.

Bad assumptions

Some of the cons are if you're not good at your analysis, or you make some bad assumptions. Or, if you don't have the right knowledge on leveraging the right contract, because you tried to do it yourself, and you didn't get a professional to do it. You could lose money. You could underestimate your rehab costs. Also, you must factor in higher interest rates, since rates can go up between the time you buy and refinance.

Stress Test Analysis

Say you know, you're going to refinance in six months… What is it going to look like if interest rates are a percent higher or a percent and a half higher than where they are today? You have to do that stress test analysis to see how that change impacts your deal. How's the deal look now? Or do you need to buy it for a little bit cheaper?

Credit Score

You want to make sure that you have your credit score intact. You want to qualify for the best interest rates.

It is not a sprint. It's a marathon.

It takes patience to find, buy properties and just go in and do the work. To refinance and pull your money out, then do another deal. $250-$300 a month doesn't sound like a lot to some people. But when you start doing it over and over and over again, we start talking about the benefits of appreciation. The debt is paid down by the residents paying the mortgage. The tax write-offs and the depreciation that comes with it. Over time, your equity position and net worth skyrocket!

Inflation-proof

Inflation is always here. Fed said they want to keep inflation at 2%. So that means 2% over 10 years, the dollar is gonna be worth 20% less in 10 years. You want to buy an asset that lets you hedge against inflation. Right now inflation is over 8% inflation, that's why so many institutional investors started buying more real estate.

If you've used the BRRR strategy before and you know additional benefits that you found or some more cons that you ran into, share that down in the comments. I’d love to hear about your experience too!