In BRRRR real estate investing, the property is treated like a flip, using short-term financing such as private money, hard money, a home equity loan, or cash to acquire and rehab. Then, after the property has been finished, it is rented out to a tenant. The owner then obtains a refinance on the property to pay off the short-term loan and turn the property into a stable,long-term, cash flow positive property.
Of course, as with all investments, the math has to work for the strategy to work. When a person goes to refinance such a property, a bank will typically only refinance up to 75% of the new value. Therefore, for you to get enough to refinance the entire short-term loan and to possibly get back your rehab money, the property needs to be worth significantly more than what you paid for it.
For example, let’s say you bought a property for $100,000. The property needs a $25,000 rehab to be rent ready, for a total cost of $125,000. You could use a short-term loan to buy the property (like hard money) and your own cash to rehab the place. Then, you’d refinance the property with a new loan from a lender. If the new lender’s appraisal came in at $160,000, they might give you 75% of that amount in a new loan, which is $120,000. This would pay back your entire short-term loan, get you most of your rehab budget back, and give you a stable, long-term rental property with $40,000 of equity at the start.
Related: Case Study: My BRRRR Deal That Went Sideways (& What I Learned From It)
Of course, this example only works if the ARV comes out at the $160,000 level. It wouldn’t be as nice if the ARV were to come in at $100,000, and the bank would only give you a loan for $75,000—not even enough to pay back the short-term loan. This is what I mean when I say the math has to work for the strategy to work. Let’s summarize some of the pros and cons of this strategy.
Potential No Money Down
BRRRR investing is one of my favorite strategies for investing without needing a lot of cash. If the numbers work out right, you could get into a deal for very little money out-of-pocket, or perhaps even none! Of course, the better the deal you can find, the less money you’ll ultimately need to provide.
High ROI
Because of the low amount of out-of-pocket cash you’ll need for this strategy to work, your ROI should be astronomical. In other words, if you end up having only $10,000 in the deal, but you are cash flowing $2,500 per year, that’s a 25% cash-on-cash return, and that doesn’t account for all the equity you built during the rehab stage.
Equity
BRRRR real estate investing allows you to build some serious equity right off the bat. Rather than owning a rental property that is worth what you paid for it, wouldn’t owning one that you have $40,000 of equity in be better?
Renting a Rehabbed Property
After the full rehab has been done, and the property is rented, you own and lease a property in Class A condition. This can help you attract the best tenants and reduce your maintenance budget on the property, making your landlording more hassle free.
The Short-Term Loan
The short-term loan you get at the beginning can be expensive, especially if you are using a hard money loan. Also, the short term on these loans can make the carrying costs expensive, possibly resulting in negative cash flow during the time you are paying on the loan. For this reason, many people use a home equity loan or cash to fund the first phase of the project, then refinance to get their cash back so they can rinse and repeat.
The Possibility It Doesn’t Appraise
Of course, if after the rehab, the home doesn’t appraise high enough, you could end up with a problem. This is why doing the correct math going into the deal is imperative.
Seasoning
The refinancing bank will likely require you to wait six months or maybe even 12 months after the original purchase before they will refinance the property. This period of time is known as “seasoning,” and most conventional and portfolio lenders require it. If your end-lender requires you to wait 12 months, but your short-term loan is only good for nine months, you’ve got a problem.
Related: 3 Critical Keys to a Successful Refinance (for the BRRRR Strategy!)
Therefore, when I use this hybrid real estate investing strategy, I try to make sure my short-term loan is for no less than 18 months. This gives me the time I need to refinance, and if something goes wrong after month 12 and the refinance won’t work, I still have six months to sell the property or hunt for a new refinance.
Dealing with a Rehab
Finally, when you use this strategy, you have to deal with the complications of a large rehab project. And trust me, rehabbing a property is not easy. Dealing with contractors, unknown problems, mold, asbestos, theft, and the rest of the headaches that come with a rehab are not fun.
In summary, BRRRR real estate investing can be a powerful way to build wealth through real estate and one of my all-time-favorite strategies. Being able to capitalize on the forced appreciation the way a house flipper would while acquiring a great rental property that will provide years of cash flow is truly getting the best of both worlds. However, the strategy is not a simple undertaking. It requires exquisite math, planning, and the ability to find a great deal. But for those willing to take on the challenge, BRRRR real estate investing can supercharge your business and set you on a path to greatness.
