BRRRR Strategy in 5 Easy Steps
Start Investing with the BRRRR Strategy in 5 Easy Steps
BRRRR Strategy in 5 Steps
Real estate investors love a good acronym.
We have lots of them and one you may have heard of is the BRRRR strategy. One way to remember what BRRRR all about is to think about making some cold hard cash - brrr 🥶!
What is the BRRRR strategy?
This is a buy and hold strategy where you put your real estate investing process on repeat once you’ve got a system that works. That’s what the last R stands for: Repeat.
BRRRR can be broken down into 5 consecutive actions:
* Buy
* Renovate
* Rent
* Refinance
* Repeat
So how does this method work?
First you have to find a home that is in need of repairs. Check out our post on Flipping for a Profit, as that strategy also looks at similar properties - places that are run down, absentee landlords, or otherwise not well maintained.
These downtrodden homes have fallen out of favor of the general buying population and are waiting for someone to come in and add value by renovating and bringing them up to their optimal state.
Once the renovation is done, the idea is that you hold onto the property and generate monthly cash flow by renting it out.
Now that you’ve added value to the property and you have a lease agreement in place, it’s time to apply for a cash out refinance so you can recoup some or maybe all of your cash investment (down payment, closing costs, and renovation expenses) so that you can keep that money working for you in the next investment property.
Ready to learn the 5 steps to the BRRRR buy and hold strategy?
First let’s talk terminology since there are even more acronyms to remember!
ARV = after repair value
MAO = maximum allowable offer
70% rule = (ARV x 70%) – repair costs = MAO
Here’s how the BRRRR strategy works:
Step 1: BUY
Getting this step right is crucial because if you overpay up front, the rest of the strategy doesn’t work.
You’re looking to buy low, add value, appraise high, and get your equity out to use again.
So you have to work backward. First you want to figure out your ARV: what could this home sell (or appraise) for after your renovation?
Once you know ARV, you want to estimate your repairs. This gets easier every time so for your first one, get estimates from contractors or other investors to start.
Now that you know your ARV and your estimated renovation costs, you can back into your max purchase price by using the 70% rule.
Here’s an example of a BRRRR property we sold in La Pine:
Asking Price: $225,000
ARV: $350,000
Repairs: $42,000
MAO = ($350,000 * 70%) = $245,000 – $42,000 = $202,000 MAO
Buyer offered $180,000 cash ($45,000 below asking price) and the seller said YES!
Sometimes your MAO is well below the seller's asking price. That means you need to find out what their motivation is for selling. By understanding that, it’s possible to buy the home for your MAO.
Step 2: RENOVATE
Time to sharpen your pencil and your tools!
The most important part of this step is estimating the IMPACT of your renovations.
That means: if I choose the cheaper option, will it impact the amount of rent I can charge?
Or if I remodel the kitchen instead of adding a large patio, will it significantly increase the refi appraisal amount?
You want to be making business decisions, not emotional decisions. Here’s the difference:
Emotional Decision:
“I really like these brass kitchen fixtures that cost 5x more, they’re so trendy right now!”
“My hand-painted sink from Mexico would look sooooo good in this new bathroom!”
“I have to make everything perfect, just the way I would want it.”
Business Decision:
“Even though it’s not my personal favorite, it’s neutral enough to appeal broadly.”
“It’s functional, visually appealing, and not too niche or customized.”
“It doesn’t need to be the best, it needs to be good enough and done right.”
The success of the BRRRR strategy lies in making decisions and renovations that appeal to a broad audience and withstand the test of time.
Step 3: RENT
You’ve completed the renovation and now it’s time to rent the property to your first tenants.
Here are the 4 steps to renting your BRRRR:
1. Rent price
You need to determine your rental price. You can do this by looking at comps on Zillow Rental Manager, Craigslist, or Rentometer.
2. Description
You’ll write your property description. Be sure to include key features that appeal to tenants - updated kitchens, bathrooms, efficient systems that will save them money on utilities, outdoor spaces, pet policies, and neighborhood amenities.
3. Marketing
Now you’ve got to market your rental to prospective tenants. You can list your rental on Zillow Rental Manager, Apartments.com, and a variety of other websites.
4. Selecting Tenants
This process will depend on landlord tenant laws in your area, so make sure you understand what your obligations are. Choosing the right tenant for your property is crucial to maintaining your investment and getting the maximum cash out when you go to refinance it.
Step 4: REFINANCE
It’s time to pull your cash out of your investment so you can keep your capital working for you on the next investment.
Generally lenders want to see that you’ve owned the home for at least 6 months and it’s been rented consistently for 6 months. They’ll be looking at your lease agreements to ensure that rents are generating cash flow for the property.
You’ll need to leave at least 20-25% equity in the property after you pull your cash out, so it’s important to run your numbers and estimate conservatively.
Expect to pay lender fees for the refinance and include them in your budget. You’ll also pay for an appraisal, which will determine the amount of cash (equity) you can pull out of the home.
Another option would be pulling out a HELOC on the property. You should plan to refi at the 1- or 2-year mark.
Step 5: REPEAT
Now that you’ve done the first 4 steps, it’s time to celebrate your wins and leverage your mistakes by doing it all again!
The whole point of the BRRRR method is to systematize your investments, so as one investment wraps up and you do your cash out refi, you invest that money in the next property and do it all over again.
This way you can set up systems that make you more efficient, keep your team working, and make you some cold hard cash - BRRRR!
Ready to take that first step? Then give us a call or fill out our contact form here.
We have first-hand experience with successful BRRRR investment strategies and we will:
Guide you through every step of the process
Help you build your team
Get you on the path to creating generational wealth and passive income through real estate investing