Buy, Rehab, Rent, Refinance, Repeat
If you’ve researched real estate investing, you’ve probably come across the BRRRR strategy. It is sometimes referred to as the BRRR strategy (with one less R).
It’s a popular way for investors to build their real estate portfolios, and the good news is that it works wonderfully for many investors and helps them scale their real estate business with ease.
When we talk about the BRRR method, we need to start with what it means. BRRR stands for buy, rehab, rent, and refinance. Many add a fourth R to BRRRR which stands for repeat.
This investment strategy can be a great way to make money on rental property investments and rental real estate without a huge initial outlay of capital. The key is to understand the nuts and bolts of the strategy, choose the right loans, and know how to reduce risk.
How the BRRRR Method Works
The BRRRR investment strategy can sound complicated, but it’s actually pretty straightforward. If applied correctly, the BRRRR method is a great way for real estate investors to create passive income and a revolving method for purchasing rental property.
Here’s what you need to know before you take out a loan for an investment property:
- Buy an undervalued property: The goal is to improve the condition of the property – just as you would with a fix and flip investment – to increase its value so that you have built-in equity when you refinance.
- Rehab the property: Evaluate each potential upgrade to determine whether the renovations will cost you more than they value they add to the overall value and/or rental rate. For example, structural improvements like new bathrooms are worth the investment and will provide the property investor ROI, but high-end flooring and appliances may not be, depending on your intended market.
- Rent out the property: Vet tenants thoroughly and, for short-term rental property investments, charge enough rent to immediately generate positive cash flow. As a rule of thumb, aim for a monthly rental fee at 1% of your cost – defined as purchase price plus what you invested in renovations.
- Do a cash-out refi on the property: With a cash-out refinance on investment property, you get out of the short-term interest-only loan and into a 30-year, fully amortized loan or other form of long-term hold financing so that you can hold the property in your portfolio.
- Bonus Step! Repeat: Use cash from your refinance to purchase your next real estate investment and start the BRRRR process again.
Pros & Cons of the BRRRR Method
There are several factors to consider before tackling the BRRRR method in real estate ranging from ROI to equity to expenses to appraisal risks.
Pros of the BRRRR Strategy
- Potential for creating cash flow: When done right, real estate investors can purchase a distressed property for a relatively low cash investment (buy), fix it up (rehab), and rent it out for strong cash flow that serves as passive income (rent).
- Building equity: Along with that passive income, investors using the BRRR method increase their equity. Buying and holding multiple properties increases your total equity, which gives you more options to grow your portfolio.
- Economies of scale: Once you hit your BRRRR stride, you can achieve economies of scale, where owning and operating multiple long-term and short-term rental properties at once can help you increase your cash flow overall by lowering your average cost per property and spreading out any risk of capital expenditures or tenant issues.
Cons of the BRRRR Strategy
- Profits aren’t fast: The BRRRR method doesn’t offer investors fast cash. It’s a slow and steady kind of real estate investment strategy. You have to put in work and time before you start making money and be patient enough to add properties to your portfolio one at a time.
- Time-consuming rehab: Rehab and fix and flip projects means project timelines, managing contractors and sub-contractors, and dealing with unexpected issues. Plus, rehab projects take time, and they aren’t cheap. The good news is that every rehab or flip you complete gives you more experience, which helps you improve your processes and streamline the time investment per property.
- Loans can be expensive: Depending on the extent of the repairs, investors may need to take out a rehab loan, which typically have higher interest rates than a traditional rental loan and can be costly.
What Type of BRRRR Financing Do I Need?
BRRRR investments require two different types of loans. When you buy an investment property, you take out an interest-only fix and flip loan to cover the cost of the purchase and renovations. Then you will refinance to a long-term rental loan with a lower interest rate and full amortization. Below are some details on how these loans work at Lima One Capital, but the principles of financing will apply in general.
Fix and Flip Loans: Fix and flip loans can cover up to 90% of the purchase cost of the property with a term length of 13, 18, or 24 months. These interest-only hard money loans are ideal ways to minimize out-of-pocket costs during the rehab period.
Rental Property Loan: When you’re ready to refinance, you will take out a long-term rental loan. Typically, this is a 30-year, fully amortized loan with a maximum loan-to-value ratio of 75-80%. Since loans for rental properties are based on current value, you may need to do a new appraisal on your investment that assesses the material improvements you have made.
Lima One offers loan options such as ARMs and even interest-only periods to help you maximize cash flow after you refinance your rental property. We also offer discounts on rental loans for investors who finance the rehab portion of the BRRRR with us, to maximize value for investors.
What Investors Should Know About the BRRRR Method
The BRRRR strategy can be an excellent option to create passive income from rental properties and fix and flip investments without a huge initial outflow of capital. When you understand the basics of the strategy, it’s a great way to build your real estate portfolio, create passive income, and achieve your goals as an investor.
Contact Lima One today to learn more about the BRRRR method and how our financing is designed to help your BRRRR real estate strategy.