If you're new to real estate investing, you should familiarize yourself with the BRRRR method. Like "flipping," which you may have seen on various HGTV shows, BRRRR is a popular acronym among real estate investors that stands for Buy, Rehab, Rent, Refinance, Repeat. Anyone can employ this strategy to generate passive income and grow their real estate portfolio.
The BRRRR Method Step-By-Step:
The first step to any deal is finding a potential property to buy. If employing the BRRRR strategy, you'll want to seek out properties that can be purchased at a discount and offer upside. Picture a distressed property that has received little to no renovations in the past 20-years. Once you've found one, the next step before purchasing should be to analyze the cost of the rehab, estimated vacancy loss to perform the work, and the potential increase in rental income. This allows you to determine if the project is a "go" or "no go." A quick check may be to apply the "70% Rule", which estimates the property's ARV (After Repair Value) to ensure that the property's purchase price never exceeds 70% of the ARV. If you are unable to finance the project by yourself, it’s recommended that you get in touch with a private or hard money lender that could provide you the needed capital.
Once purchased, you can start adding value to the property. This is often done by addressing the needed physical renovations, but you can also improve your net operating income by implementing annual rent increases, which prior owners may have neglected. All efforts and improvements should boost the value and desirability of the property to justify an increase in the rental price. Examples of improvements that won’t break the bank would be to renovate the bathrooms or upgrade the kitchen appliances and cabinets. Simply taking over the property and demanding a higher rent will not work.
If you're less handy, you may opt to consult with a general contractor to quote the expected timeline and cost to complete the rehabilitation. You can also connect with a Byson agent who can offer insights on market rates and trends.
When you finish the renovations and obtain the necessary permits/certificates of occupancy, you can start to lease out the vacant units and negotiate renewal rates with tenants in place. You will want to set the rent at a price that will attract tenants, but also provides you with a positive cash flow after covering the monthly costs associated with the endeavor. It would also be useful to research the rent rates of the comps - comparable properties - in the area and ensure that the price you are planning to charge is not too low or high. Finally, it’s extremely important to choose tenants that will pay the rent on time, treat your property with respect, and be a good neighbor to the surrounding individuals. This can be achieved by performing a thorough background check on the prospective tenants occupation, finances (i.e. credit score) and criminal history.
If day-to-day leasing and property management isn't in your wheelhouse, consider hiring Byson to handle everything from leasing and marketing to collecting rent.
Once you've successfully leased your property, you can show the bank the value you've added in the form of a financial statement. With an improved net operating income, you'll be eligible for a cash-out refinance, which will allow you to pull out your initial investment. Unlike flipping, this can take time. Lenders will typically require you to have owned the property for a given amount of time (which is of their own choosing), before they go through with refinancing it.
Once you've officially refinanced your property, the bank will pay you back the funds initially invested in purchasing it and renovating it. The refi-cash can now be put towards a new project. Hence, repeating the process. Considering that the profitability of the BRRRR method is largely dependent on the ability to do these projects in mass, it’s highly important that you repeat the process more than once. Achieving this will not only generate additional cash flow, but as you repeat the process over and over, it will eventually become familiar and each project should only become easier every go. No obstacle will seem intolerable and the turnaround time to complete a project will quickly diminish.
The advantages and disadvantages of BRRRR method are as follows:
- Passive income - The BRRRR method is proven to provide great ROI for real estate investors if performed correctly. As it’s suggested, you should also try to achieve economies of scale with the method, which would help decrease overall costs and thus, increase total ROI.
- Requires little upfront capital - You do not need to be a millionaire to get into real estate investing and make money. Thanks to the ability to take out loans and refinance the property, the capital originally invested should be insignificant to the return it provides.
- Portfolio growth - The BRRRR method can allow anyone to begin or continue growing their real estate portfolio. If performed correctly, you will eventually own multiple rental properties that are providing you with a steady cash flow every month! You will also always have the option to sell these properties if you ever want or need to completely separate with the property. Plus, in such a case, you will likely sell the property more than you purchased it for, as real estate typically appreciates over time!
- Unexpected costs - Rehab costs and interest rates are always subject to fluctuation. This could certainly mean a decrease, but due to inflation, it’s likely that these costs will if anything increase over time. Just don’t forget, any costs you incur to upgrade the property, will be absorbed in the value of the property, as it isn’t simply a sunken cost.
- Competition - There is a lot of opportunity in the real estate sector and this isn’t unknown. You will find that there will be fierce competition for certain properties, so you must ensure that you are doing your research and due diligence. When the right property comes across your plate, it shouldn’t be a question for whether you fight for it or not.
- Time - Purchasing the perfect property, finding a lender, performing rehab on the property, and many other steps of the BRRRR method take a significant amount of time. As a real estate investor, you must take this time into consideration and decide whether the time it takes to achieve the possible ROI is indeed feasible for your situation and needs.
As with any real estate investment strategy, there's risk and reward. The BRRRR method is not infallible. Unexpected issues, increasing costs of goods, unfavorable interest rates, and external market changes can always impact your bottom line.
However, implemented successfully and with the right team, this strategy can create a steady passive income stream to increase cash flow and lend itself to portfolio building.
If you are considering undertaking a "BRRRR-like" investment rental property in New York or Colorado, contact Byson to be connected with a knowledgeable agent ready to work for your best interests.