Have you ever heard of the BRRRR investing strategy? It’s a fantastic method that enables you to explode your rental portfolio while minimizing your out of pocket cash. Amanda and I have used this method for years without knowing it was a formal thing with its own acronym! Here’s the skinny…
BRRRR stands for:
Buy, Repair, Rent, Refinance, Repeat
Let’s dive into it a little deeper.
This is the key to the whole strategy: Buy below market value so that you can add value quickly. It’s what you want to do with any investment, whether stocks or real estate…. Buy low, sell high. Your added value percentage depends on the rehab of the house. If you’re careful, you won’t have to drop a lot of money to get it ready to rent. Many investors use a private money lender for this acquisition.
You don’t want to spend more money than you need to. If you’re flipping, you want to spend money on lavish things such as granite countertops. But if you’re holding the property to rent it, you don’t want to “over upgrade.” The longer it takes for you to repair the property, the longer it takes for cash flow to come in since a tenant isn’t in yet. Spend money on repairs of key things: roof, windows, water heater, furnace, plumbing, electric. Those are the main components of your house and they will last many years once taken care of. Paint, drywall, and carpet can also be replaced quickly, but stay strict on not overspending.
Once it’s ready, find a good tenant! Some people self manage, but I use a property management company to handle my holdings. They are able to find great tenants who will pay top dollar and on time every month. It simplifies my involvement and is worth every penny.
Once the house is repaired and rented, go to a local bank or credit union and refinance it. Local banks are competing against the big guys, such as Wells Fargo and Bank of America, so they’ll often have great introductory rates and promos, whether it’s pulling a home equity line of credit or a cash-out refinance. They will be impressed when you show them how you’ve added to your net worth by obtaining a new property and building equity in it the right away. Let them know that your goal is to pull the money back out and leverage that to buy another property.
Do it all over again! Identify a target area where you want to obtain more holdings, then go out and buy another property!
As with any investment, there is some risk involved. Here’s what I love about the BRRRR strategy: you can minimize the risks by doing your homework. These are some good steps to take:
- Speak to a local bank to make sure you can qualify for a refinance.
- Determine what the after-repair value is by looking at recent sales comps. This is a core function our team provides all clients.
- Run the numbers properly to ensure that you’ll have enough equity to get the loan.
Though not ideal, if something comes up after the repair, you have the option of selling your property as a flip to get the money back quickly.