If you’re looking to start building a passive income through real estate investing, one way to do so is by using something called the BRRRR method.
The BRRRR investing strategy can be a very lucrative method of making money off multiple rental properties, provided you understand how to make it work best.
What exactly is the BRRRR method?
The meaning of BRRRR is Buy, Rehab, Rent, Refinance, Repeat. These are the five steps required to use the BRRRR real estate investing strategy effectively.
How the five steps of the BRRRR method work:
Buy: Start by buying a property, ideally below market value.
Rehab: Rehab (renovate) the property to get it move-in ready.
Rent: Find tenants to move in and start earning money from rent.
Refinance: Refinance the property to get enough money to buy another one.
Repeat: Do the first four steps over again to continue building passive income and equity.
The BRRRR method is good for beginners in real estate investing because it typically requires less money to get started than other types of real estate investments.
The main idea is to find a good deal on a property, then make renovations that add value and allow you to charge a profitable rental fee.
Once you get your first property rented out and are able to refinance it, you keep reinvesting that money in more rental properties to snowball your real estate assets and passive income.
BRRRR investing is popular with people who adhere to the FIRE movement, which stands for Financially Independent, Retire Early. These are a type of investors who aim to become financially independent when they are much younger than the traditional retirement age.
The BRRRR Strategy: Tips for Each Step
The BRRRR strategy sounds easy enough, but there are some guidelines you need to follow to make it really work for you.
Buy
The BRRRR method works best for properties that are listed below the average market value. This typically means that they are in need of some fixing up in order to raise their value.
In other words, if you find a home for sale for $150,000 that’s in need of some renovations, and comparable homes in the area that are in better shape are going for $175,000, this could be a good property to start BRRRR investing with.
To finance your first rental property, you will likely need to get a mortgage through a bank. The requirements for a mortgage loan can vary, but they typically require you to make a down payment, show proof that you have enough income to pay the mortgage, and have a good credit score.
After you get your first property and rent it out, you can refinance the mortgage to cover the costs of the purchase and renovations and buy your next property.
Rehab
Once you have bought a property, you’ll need to make enough renovations to bring it up to code and turn it into a desirable living space.
The condition of the property will dictate how heavy the renovations need to be, but in general you want to focus on a few key areas that offer the highest returns on your investment.
For example, you should prioritize fixing any hazards and renovating bathrooms and kitchens. Other things to prioritize include roof and drywall repairs and landscaping (e.g., removing overgrown vegetation from the property).
Rent
After you rehab your rental property, the next step is to get new tenants into your BRRRR property as soon as possible to start earning rent from them.
Depending on how involved you want to be, you may choose to do this yourself or hire a property management company to do it for you. Just keep in mind that a property management company will charge you about 10% of the monthly rent, on average.
Ideally, you want to make sure the amount of rent you charge your tenants covers your monthly mortgage payments and any other costs you have associated with renting the property.
Don’t forget to get a good landlord insurance policy to protect you and your property against accidents and liability incidents.
Refinance
With your passive rent income rolling in, you can start thinking about investing in your next BRRRR property.
Different lenders have different requirements for how long you must own a property to refinance it, so you may have to play a bit of a waiting game here.
Once you’ve owned your first rental property for long enough and have built up its equity, get it reappraised to determine how much you can refinance it for. Most lenders let you refinance up to about 75% of a property’s value.
So, if your investment property is now worth $175,000, you should be able to refinance it for approximately $131,250.
Repeat
Use the money you got from refinancing to pay off your original mortgage loan and renovations and use the remaining funds to cover the down payment for the next property — and do the whole process again!
Pros and Cons of BRRRR Investing
Pros
- Can build up enough passive income to supplement your main income or to live off of
- Lower-than-market-value properties offer potential for a high return on your investment
- Multiple properties make your equity snowball over time
- BRRRR investing is highly repeatable
- Owning multiple rental units spreads out the risks of your investments
Cons
- First-time loans can be expensive
- Renovations have a tendency to cost more and take longer than you expect
- BRRRR investing is a slow strategy that takes time to build cash flow
- Being a landlord is a lot of work, especially with multiple tenants
- As with any investment, there’s always a financial risk
Tips for Beginners Using the BRRR Method
If you’re interested in getting started with BRRRR real estate investing, it’s best to stay away from buying properties that are designated as historic.
Historic properties often limit the types of renovations and updates you can make, so they don’t work well with the BRRRR strategy.
Additionally, although you want to find homes that are in need of a little love to make them desirable, you should stay away from properties in need of major repairs. For example, don’t buy anything that has structural problems, such as big issues with the roof or foundation.
Stick to properties that will allow you to increase their value with minimal, mainly cosmetic, renovations.
Main Takeaways
If you’re someone who’s interested in real estate investing, the BRRRR strategy can be a good way to make your money work hard for you with less capital up front than other types of real estate investing.
That being said, there is always a risk with any type of investment, so make sure you follow the tips we mentioned above to make the BRRRR method work for you.
Remember to:
- Buy a cheap property that lets you add value yourself with renovations
- Avoid properties that belong to HOAs, are designated as historic, or have major issues
- Focus on making cosmetic updates in key areas, such as kitchens and bathrooms
- Make sure the rent covers your mortgage payments and other overhead expenses
