BRRR Method: The Best Way To Invest In Real Estate
Intro
If you're seeking to invest or try out a new strategy, the BRRR method is a game changer. I was lucky into finding a partner early in my career who helped me wholesale, and through wholesaling, I fell in love with the BRRR strategy. I started investing in my thirties and as that old saying goes "The best time to invest in real estate was 20 years ago, the second best time is right now" I always felt as though I was not doing enough, I could not save fast enough for the next investment.
With this strategy, I was able to recycle my capital. I would use it over and over again until I felt like I had finally enough properties under my belt.
If you are looking to invest, take a quick read and check out if the BRRR method is for you!
You might also like "Guide To Co-Wholesaling"
Key Takeaways
In this article we will go over the following:
The meaning of BRRR.
What is the BRRR method exactly?
A real-life example of a BRRR I completed.
We will break down every individual step.
I will provide a few great calculators you can use as well.
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BRRR Meaning
BRRR simply stands for buy, renovate or rehab, rent, and refinance. You will sometimes see it with an additional R at the end BRRRR, the final R stands for repeat.
BRRR Strategy and Example
This strategy has been around for a long time, Brandon Turner of BiggerPockets is the first to coin the term BRRR. This is one of my favorite investment strategies as you can recycle your capital once you refinance and purchase another investment afterward to repeat the process. In my first year, I was able to buy 2 properties which was huge for someone who only had 10K in capital. I was able to make this possible by having a money partner who invested the down payment and renovation costs.
Here is the breakdown of my very first BRRR:
Purchase Price
I purchased my first deal off-market through a wholesale deal. The purchase price came out to $105,000.
Renovation Costs
The renovations were quite extensive, nothing structural but we installed a new kitchen, gutted and updated 1.5 bathrooms, new paint all around, new flooring all around, new doors to all bedrooms, new shingles, and many other miscellaneous small repairs. The total cost of repair came out to $55,000. This price includes the holding costs and the wholesaling fee.
Rent
The rental is found in a C-grade area and rents are not great, this is a 4 bedroom and 2.5 bathroom home which is approximately 1300 sqft. The property currently rents out for $1,495/month and the tenant is responsible for all utilities.
Refinance
Once all the work was completed, the property was appraised at $230,000. I refinanced taking out a 80% LTV, which comes out to $184,000. So we will first deduct the new loan from the owing initial loan $184,000 - $84,000 = $100,000.
So now I have 100K left in my account. First thing is first I paid back mu investors (with interest). My investor invested a total of $57,100 and the agreement was 1 point with a 10% annual interest. This project took 90 days from start to finish which means I owed this investor approximately $2000 in interest plus the investment which comes out to $59,100.
Once I returned my investor's investment and paid them their interest I was left with $40,900. and the property cashflows for $100/month. Not a terrible first go at it.
Check out my Resource Page for some of the top software to help you on your Real Estate Journey
Buy Investment Property
The first step to BRRR is to purchase an investment property. The first step is probably the most difficult as you need to find the "right" property that fits your numbers. Before even looking for a property you need to know what kind of property meets your needs. When using the BRRR method, you are looking for a fixer-upper. Something outdated, not well maintained, hoarder homes, and/or just something that is way below market value. Check out my article on "Hoarder House Whoelsaling" for more detail on hoarder homes.
Before putting in an offer you will first need to know the after-repair value of the home, your renovation costs, your holding costs, and any profit you may want to make, and from all of this you can work backward to find the number that works for you.
Here is a simplified example of how to work backward to find your number.
The prospective property has a conservative ARV of $390,000.
The renovation budget to meet the home's full ARV potential will cost you $70,000.
Your holding and closing costs come up to a total of $7,500.
You would like to make a profit of $5,000.
With an 80% LTV the property will refinance at $312,000.
Deduct the reno cost, holding costs, and profit.
$312,000 - $70,000 - $7,500 - $5,000 = $229,500
This tells us that $229,500 is the absolute maximum we can pay for this property.
Renovate or Rehab
The renovation or rehab is not as difficult as the first step but this step requires someone good with timelines and budgeting.
If you only give yourself enough holding costs for 3 months, anything over that 3 months will start to take away from your profit.
It's also the same for your budget. If your budget was for $70,000, anything over, comes from your profit, possibly even your own money if you go over.
Rent The Property
Now that the property is completely renovated, some banks want to see some rental income before they will consider a refinance. Also, having rental income could give you better chances to qualify for a better interest rate.
Whether you choose to self-manage or hire a property manager, the time it takes to fill out your property is still dipping into your holding costs. So make sure to have it filled up as quickly as possible and that the rent you will receive will cover your mortgage, taxes, insurance, vacancies, and maintenance while still having some left over for positive cash flow. Check out my article on tenant screening if you choose to self-manage.
Refinance The Rental Property
Now comes the most nerve-wracking part, the refinance. Assuming your numbers work, the appraisal goes well, and you have good credit all of this should be a breeze. I typically will go to an A lender but I always have a backup plan and so should you.
If an A lender will not refinance your mortgage and you have all your capital stuck in the property, or worse an investor's money, one of my alternative exit strategies is to put the property up for sale. As long all your numbers are correct you should make a profit even considering your realtor's cut and additional holding costs.
You can also choose to refinance through a B lender with higher rates, this would be a short-term solution until you can make it work with an A lender.
BRRR Calculator
There are several great calculators out there to help you feel confident in your numbers and to make sure you don't offer more than you should
Excel
I started the same as most investors do and used Excel. It was great to start with, but I found myself making unforgivable mistakes. Excel works in a pinch but there are so many tools one can use.
Bigger Pockets
If you know of, or are part of, the Bigger Pockets community you would know that they are a great asset to have. Not only do they have like-minded individuals who are ready to share at any given moment, they have amazing calculators. These calculators are not free, you do need a membership and I found myself just not utilizing Bigger Pockets as much as I should so I eventually unsubscribed.
DealCheck
Eventually, I found my calculator of choice, DealCheck. I started with the free version which was incredibly useful, after almost 6 months of using them for free I finally upgraded to take advantage of their extra perks. But it's always great to just try it out first.
You might also like "Mastering DealCheck"
Outro
As you embark on your BRRR journey, remember that diligence, patience, and strategic planning are your greatest allies. Whether you're a seasoned investor or just stepping into the world of real estate, the BRRR strategy offers a dynamic framework to achieve your financial goals and build lasting wealth.
As you navigate the buy, renovate or rehab, rent, and refinance cycle, don't hesitate to leverage resources, calculators, and communities like DealCheck and BiggerPockets for guidance and support. Stay adaptable, stay informed, and most importantly, stay committed to your vision of financial independence through real estate investment.
With knowledge and determination, go forth and conquer some real estate deals with the transformative power of BRRR. Here's to your success, your growth, and your thriving portfolio.
Happy investing!
Check out my Resource Page for some of the top software to help you on your Real Estate Journey
FAQ
Can You BRRR In Canada?
Yes, you can absolutely BRRR in Canada.
What are the downsides of BRRR?
There are a few downsides or risks to consider when you utilize the BRRR method. You will need a good amount of capital to start considering the down payment, closing costs, holding costs, and renovation costs. There are also some market risks, your numbers may dictate your ARV is a certain amount and that can change during the renovation period. Another item to consider is unforeseen issues when doing the renovations.
Is BRRR a good strategy?
BRRR is a great strategy used by many investors, it is a great way to pull out as much initial capital as possible and re-use it for another investment property.
How does a cash-out refinance work?
After renovating the property using personal funds or investor funds, you have it appraised to establish its increased value. With this new valuation, you apply for a cash-out refinance with a lender, leveraging the higher property value as collateral. If approved, the lender provides a new mortgage loan surpassing your existing mortgage balance, and you receive the surplus amount in cash at the closing.