If you’re looking for a way to build your real estate portfolio, consider the BRRRR method in real estate. It’s an acronym for Buy, Rehab, Rent, Refinance, Repeat. It’s not as complicated as it sounds when you break it down, and you can use this handy calculator to crunch the numbers.
What BRRRR Stands For
Let’s look at each letter and what it means.
- Buy – When you buy a rehab property, you buy an undervalued or underpriced property that you know has potential. This requires extensive due diligence. Find out the values of the other properties in the area. What visions do you have for the home? Are the visions in line with the values in the area? What about average rent prices? The rent you charge should exceed the home’s costs so you have a profit.
- Rehab – The rehab costs play a role in the success of the home flip. They add to the home’s costs and therefore your profits. Price out the renovations before you buy the house. Are they within your budget? Do they leave room for profit? Will the renovations improve the property’s value so you have equity and will buyers want them?
- Rent – Find the right renters and sign a lease contract. Do your due diligence, screening the tenants to make sure they’ll make good on their rent and take care of the property.
- Refinance – Here’s where the fruits of your labor pay off. At this point, your home should have appreciated thanks to the rehab work you have completed. There should be a decent difference between what you paid (undervalued) and the home’s new value. Refinance to take that equity out of the home.
- Repeat – You keep the house you just worked so hard on, but now you take the equity from that house and start the process over again with another house. You use the money earned from the original purchase, so there’s no money out of your pocket, yet your investment portfolio grows.
BRRRR Method In Real Estate Pros And Cons
Pros:
- Cash flow – If you buy an undervalued property, fix it up and rent it out, you put yourself in a good financial position. You’ll have cash flow coming from the rent, which you can use to further your investment portfolio.
- Equity – Buying the first property requires the largest cash output from you. Once you build equity in your first home, you tap into it and use it for the down payment on the next home. You keep doing this to keep your portfolio growing.
- Attract good tenants – When you rehab properties, making them top-notch for the area, you’ll attract higher quality tenants who can pay the rent and keep the house in good condition.
- Diversification – Investing in one property is a good start, but it’s risky too. If your renters bail, you lose big. But, if you have other properties to offset the one vacancy, the loss has a lesser impact on your finances.
Cons
- Rehabs can be expensive – You must do your due diligence and find properties with just the right amount of rehab needs. Spending too much on the rehab diminishes your profits.
- Idle time – There’s quite a bit of idle time between buying and renting the property and then again between renting and cashing out the home’s equity.
- Value risk – If you don’t do your due diligence, you could assume the property will appreciate more than it will, leaving you with a potential loss.
Who Is The BRRRR Method In Real Estate Right For?
If you’re an investor who likes to think on his/her feet, doesn’t mind hard work, and does a lot of due diligence, the BRRRR method in real estate could be a great choice.
It’s not for the faint of heart, however. You aren’t buying a turnkey property. You buy the property to fix it up, rent it out, and keep the process going. If you’re a go-getter who doesn’t mind hard work, this is the strategy for you.
Is The BRRRR Method Right For You?
Think about what you want in an investment property. Do you envision yourself buying a home and selling it right away? Then the BRRRR method isn’t right for you.
If instead, you delight in rehab work, finding tenants, and enjoying a home’s profits then the BRRRR method could be your key to a successful real estate portfolio.
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