What is the BRRRR method and how to use it for real estate investment?

The BRRRR (Buy, Rehab, Rent, Refinance, Repeat) method is a real estate investment strategy that focuses on finding distressed properties that can be purchased at a low cost, rehabbed or flipped, rented out for cash flow, refinanced to extract cash, and then using that cash to invest in more properties.

One of the key differences between the BRRRR method and traditional property investment strategies is its focus on investing in distressed properties and refinancing those properties to purchase another property, rather than selling the property to a new buyer for a one-time profit as in a fix-and-flip deal. The BRRRR method is designed for real estate investors.

Principles of the BRRRR method

• Buy property: The property purchased is likely to be a distressed property.
• Rehab the property: A lot of repair work may be needed due to the poor condition of the property.
• Rent out the property: Determine the rental price and find a tenant for the property.
• Cash-out refinance the property: You can convert your asset into cash through cash-out refinancing.
• Use the refinanced funds to buy another property: In this final step, the whole process is restarted.

Buy, Rehab, Rent, Refinance, Repeat (BRRRR): Tips for Each Step

Buy

Distressed assets with rehab potential are an ideal choice for BRRRR investments. Purchasing and rehabbing distressed properties for rental income allows investors to take advantage of high leverage and rehab financing.

The BRRRR strategy relies on buying distressed properties that require updates and repairs, which can make it difficult to obtain traditional mortgage financing for the property. Most lenders require an appraisal of the property, but it can be difficult to determine the value of such properties. You can talk to lenders to see if there are other options, such as using a bridge loan, home equity line of credit (HELOC), or hard money loan to provide funds for the purchase. Especially with bridge loans, the terms and approval process are more flexible.

Additionally, when buying distressed properties, it is important to calculate the after-repair value (ARV). The ARV is the estimated value of the property after renovating or rehabbing it. Follow the 70% rule of real estate when deciding how much to offer.

Rehab

The first improvement to be made when rehabbing a property is to bring it up to code and ensure living safety.

The purchase cost of a distressed property may be lower, but the rehab cost may be higher. To avoid investing more than 70% of the property's ARV, a realistic budget and timeline can be established before starting the project.

Additionally, identify improvement projects that truly add value, such as updating the kitchen and bathrooms, installing energy-efficient windows, appliances, etc. The main goal is to renovate the property for structural, safety, and aesthetic improvements, and to prepare it for tenants.

Rent

It is important to find tenants before refinancing because lenders are typically unwilling to refinance properties that are unoccupied.

When selecting tenants, consider the following traits:

• Good payment history
• Stable employment, stable income
• Good credit report
• No criminal or eviction history

Confirm this information by meeting with potential tenants, having them fill out an application, obtaining their consent to view their credit report, asking for references, and conducting a background check.

When determining the rental price, ensure it is fair to the tenant while still covering expenses such as mortgage, taxes, insurance, and maintenance.

Refinancing

Refinancing refers to the process of obtaining assets by mortgaging loans or borrowing more money than what is currently owed. The cash can be used for any purpose, including purchasing another property. After renovating and renting out the property, the new equity line can be used to obtain funding for the next investment, often through DSCR lease loans with lower interest rates and a long-term fixed period of 30 years.

Although lenders may have their own set of requirements, you need to meet the minimum credit score requirement (cash refinancing is typically around 620), the maximum debt-to-income ratio (usually around 50% or lower), and have ownership of the property.

Repetition

Using the funds from cash refinancing, you can purchase another distressed property, repair it, and then rent it out and refinance the property again. The whole process is repeating the previous steps in the same order. You can take notes each time you execute this process so that you can learn from past mistakes.

Pros and Cons of BRRRR Investing

Before deciding on the BRRRR strategy, it is essential to weigh the pros and cons to ensure that it is the right investment strategy for you.

Advantages

Some of the advantages of the BRRRR method include passive income, increasing rental portfolio, and building assets during the renovation process:

• Lower initial capital requirements, and you do not need to save a large sum of money to start implementing the BRRRR method.
• Potential high return on investment (ROI).
• BRRRR real estate investment strategy is scalable. Once you have completed the initial steps, they become easy to replicate - each time you do this, you become more adept and financially comfortable.

Disadvantages

Some of the disadvantages to consider are primarily the costs and work required to repair the property. For example, you may not be able to obtain traditional home mortgage loans. YouLand's bridge loan can help you with the purchase, with quick approval, fast disbursement, short processing time, and can be used as cash; later, if you want to expand your rental portfolio, YouLand's DSCR loan can also assist you!

YouLand’s newly launched Point of Sale (POS) system, which makes it easy to submit bridge loan request including bridge, fix and flip as well as ground up construction. Whether you are a loan broker, a loan officer or a real estate agent, you’ll be able to: 100% online with 24x7 access.

In addition, there may be issues such as repair costs exceeding the budget, difficulty in renting out, and waiting time for refinancing. However, if a detailed and feasible plan is made, it will be helpful!

The BRRRR method is an effective way to quickly grow a real estate investment portfolio! By mastering the BRRRR cycle, you will accumulate wealth, gain real estate investment experience, and even achieve financial independence. However, patience is required in repairing properties, finding tenants, and making adjustments before obtaining cash refinancing. It is also important to consider these pros and cons before planning the next steps, and you can learn more and make the most suitable choice based on your actual situation!