BRRRR has become a popular term for rental property purchases. It stands for Buy, Repair, Rent, Refinance, and Repeat. When used right, the BRRRR method can allow real estate investors to buy rentals cheap because they need work, and refinance most of their money out because they added value through repairs. I did not come up with the term BRRRR, but I have used this strategy to get most, if not all of my money back out on some of my rentals. To use this strategy effectively you must make sure you get great deals, know your market well, and have great lenders as well.
Why is it important to get a great deal on a rental property?
I have purchased 16 rentals since the end of 2010. All of them except for one (a turn-key rental I bought in Cleveland) were great deals. There are many reasons getting a great deal will make you more money:
- The less you pay for a house, the more money you will make every month. Some areas of the country do not have great rent to value ratios for landlords. However, if you can buy a property for 20 percent less than it is worth, that may make the property profitable.
- The better deal you get, the easier it will be to refinance the house and take money out. If the property appraises high enough, you might be able to get your down payment back, plus all the money you spent on repairs.
- The better deal you get, the more willing banks and other investors will be to lend to you. If you are buying houses well below market value, banks will feel safer lending to you and private investors won’t worry about you losing all their money.
- Buying houses below market value increases your net worth. When I buy a house for 20 percent less than it is worth, I instantly add tens of thousands of dollars to my net worth. This also makes you look better to banks, because the higher net worth you have, the more stable you look.
- It is much safer to invest in real estate when you have equity. The biggest fear most real estate investors have is losing their hard-earned money. The best way to avoid losing money with rentals is to buy them cheap, with cash flow. When the market goes down, you still make money every month and do not have to sell. If you do have to sell, it is much easier to do so when you purchased a great deal to begin with.
I talk about how to get great deals on rentals, as well as many other subjects in my book: Build a Rental Property Empire: the no-nonsense book on finding deals, financing the right way, and managing wisely.
How money should you spend on repairs on your rental property?
Some of the properties I have bought needed a lot of work and some just a little. For the most part, the more work a house needed the better deal I got. However, if you buy a house that needs too much work, it can take too much time and too much money to be worth it. I have tried to stay away from houses that need more than $20,000 in repairs before I could rent them. When flipping houses, I am willing to spend much more on repairs because I will get my money back when I sell. When renting houses it can be tougher to get your money back and you are not collecting rent while those repairs are being made.
If you are new to real estate investing, I would avoid large remodel jobs as well. It is tough for me to complete large remodel jobs, and I have been doing this 15 years. When I say it is tough for me, I mean hiring contractors and managing those contractors, I do not do the work myself. The larger remodel you take on, the more that can go wrong. I have a rule of thumb whenever doing a rehab. It will always take longer than you think and cost more than you think. Even if a contractor says he can handle a big job, they often bite off more than they can chew.
How can you refinance a house after you buy it and fix it up?
The key to using the BRRRR strategy is refinancing the property after you have fixed it up. When you buy rental properties it can take a lot of cash. Most banks will want at least 20 percent down on investment property loans. On top of putting 20 percent down, you also have to pay for the repairs, because it is rare that a bank will finance any of the rehab. On my rental properties that I bought for around $100,000, I would typically have $30,000 of my own cash into the deal. There are ways to buy with less money down, like buying as an owner occupant, but it is not easy to implement that strategy.
Refinancing means you get a loan on a house, which you already own. The process works like this:
- Find a bank that is investor friendly and will refinance your rental.
- Apply for the loan after making sure the terms and costs of the refinance are acceptable.
- Wait for an appraisal to be done, which will determine the value of the property.
- Close on the loan and collect a check from the bank.
Most banks will only refinance 75 percent of the value of an investment property. If the appraisal comes in at $200,000, the bank would give you a $150,000 loan. There are closing costs, appraisal costs, title costs, and other costs with a refinance that may total 2 to 3 percent of the loan amount. If you had no other loan on the property, you would get about $146,000 back after the refinance. If you had a $100,000 loan on the property, you would get about $46,000 back.
How will a refinance allow you to get most of your money back when using the BRRRR strategy?
Most banks have what they call seasoning periods. That means they will not refinance a home for more than you bought it for or the most recent appraisals (whichever is lower), within a certain amount of time. Most banks have a one year seasoning period and others have a 6 months seasoning period. There are a few banks and refinance programs that have no seasoning period. If a bank had a one year seasoning period and you bought the home for $60,000 6 months ago, that bank would only lend you 75 percent of the $60,000, even if an appraisal comes in at $200,000.
If you can find a bank with no seasoning period, or wait the required amount of time, you could base the refinance off a new appraisal. If you bought a house for $60,000, spent $30,000 on the repairs, and the home appraised for $200,000 you could get a loan for $150,000. Not only did you get your original investment back, but you got another $50,000 in cash! It is not easy to buy houses for $60,000 that will appraise for $200,000. A more realistic example would be buying a house for $60,000, putting $30,000 into it and it appraising for $150,000, which would get you a $112,500 loan. Since you can only refinance 75 percent of the value of the home, it is vitally important you get a great deal on any property you buy.
One issue you may run into when refinancing a rental property, is appraisals often come in lower than the owner was hoping for. Appraisals will error on the side of caution when appraising homes that are not for sale, especially when the owner just purchased the property for much less money. Do not count on the property appraising for full market value.
How do you pay for the property when you first buy it using BRRRR method?
The tricky part about using the BRRRR strategy is paying for the home when you first buy it. If you have the cash available for the purchase price and the repairs, that makes it easy. Most people will not have $100,000 or $150,000 in cash to invest in a rental property. There are ways to finance a rental until you can refinance it.
- Conventional loan: Banks will lend on investment properties, but they will require at least 20 percent down. The cost of the loan will be similar to a refinance at 2 to 3 percent of the loan amount. When you buy the property you will still need a significant amount of cash for the repairs and down payment. Conventional lenders also prefer not to have their loans paid off right away. If you pay off the loans in less than one year over and over, they may stop lending to you.
- Portfolio lender: I use a portfolio lender for my rental properties and flips. A portfolio lender uses their own money for loans, which gives them more flexibility. You will still have loan costs similar to a conventional lender, but you may be able to finance some of the repairs. A portfolio lender will not be happy if you are refinancing all of their loans right away either.
- Private money: Using private money is a great way to implement the BRRRR strategy, because you can get a short-term loan, and possibly use less of your own cash. Private money lenders may finance all of the deal including the repairs.
- Hard money: Hard money lenders also have loans that are designed to be paid off quickly, but they have much higher rates and costs. Hard money loans can be based on the repairs and the after repaired value as well, which allows an investor to put less money into the deal.
If you are financing the initial purchase with conventional or portfolio loans, it is going to take more cash and you might annoy the lender after paying off the loan quickly. When I refinanced my rentals, I waited at least one year and in some cases longer. I also refinanced my rentals with the same portfolio lender who I used to finance the purchase.
If you use private money or hard money, it can cost you much more in costs and interest, but you won’t have to use as much of your own cash. There is also a way to refinance with no seasoning period, which I talk about in this article.
Do you need to rent the home before refinancing it?
As soon as the property is repaired, you should try to rent it. The sooner you have money coming in, the better. Some lenders will base the refinance amount on the rent amount, depending on the property. If you are buying a multifamily property, the appraisal will most likely come in higher if the rent is higher. It may not matter on a single family rental if it is rented or not. Either way, you want to wait until the home is fully repaired until you refinance it, and it makes sense to get it rented right away after it is repaired.
How does the BRRRR strategy allow you to buy multiple properties?
One of the challenges of buying rentals is coming up with the cash needed. Many people save for years to come up with the money needed for one property. If you want two, five, or ten rentals, it would take forever to save the money for down payments and repairs. When you use the BRRRR strategy correctly, you can get most or all of your money out of any rental you buy, which allows you to use that money for buying the next property.
When I had 16 rentals (I sold two recently), they cash flowed about $8,000 a month or $96,000 a year. Including repairs and down payments, I have spent about $495,000 buying my houses. That does not include any carrying costs or closing costs, but many times I have the seller pay closing costs and as a real estate agent, I also make a commission (usually 2 to 3 percent of the purchase price). I assume the closing costs and commissions cancel each other out. I have refinanced seven of my properties, which gave me about $320,000 in cash back. Overall, I have spent about $175,000 to buy my rentals. The $96,000 a year I cash flow is about a 55 percent return on the money I have invested (without considering appreciation, equity pay down, or tax advantages).
I actually received more than $180,000 from the sale of my two rentals. When I look at the grand scheme of things, I have spent none of my own cash, own 14 rentals that make me $7,000 a month, and have over 1.5 million dollars in equity in my rentals. I did not use the BRRRR strategy as efficiently as some, because I waited many years in some cases to refinance, but the basic principles still apply.
The BRRRR strategy can be a great way to invest in rental properties. The hardest part is making sure you get an awesome deal, and finding the right strategy to pay for the home. It can also be tricky qualifying for loans with banks, once you have multiple rentals. House hacking and making sure your properties make a lot of money will make it much easier to find financing.