In this post, I want to explain a real estate strategy know as the BRRRR method. The BRRRR method is one of the best if not the best strategy for acquiring rental real estate properties. BRRRR stands for Buy, Rehab, Rent, Refinance, and Repeat. Here’s the run down:
This step is self explanatory. You need to get a great deal on the property you buy. You will not be buying the property using a mortgage, because it is going to be a fixer upper which will enable you to get a nice chunk of equity once it’s fixed up. Some sources of financing for this might be cash, hard money, private money, or a line of credit. A good rule of thumb to go by when deciding on a purchase price for a property is the 70% rule. The 70% rule is popular among house flippers and basically says that the max offer price on a property is 70% of the After Repair Value minus the repair costs. For example, your max offer on a house worth $100k fixed up with $30k worth of repairs would be (.7*$100k)-$30k=$40k.
The next step is to rehab the property after you buy it. By rehabbing a fixer upper, you are hopefully gaining a good chunk of equity by forcing appreciation. I wouldn’t go overboard with the rehab on a rental property, but still nice enough to attract good tenants that will take care of the place. Make sure you have a good trustworthy crew of contractors ready to tackle the project.
The next step is to get tenants in the property and start making some money every month! Make sure you screen the tenants to sort out the duds. The nice thing about this strategy is since you just rehabbed the property, there will be less maintenance and repair costs you will have to pay out on a monthly basis, thus increasing your cash flow you receive.
After getting the property rented, you want to get in touch with a mortgage lender to refinance the property and get most/all of your money you spent on the purchase and rehab back. Most lenders will refinance a property for somewhere around 75% LTV. In other words, they will lend 75% of the value of the home. For example, say we bought a house worth $100k for $40k and put $30k worth of work into it. We are all in for $70k. We then go to a bank and get a mortgage for $75k on the property. This pays us back all the money we spent and gives us roughly $25k of equity in the property! You are then sitting with a cash flowing property that has $25k in equity and your $70k back in your pocket. Not to mention, you have a nice 30 year fixed mortgage that your tenants are now paying off for you.
After you get all of your money back you are ready to repeat the process! You can do this as many times as you want until the bank cuts you off and stops lending to you. Each time, acquiring a cash flowing rental property with equity for little or no money out of your pocket. This is a method that can really sky rocket your wealth in a relatively short amount of time. You also have the advantage of being able to make cash offers on deals that need a lot of work, which buyers that need to use a mortgage aren’t able to acquire.
The most important part of this strategy is making sure you buy a good deal and use the correct numbers. You don’t want to underestimate the ARV or overestimate the repair costs of a property and be left owing money to a hard money lender because your new mortgage isn’t enough to pay them back. For this reason, I would make sure you have some extra liquid funds to use in case something doesn’t go as planned. Overall though, this strategy works fantastic if you do your due diligence and execute!