How to Invest in Real Estate with the BRRRR Method
What is the BRRRR Method in Real Estate?
The BRRRR method is a real estate investing strategy that involves buying properties, renting them out, and then selling them. The BRRRR method was created by Robert Kiyosaki in his book “Rich Dad Poor Dad” and is used by many real estate investors today.
The BRRRR method is an acronym that stands for Buy, Rehab, Rent, Refinance and Repeat. It’s a property investment strategy where investors buy low-priced properties at auctions or off the MLS. They fix up the houses with inexpensive repairs and then rent them out to tenants until they can sell the property at a profit.
The BRRRR method is one of many real estate investing strategies that can help you build wealth over time.
How to use the BRRRR Method
This strategy can be used in many different ways depending on the situation. It can be used to buy properties at auction or to flip houses. The BRRRR method follows five simple steps to start investing:
Step 1: Buy
Buy a property that needs some work done on it. Buying a distressed property allows you to purchase a home in poor condition for a lower purchase price. Examples of distressed property include homes on the brink of foreclosure, or those already owned by the bank. Many homeowners on the brink of foreclosure will offer a short sale, meaning they sell the property for less than what the current owner owes on the mortgage.
When buying a distressed property, it is highly advised to calculate the after repair value of the property. This is the anticipated post-renovation value of the home. The easiest way to calculate this without engaging an appraiser, is to identify similar homes in the area and their recent selling price. Factors to take into account include lot size, age of building, number of bedrooms and bathrooms, and the condition of the home.
Step 2: Rehab
Renovate the property and make sure that it meets all of the requirements for rental properties. This will increase its value and make it more attractive for renters. Renovating a property allows short term investors to gain a profit by turning below market price homes into desirable dwellings.
Some of the most impactful home renovations are kitchen renovations, additional bedrooms and bathrooms, upgrades to the existing bathrooms, cosmetic upgrades like fresh paint, new windows and siding, and things to enhance the curb appeal of the property - like a new garage door, light landscaping, or a freshly paved driveway.
Depending on your budget, a home rehab cost can range anywhere from $25,000 to upwards of $75,000. Many will find savings by doing the labour themselves, as general contractors can drive up the cost of renovation significantly. The typical rule of thumb is a general contractor costs around 10-15% of the total project budget.
Before beginning a rehab, identify the areas of opportunity to increase value in your home; plan a budget to tackle the repairs; ensure you have the correct building and construction permits; and make sure you have builder’s risk insurance to protect you from liability and property damage costs in the event of a loss.
The third step is to rent it out as soon as possible after the purchase. This may sound like the easy part, but finding high quality tenants who will care for your property and pay their rent on time is not always easy.
A platform like TurboTenant helps to streamline the rental management process, by offering an easy way to screen tenants, market your rental, receive applications, and collect rent online. You can post your rental across the web with a single click, and most landlords report an average of 22 leads per property. Rental management systems, like TurboTenant, also offer free tenant screening with an easy-to-read criminal history, credit report and past evictions. The best part? It’s free for landlords to create an account.
With your property being efficiently managed, you are free to focus your time and energy on the last two steps of the BRRRR method of real estate investing.
Refinance your home with a low interest rate mortgage so that you can take advantage of cheap money from lenders. This is sometimes referred to as a cash-out refinance. There are often a few different ways to finance your next property purchase, such as a HELOC, conventional loan, private lender, or hard money.
A HELOC is a home equity line of credit, which means it is credit that you secure from the equity you have built in your existing property. You can access funds from the line of credit as you need, often through an online transfer, check, or credit card linked to the account. Your lender will provide information on fixed or variable interest rates, and you are able to borrow against this credit at any point in time.
A conventional loan usually requires a 20-25% down payment for a mortgage on the property. You can secure a conventional loan through a traditional bank or a local bank, which will look at your debt to income ratio and other factors in determining the interest rate and terms for the loan.
Private lenders are typically people who you know and have a financial relationship with, such as friends, family, or investors. Private lenders are a good alternative to traditional banks as you can set the terms and conditions of the loan with more flexibility, and oftentimes private lenders will also finance the cost of repair and rehab to the property. Lastly, hard money lenders often specialize in fix n’ flip financing and are familiar with the terms and process. The downside is that interest rates can be much higher than with traditional banks, which can drive up the total cost of renovation and repair.
The last step of the BRRRR method of real estate investing, is to repeat. In order to repeat the process, you will have to successfully refinance your first property in order to pull out funds to invest in growing your portfolio.
A simplified example of BRRRR financing is below:
Property purchase price: $200,000
Down payment: $50,000
Cost to rehab property: $40,000
Total investment (down payment and rehab costs): $90,000
Monthly rental income: $2,400
After-repair value within 12 months: $320,000
Refinance loan for 75% of the appraised value: $240,000
Pay off initial loan of $150,000
Cash leftover: $90,000 ($240,000 - $150,000)
The cash leftover is the same amount as your initial investment, which enables you to go out into the market to find a similar property to repeat the process, while continuing to maintain your existing property with a steady monthly rental income.
How many times should you repeat this method?
How often you use the BRRRR method depends on a number of factors, including the speed at which you can rehab a property, the terms of financing, and your ability to consistently rent your existing property. Many investors have found great success in using this method, and some as often as multiple times in a year.
The amount that you will apply this method to your own portfolio also depends on your own financial goals, risk appetite, and wealth building strategy. Some, for example, rely on real estate investing as their primary source of retirement income. Run the numbers and find the right scenario for your short and long-term goals.