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So, you are starting your real estate investing journey.  Perhaps you already own a property.  You keep hearing about this ‘BRRRR Method’.

What is it?

Why do so many investors use it?

Let’s find out.

What is the BRRRR Method?

How to find properties for BRRRR method?

How to use the BRRRR Method when starting out

How much money to save up for BRRRR Method

How To Cash Out Refinance Investment Property

BRRRR Method Example

 

 

What is the BRRRR Method?

This is an investing strategy that real estate investors consider when they start their portfolio.  Overall, this method allows you to purchase a property and pull out the invested money later. 

The result is purchasing a rental property with less capital.  But this takes months to get your money back.

BRRRR stands for:

BUY

Purchase a rental property.  Typically, a single-family or small multi-family (2-4 units).

 

REHAB

Renovate the property.  This can be renovated immediately or over time.  By renovating, you are forcing the property to appreciate in value.  Very important.

 

RENT

Find a renter to occupy the property.  Start collecting rent.  Remember to always screen your applicants.

 

REFINANCE

Once you have a renter in place, refinance the loan.  This can either replace the hard money loan or traditional mortgage loan you initially took.  At this point, you are doing a cash out refinance on the investment property. Often lenders require an 80% LTV (loan-to-value).  Said differently, you can pull 80% of the property value minus any previous loan pay-offs.

 

REPEAT

Take your new cash and go find another BRRRR property!

 

Fun, isn’t it?

 

How to find properties for BRRRR method?

BRRRR Method works best when you can add value to a property.  Therefore it is important to find properties needing renovation.  Unfortunately turnkey properties do not work well for BRRRR.

There are several ways to find distressed properties.

Look on the MLS. Multiple Listing Service

This approach often requires you to work with a real estate agent.  That increases the asking price because of the agents commission.  However, there are properties listed that are below market conditions.

 

Contact a Wholesaler

Wholesaler’s main task is finding below market investment deals.  These wholesalers are calling or texting homeowners asking if they want to sell their property.

Most properties found by wholesalers require substantial work.  Therefore, would not do well on the MLS.  This is where real estate investors come in.  Since investors look for opportunities, they want to add value.  Then sell or rent the property.  If renting, this can turn into the BRRR strategy.

Find Your Own Deals

Nothing stops you from finding your own deals.  Drive the neighborhoods you want to invest.  Talk to the neighbors.  Look for houses that are in poor condition.

Then look up the property on your county assessor for information on the owner.  You can search for their contact information or even mail them a letter.

This takes the most work.  Yet, you cut out the wholesaler which means more profit for you.

 

 

How to use the BRRRR Method when starting out

There are two levels of starting with the BRRRR strategy.

Primary Home – 5% down

If you have little money then a primary home is a great start to brrr strategy.  You can always turn a primary home into a rental. 

The benefits of starting as a primary home is the opportunity to pay 5% down.  Then renovate the property over two years.  Most mortgages require you to be the primary resident for the first two years.  You can use that time to renovate!

The downside is the expense of your mortgage.  Since mortgages are front-loaded with interest, your first 2 years will be vastly interest.

Take advantage of loans that allow you to finance renovations.  Do your homework on the potential ARV (after renovation value) so you can provide a good estimated value.  Loans like Fannie Mae HomeStyle or FHA 203(k) are great loans to finance renovation costs.  This will save you cash.

Investment Property – 20 to 25% down

When you do not intend to live in the property, that is an investment property.  Loans for investors have stricter guidelines.  They require 20-25% down.

Investment properties for BRRRR method will consider using hard money loans.  These are high-interest yet shorter loans.  Investors can finance the renovation costs too.  Be careful because these are collateralized loans.  Meaning your primary home could be taken if you fail to repay the loan.

 

How much money to save up for BRRRR Method

The beautiful thing about real estate is the vast amount of options.  The Buy Rehab Rent Refinance Repeat method is the same.

Traditional Mortgage:

Primary homeowners can take advantage of the 5% down.  As long as you live in the home for 2-years.  This is a great starter approach.  You would pay for the renovation costs out-of-pocket.

 

Mortgages that Finance Renovation

Loans like Fannie Mae HomeStyle loan and FHA 203(3) allow homeowners to finance the renovations.  There are criteria how that money can be spent.  Typically they limit the amount of work that can be self-performed.  Therefore you will need to hire contractors.

 

Hard Money Loans

Investors will utilize other peoples money.  Also known as OPM. 

If you want to buy and renovate the property immediately, consider a hard money loan.  Yes they are higher rates.  However, they allow more flexibility how the money is spent. 

Although they require 15-25% down, if you do not have enough capital you can use assets as collateral.  Be very careful because not paying back the loan will cost you the investment property and the collateralized asset.

 

HELOC: Home Equity Line of Credit

Do you have substantial equity in your primary home?  Consider a HELOC. 

This line of credit works as a credit card.  Meaning you only pay for money you take out from the credit line.  Unlike a hard money loan that starts to accrue interest regardless if you spend the money or not.

HELOC’s allow investors to leverage real estate they own.  This is easy access to money.  However, leveraged real estate is always more risk.

 

How To Cash Out Refinance Investment Property

Perhaps the best part about the BRRR strategy is pulling cash out of the property! 

This occurs when the value appreciated substantially more than your total cost.  Lenders will loan 75-80% LTV (loan-to-value) on the property.  If your previous total all-in cost was below, you can take out the net difference.

You are not required to do a cash-out refi.  For BRRR to be effective, you only need to refinance your previous total cost.  This means you get back your invested money but no profits.

By taking cash out, investors increase their mortgage payments.  If you prefer more cashflow, your objective is keeping mortgages loan.  If you prefer capital gains, consider taking the max loan possible.

BRRRR Method Example

To illustrate the process of BRRRR method, we take you step by step.

  1. Buy Property: You found a distressed property for $100,000 and received an accepted offer.  This property is vacant.  You estimate renovation costs to be $25,000.  You put down 20% of ARV ($125,000).  Hard Money Loan (HML) rate is 10%.
    • Property Value: $100,000
    • Total Financed: $100,000
    • Total Invested: $25,000
  2. Renovate Property: Over the next 3 months, you renovate the property.  During these months, you use HML to pay for contractors and supplies.  Also, you make 3 monthly interest payments.  $100,000 financed x 10% rate / 12 month = $833 monthly interest payment.
    • Property Value: $100,000
    • Total Financed: $100,000
    • Total Invested: $27,500 (+$2,500)
  3. Rent the property: After renovation, you find a tenant and they move in.  Rent is $1,000.  Perfect time to set them up with Burbz online rent collection!  Hint hint.  We digress. It took 2 months to find a renter before they moved in.  That is 2 more months of interest: $833 x 2 = $1,666.
    • Property Value: $100,000
    • Total Financed: $100,000
    • Total Invested: $29,166 (+$1,666)
  4. Refinance the Property: Renovations: done.  Tenant paying rent: check!  Time to convert financially into a loan term rental.  You pay $5,000 in closing costs.  Interest rate is 4%.  The appraisal ARV (after repair value) comes in at $185,000.  Nice work!

 

As an investor, you have two methods.  Maximize cashflow or maximize pulling cash out.  These are BRRRR method examples for both.  Regardless of the choice, your lender will require at least 80% LTV.

 

Maximize Cashflow:  Only refinance the total cost of the project.  That is $129,166.  Which consists of the HML loan ($100,000) plus your total invested cash ($29,166). 

 

Math is Total Project Costs / 80%.  $129,166 / 80% = $161,457.

 

Final result: you got all your money back out and paid off the HML.  Your mortgage is $617 per month.  Property rents for $1,000.  Monthly profit is $383, $4,596.  ROI = infinity!  You pulled out all of your money and end of the day have zero invested.  Beautiful, isn’t it.

 

Maximize Pulling Cash Out:  Refinance the max amount, 80% of appraised value.  $185,000 ARV x 80% = $148,000 loan.  After you pay off the Total Project Cost ($129,166), you net $18,834.  Cold. Hard. Cash.  Yum!

Your monthly mortgage is $707.  Earning you $293 per month.   Or, $3,516 annually.  Which is $1,080 less per year than Maximizing Cashflow.

 

Manage Your BRRRR Investment Properties

When you start looking for renters, look no further than Burbz for assistance.  Burbz offers free software for landlords.  You can self-manage or hire management through our platform.

Rest easy at night knowing online rent payments go directly to your bank.  Take advantage of our free rental history reports to properly screen tenant

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