What is BRRRR? No, it’s not the sound you make while shoveling snow in winter – BRRRR is a popular investment strategy that involves purchasing properties that have great potential (‘diamond in the rough’ as they call it), repairing them, leasing them, refinancing to regain your investment, then repeating the process. Done correctly, the BRRRR strategy can leave you with multiple rental properties while reaping the benefits of house flipping.
Learn more about the five steps you’ll need to follow in BRRRR along with how this type of investing strategy can be used to generate wealth.
The foundation of the BRRRR strategy lies in the initial property purchase. While most homebuyers look for a good deal, this needs to be a great deal – one that doesn’t necessarily show until it has undergone some refinement (in other words – ‘fixer-uppers’ or ‘diamonds in the rough’). A popular rule of thumb is to pay for 70% of what the property will be worth after renovations.
Financing the first purchase may present the biggest challenge. Lenders may be unwilling to loan on these types of properties. For this, you’ll probably be looking at cash or home equity.
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The next step is to renovate the property to add value. The key in this step involves using materials that are durable and can sustain long tenancy periods so you’re not spending additional money to fix tenancy-related issues. The goal here should be to focus on which renovations would add the most value to the property and prioritize those first. For example, converting a two-bedroom flat with a laundry room into a three-bedroom adds a significant amount of value to the property and should be placed first on your project list.
If this is the first property being utilized as part of the BRRRR strategy, you may want to consider renting the property first to increase the chances of refinancing for the next property. It is critical to screen tenants to ensure your property is well cared for.
When it is time to re-assess the property once the decision has been made to refinance, it is important to notify the tenant in time so that they can prepare. You want your property looking its best so that it will get the highest appraisal.
Refinancing is key to the BRRRR strategy. Through refinancing, the investor can free up cash to purchase another property. Most lenders will refinance a property for around 70% of the value of the property. Refinancing a property with a low-interest, long-term fixed mortgage loan will pay back your original investment and will allow you to follow through and repeat the strategy.
With the funds acquired from the refinancing phase, you can then repeat the process. The end result is multiple stabilized rental properties that provide a continuous cash flow and equity value that can increase with time.
The BRRRR strategy is a great way to build wealth in real estate. When you want to cash out on the added equity from the rehab phase, you’ll need to sell the property. However, listing properties and selling a large asset like real estate can come with huge costs. At the time of sale, the best way to preserve equity and minimize transaction-related expenses is through the flat-fee real estate model.