Hi, I’m your host Matt Jones and this is the real estate investing roadmap podcast - in this episode we’ll be talking about one of the most powerful and most popular ways to invest in real estate - The BRRRR strategy. Because of its popularity there is a solid chance that you already know that the BRRRR strategy stands for Buy, Renovate, Rent, Refinance, Repeat but what you probably don’t know is how to execute this killer option for investing in real estate. No worries, when we finish here today you’ll know exactly what you need to do in order to execute the BRRRR strategy at a high level.
Before we dive into the strategy itself I want to say a few things about the impact of doing BRRRR deals and about the positives and negatives of this strategy:
First, personally this strategy helped me start with a $70k home equity line of credit and turn it into 26 rental units. The best thing about the BRRRR strategy is that it lets you re-use your investment capital over and over again. Many people, including me, don’t start with a ton of money when they get into real estate investing and growing a real estate portfolio can eat through even a very large pile of available money if you don’t take some steps to reduce the need for down payments or find a faster way to replenish the money you have. The BRRRR strategy is about replenishing your money. Finding no or low down payment deals or loan options would be a multiplier if combined with the BRRRR strategy but for most people it’s more difficult than finding a property that you can BRRRR.
I don’t want to oversell the BRRRR strategy so I’m actually going to cover the negatives of the strategy before the positives. So, what isn’t great about the BRRRR strategy:
- In a sellers market like we’ve been in the last few years it’s harder to find deals that will work for the BRRRR strategy. The first and most important part of the BRRRR strategy is the B, buy the property right and you’ve done half the work.
- The BRRRR process takes time and In a rising interest rate environment you can have a hard landing if you ran your numbers at a low rate and then rates rise significantly before you can refinance. This could really eat into your cash flow or turn a marginal deal into a negative cash flow deal.
- The BRRRR strategy can eat up a lot of your personal time depending on how you do it, what kind of team you have in place and how that team performs.
Ok, let’s talk about each step in the BRRRR strategy more in depth.
The B in the BRRRR strategy stands for BUY but that doesn’t tell the whole story. For the BRRRR strategy to work you MUST find a good deal! So buy but buy at the right price. I’ve reviewed how to run your numbers in previous videos so I wont belabor the point here but it’s vitally important to a successful BRRRR investment that you run your numbers on the front end. While it is possible to find something turn key that works as a BRRRR it’s unlikely. Most deals that work as a BRRRR investment are value add deals meaning that they need some work or maybe the property is in good shape but you are going to make changes to the property like adding a bedroom or bathroom. So, when you are looking for a property to BRRRR you are probably looking for a value add deal.
I’ll take a moment to point out that if you don’t have the ability, budget, interest or time to take on a value add property then you need to ask yourself if the BRRRR method is really the best investing strategy for you. The BRRRR strategy is powerful and it sounds almost too good to be true which sucks people in BUT, like any strategy, it’s not right for everyone. We’ll cover the 4 R’s of the BRRRR strategy next to help you figure out if the BRRRR strategy is right for you or if you might be better off with another strategy.
The first R in the strategy stands for Rehab. This is where you add value to the property. There are lots of different levels of rehab or renovation so think about what you would be comfortable with and start there. My first renovation was on a 104 year old house that had been sitting vacant for 12 years and was owned by hoarders. While I learned a ton it wasn’t a great choice because it was very stressful and I definitely wasn’t efficient with my time or money because I was learning at every turn and it felt like there were about 1000 turns. Finding something dated that you can make modern is a great place to start. These tend to be more cosmetic renovations. If you’re comfortable with that you might move on to something that has significant deferred maintenance and neglect. Still too easy? Opening up a wall, converting an existing space into an extra bedroom or bathroom and more significant projects are all available to you. Add ons are another option for more experienced investors. There are a few items that I always advise caution on though: The first, significant termite damage. It’s hard to know what it will take to fix significant termite damage until you have opened up the walls and generally you don’t get to do that until you already own the house so big time termite damage could be a profit killer and budget buster. The second, foundation damage. Foundation damage can range from relatively simple to fix to catastrophic. While it’s certainly not something to avoid forever if you are an ambitious investor I would recommend avoiding it for your first, or first couple, of rehabs. Finally, extensive fire damage. This is another one that can snowball on you and I personally wouldn’t touch it until I was very comfortable rehabbing properties.
Ok, if you’re still with me we are on to the second R in the process which is RENT. This isn’t the most complicated part but I do want to point out a few things here. If you are hiring a property manager you should have interviewed several and made your choice on who to move forward with during the Rehab process. Don’t wait until now to start looking for a property manager. Whether you are self managing or hiring a property manager there are a few important things to do when you are ready to rent out your property. 1) Make sure that you have full coverage insurance. It’s not uncommon to have a builders risk type of policy during the renovation and that isn’t meant to cover an occupied unit so you’ll want to update your insurance now. 2) Get the unit in tip top shape. Don’t be one of the landlords who starts advertising the unit while it’s under construction or who gets fatigued at 90% and leaves the detail work undone. You want to get a good tenant who is well qualified and will pay you top dollar. That means you need to offer them a quality home to rent. 3) I like to have professional photos done when the reno is done and before the first tenant moves in. It’s great to have before and after photos to show the bank if needed but also to show that you are an experienced investor with a track record of success as you look for new partners and lenders in the future. 4) When you find a good tenant, be sure that you sign a long term lease. Typically the lender in the refinance step will want to see a long term lease in place so don’t go month to month and don’t go verbal when it comes to the lease.
The third R in BRRRR is to refinance. One of the key parts of the BRRRR strategy is refinancing to pull the cash you put into the deal back out. By pulling the your cash back out of the deal you have the money to go do another deal. If you successfully pull your money out each time then having the downpayment to keep investing is never a problem. To be candid here, not all deals will allow you to pull 100% of the cash back out with a refinance. If you didn’t create enough equity through your renovation or you didn’t get a good enough deal when you bought then you will likely have to leave at least some money in the deal. That said, ending up with $10k in a property and $40k back in your pocket still gives you more options and power than leaving all $50k tied up in the property. The terms of your financing are really important. I’m not sure that all investors understand that, they just get the first loan they can get approved for and sometimes they leave too much money in the deal or they incur future risk and expenses because they used the wrong type of financing. Personally, I didn’t understand the value of quality long term financing when I was getting started. Many of my loans were commercial loans for 5 years that would have to be refinanced. As a new investor and new real estate agent those were good loans for me to get started. Rates were relatively low and didn’t seem likely to change much. Well, I learned my lesson there. Thankfully, I bought good deals and have solid equity so it hasn’t been an issue but I probably did leave some money on the table. Since then I’ve learned about DSCR loans, go watch my episode on investment loans explained if you don’t know about DSCR loans, and I’ve come to wish that I had used more conventional 30 year loans before interest rates rose.
The final R is for repeat. Because you have your capital back after the refinance you can now go buy your next deal and do it again!
The BRRRR strategy isn’t for everyone but, in the right hands, it’s an incredibly powerful investing strategy.
Thanks for joining me and be sure to hit that like & subscribe button for more value loaded real estate content!