BRRRR Real Estate Investing Strategy Explained
One of the best real estate investing systems or strategy is called the BRRRR method. What exactly does this acronym stand for you ask?
Buy, Renovate, Rent, Refinance. Repeat.
The idea is to repeat this process several times over a 5 to 10 year period and eventually you’ll have acquired several properties that pay you enough monthly income to quit your job and pursue real estate investing full time if you wish.
Let’s dive deeper into the BRRRR method and look at some examples with math.
BRRRR Method Step 1 – Buy Real Estate
You’re going to need enough cash on hand to purchase the property plus fund the renovations. Start saving as much as you can from each paycheck at your job if you have less than $50,000 in your bank account.
Depending on which real estate market you live in, foreclosure properties and distressed properties can sell for under $30,000 and then you’ll have $20,000 or more left to get started renovating the place.
If you’re in a bigger city/market, properties can start off at $100,000 on the low end and get as high as several million dollars.
Usually in the Midwest (Michigan, Ohio, Indiana) you can find properties for sale under $50,000 while in cities like Miami, Los Angeles, Washington DC, and Seattle you’re not going to find much inventory below $100,000.
Once you’ve purchased the property, move on to step two of the BRRRR Method.
BRRRR Method Step 2 – Renovate the Property
During the 30-45 days you have between an accepted offer and closing, you should have the real estate agent let you into the property several times to inspect it more thoroughly so you know from A-Z what needs repaired once you officially take over the property on closing day.
Call up different contractors (roofer, plumber, electrician, painters, etc.) to walk through the property with you and quote you for different repairs.
Make sure to get multiple quotes for each service so you can make the best use of your money and not overpay.
Or if you don’t want a hands on approach, consider hiring a general contractor to walk through the property with you and let him/her manage the renovations with their crew of contractors they use.
We prefer to do a lot of the work ourselves to save money since we have the time and plus we enjoy working on the property.
Down the road, I will probably remove myself from the work and start outsourcing more. It will increase my overall costs, but also frees up my time so I can focus on more deals and scaling my portfolio using systems.
Jobs you could do yourself instead of outsourcing to save some money include:
- Demolition & Removal of Trash
- Stripping Wall Paper
- Patching Holes with Drywall Compound
If you plan to build anything or add an addition to the property make sure to check with your city about getting the proper permits. Your general contractor should be able to cover this if you’re hiring a GC to manage the renovation.
BRRRR Method Step 3 – Rent out the Property
Once you’ve neared completion of all renovations, begin advertising the property for rent.
- Post ads on Craigslist
- Place the property for rent on Zillow, Trulia, Homes.com, etc.
- Use a real estate agent to list the property for rent on the MLS (if necessary)
- Place a For Rent sign in the yard
Then set up a voicemail system that automates the information process to save you time.
In other words, set up a phone number that takes the caller straight to voicemail, where an automated recording plays, giving them all the information about the property.
This will save you the headaches of having to answer phone calls all day long repeating yourself to prospective tenants, many of which won’t actually follow through with setting up a showing.
Also include in your voice mail a website address they can visit to download an application, schedule an appointment to see the property, and information about how to submit a credit report to you.
Having a website for your real estate business is super important if you want to have automated systems in place that save you time and make investing in real estate more passive.
You can also hire a property manager to manage renting out your properties, but this isn’t recommended until you’ve grown and have acquired several units.
Property managers will charge a fee of 8 to 12% of your gross rental income which makes the fees hard to justify until you are overburdened with too many properties to manage yourself.
Most investors can handle managing 5 to 10 single family homes by themselves before needing assistance.
BRRRR Method Step 4 – Refinance
Now you may be thinking, “why don’t I sell the property as a flip and cash out for my profits?”
This investing strategy is focused on building “passive income” or “job replacement income” so the idea is to acquire as many rental units as possible so you have a diversified monthly income that can allow you to quit your job and live full time off your rental properties.
If you flip each property, you have to keep finding more deals and it’s no different than having a job. Your income isn’t consistent. When you stop flipping, the income stops as well.
With rental properties, you get the best of both worlds. You can refinance to pull out your profits, and then use them to go acquire the next rental property without giving up the current property.
This allows you to earn rental income that pays off that mortgage you take out, and eventually you’ll own the property 100% again.
In the mean time, move on to finding property #2 with your cash from the refinance and begin building a portfolio of properties over a 5 to 10 year period.
Math Example of the BRRRR Method
Now that you understand the different steps of the BRRRR method for real estate investing, let’s show you some numbers in an example scenario. But as a disclaimer, these numbers are just an example and may or may not be possible in your market depending on how inflated prices are.
Investing in the Midwest Example:
I’m going to use my first two properties I acquired at age 20 and age 22 for this example scenario. We found property #1 for $29,000, spent roughly $12,000 on renovations, and had a sale price of $120,000 to our tenants.
I’m guilty of not following the BRRRR method but it was due to my age and employment history that didn’t allow me to get loan from the bank yet so the property got sold for profits to use to acquire a 3 unit building.
Using the $120,000 value we can assume the bank would have refinanced at 70%, leaving 30% of the equity in the property.
This means we could have pulled out $84,000 cash to use to acquire more rental units with. Seeing that our expenses were $41,000 (purchase + renovations), we can assume that this $84,000 would have gotten us two more deals of similar nature to the first deal we found.
Renting the property out for $1,000/month, we would have been able to easily cover the mortgage payment for an $84,000 loan and still have plenty of cash flow to cover property taxes, insurance, and maintenance expenses each year.
All of the left over cash flow can be saved away in the bank account until it accumulates enough to acquire more properties.
Next we could have used part of that $84,000 from the refinance to acquire our 3 unit building for $32,000 and the remaining $52,000 gives us plenty of cash for the renovations.
Assuming we only need $35,000 for renovations, our bank account would have $17,000 to apply to another property purchase.
Plus the monthly rental income we’re saving up from property #1 would add to this balance every month until we have enough saved to target another $20,000 to $30,000 property.
Our 3 unit building would get valued by an assessor at roughly $250,000 (I spoke to one and walked through the numbers).
Refinancing at 70% again would allow us to pull out $175,000 in cash, bringing our bank account balance to $192,000 plus any accumulation of rental income from property #1 and property #2.
Let’s assume it’s year 3 now. We’ve got two properties so far from Year 1 and Year 2 bringing in almost $4,000/month in rental income. We’ve also got $192,000 cash in our bank account to use to acquire 4 more units with.
- Property #3 = $35,000 + $15,000 in renovations
- Property #4 = $32,000 + $16,000 in renovations
- Property #5 = $26,000 + $9,000 in renovations
- Property #6 = $38,000 + $20,000 in renovations
Total cash spent on these 4 new properties = $191,000
Gross Rental Income Breakdown:
- Property #1 = $1,000/month
- Property #2 = $3,000/month
- Property #3 = $1,100/month
- Property #4 = $1,000/month
- Property #5 = $800/month
- Property #6 = $1,200/month
Total Rental Income = $8,100
Let’s catch up where we stand at this point from a cash perspective. Property #1 and #2 are both on 70% mortgages and Properties #3 through #6 are all 100% cash.
We could at this point refinance all 6 properties under one blanket loan if you can find a bank offering such loan, or refinance properties #3 through #6 on individual loans.
Ideally, a blanket mortgage is best because you save money in lender costs and points each time you have to refinance. Plus the biggest benefit is you only have one mortgage payment to worry about paying each month instead of 6 payments.
Property values include:
Total value of portfolio – $825,000
If we could get all 6 refinanced at 70% on a blanket mortgage, we would have $577,500 in cash to use to acquire more rental properties.
The loan payment for a $577,500 is roughly $2,700 which is about 1/3 of our monthly cash flow ($8,100) from all the rental properties. This leaves $5,400 to cover taxes, insurance, vacancy risk, repairs, etc. so we are still in a healthy zone.
And if you’re still working a job, making $5,000 to $10,000 per month, then you should be able to cover any expenses if your units happened to all go vacant at the same time.
To conclude today’s BRRR method, the final step at this point would be to use your $577,500 to go after multi-unit properties, which I talk about flipping apartment complexes in this article.
Maybe you could find a 10 unit apartment building for $400,000 and use the remaining $177,500 for renovations ($17,750 per unit) with any left over cash being a safety net that sits in your bank account to cover mortgage payments, taxes, etc.
As you can see, the BRRRR method is powerful when done right. You only needed $50,000 to acquire the first property and then you were able to use the profits plus the original $50,000 to secure property #2. Then you used profits plus your original $50,000 to acquire properties 3, 4, 5, 6, and so on.
Each property was only leveraged at 70%, keeping your mortgage payments reasonable and in control in case of a downturn in the markets. Every year the mortgage leverage would be decreasing as tenants pay you rent that gets applied to the mortgage balance.
Over 15 – 30 years all of these properties could be paid off, restoring $800,000+ in equity that is 100% yours should you go to sell. And you’d be living comfortably off of the rental income.
How to Buy Your First Investment Property
If today’s blog post inspired you to get into real estate investing but you don’t know where to start, check out more articles from my blog that have lots of educational lessons and tips.
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