The BRRRR Method

The BRRRR method has been used in real estate to make people A LOT of money for a long time but the fancy acronym came around recently. BRRRR stands for Buy, Rehab, Rent, Refinance and Repeat. The general jist is you buy a run down house, fix it up, place a tenant, pull out all the money you put in and do it again.

The goal is to pull out all the money you put in but the dream is to take out more money and basically be paid to buy a house!

Sounds too good to be true? I'll explain it all..

Besides house hacking this is my favorite strategy in real estate! Just the whole idea of being able to purchase a house for free or to even be able to recoup some money at all is great. To buy a rental property as an investor you need to put 20-25% down and it can be hard to save that much each time. This is what I did with deal 2, and I am still waiting to build up enough money to rehab it so I can pull my money back out. Which is hard when I'm currently trying to rehab deal 3. 

The BRRRR strategy is nothing new but was typically done on multifamily housing, like apartments.  The strategy was given the BRRRR name by Brandon Turner of Bigger Pockets and the concept can be so complex that it required a full fledged book written by David Greene. If you are interested in learning more here is the book, I've listened to it, and highly recommend it!

​Here is how it works!

BUY
Have you seen those gross houses? Like that ones with weeds 6 feet high, pet urine stained carpets, and haven't been updated in years? Yeah, you gotta buy one of those! 

​The goal is to buy a house that is distressed or significantly below market value. Ways to do this are to send out letters or call property owners of a house that is in poor condition, work with wholesalers (people finding these properties for a fee), or look for these properties on real estate websites (Realtor.com, the MLS (Multiple Listing Service), etc.)

For this step you will most likely need to buy the house with cash or from a hard money lender. A hard money lender is someone who almost acts like the bank and will lend you money at a specified interest rate. The reason you'll have to purchase the house this way is because the property you buy may be in such bad condition the bank doesn't want to lend money on it.

REHAB
This is the most important step! You are going to need to create a budget that will allow you to get the most for you ARV (After Repair Value). That is what the property is worth once it's all done up and fancy. This process can be challenging to know what everything will cost, getting good contractors, and knowing the best way to increase it's price.  The things that will add the most value are adding more square footage like a bedroom or bathroom. You should try to buy a 2 bed 1 bath house and convert a den into a bedroom, or add a bedroom and bathroom in the basement. You'll most likely need to repair things like the floors and cabinets and most certainly paint. 

The goal of this step is to be all in (purchase price of the house + rehab) for 75% of the ARV. Need an example? If you bought a house for 50k and put 25k of rehab into it you'll want it to appraise for 100k. If you bought a property for 60k and put 30k into the rehab you'll want it to appraise for 120k. 

The reason you want to be all in for 75% of the appraised value is because that is how much you'll be able to get back in a cash out refinance. ​​

RENT
This part is pretty self explanatory, whether you are the landlord or you hire a property manager you'll need to place a tenant in the unit. The reason you'll want to do this is because it makes the property more attractive when you go to a bank and ask to refinance the property as it is already making income and should cover the mortgage easily. ​​

REFINANCE
You'll need to be working with lenders in your area to be able to get a cash out refinance. Start building these relationships early on in the process. You should work with local banks or credit unions as they may be easy to get something done. You'll also want to explain what you are doing or mention up front if you are an out of state investor because that might cause some hesitation on their end. 

As we talked earlier the hope is to be able to be all in for 75% of the ARV. This will allow you to hopefully pull out all of your money. What happens if you aren't able to pull everything out? That is perfectly okay!

If you purchased the property in cash you can easily hold the property for two or three months and get all that money back you left in the deal. But let's say worse case you go over budget or your appraised value is lower than you expected. Well, you leave money in the deal but you are still getting a newly rehabbed house with a great return! 

Let's look at some real life numbers. Talking to my current property manager she is finding and completing these deals
where people are all-in around $90k, appraise around $130k and rent for around $1200.

In this scenario you are putting 90k into the house and  getting 97.5K back.  That extra 7,500 could cover refinance costs, her fee for managing the rehab since I'd be long distance. If that 90k is including all fees you may end up getting 5k back.

I’m not sure how to calculate the return on an investment when you are paid 5k to buy a house and are paid $1200 in month rent!

Speaking of, how do you measure a return of $185 per month or 2,220 per year in “cashflow” when you have nothing left in. When I put in $14,400 of total income per year on a $0 investment I get  either “error” on my calculator or infinite return.

But for fun lets say we messed it up and it only appraises for 115k, or 15k less than we hope. We can refinance out 86K and leave 4k in the deal. 

A yearly return of total income of 14,400 on a 4k investment is 360% or “cashflow” of 55%. 

Another tip - You may end up working with a commercial lender so you can have a shorter seasoning period. A seasoning period is how quickly you can refinance a property after you purchased it and it is typically 6 months to a year. If you are able to speed up the process you could potentially be doing 2-3 a year with recycling the same money. ​

REPEAT
You just bought a property, fixed it up so you shouldn't have a lot of capital expenditures (fancy word for maintenance repairs) for awhile, found a person to rent it at market value, AND got all your money back?! You are making infinite returns on your money so it is for sure time to do it all over again. As fast and as many times as possible!

Summary
This process can be challenging because you may be borrowing money at a high interest rate, you may need to wait until you've saved enough, or you can pull equity out of your house. Either way you are either going to need to have a lot of cash or a comfortability with borrowing money. You will also gain a lot of skills to needed as an real estate investor like, managing a rehab, knowing after repair values, dealing with lenders, leasing a unit and more. But, if you are able to get one deal done you'll certainly get more experience for your next one, improve your process, and on your way to A LOT of money. If you are buying a house and refinancing out 90k of a 120k property you are gaining 30k in equity PLUS the monthly mortgage pay down and cash flow. Do a couple of these a year and you are creating over 100k in net worth. Once you've become more comfortable with your process maybe you borrow hard money or sell one or two of the properties and get 1-3 going at a time. ​