Is the BRRRR Method a Good Fit for Every Real Estate Transaction?
Key Takeaways
- The BRRRR method involves buying a property under market value, renovating it to increase value, renting out the property, refinancing to recoup the initial investment, and repeating the process with new real estate.
- There are factors that must be considered when establishing the monthly rental rate, including making sure mortgage payments, insurance, property taxes, and maintenance costs are covered, while still making a profit.
- Ultimately, the success of the BRRRR strategy is reliant upon careful planning, informed decision-making, and the input of a team of professionals.
A popular approach in real estate investing is BRRRR — an acronym for buy, rehab, rent, refinance, repeat — allows the creation of a real estate portfolio in a relatively short period. However, is the BRRRR method a good fit for every real estate investor? That and more are explored below.
What is the BRRRR Method?
The BRRRR method involves buying a property under market value, renovating it to increase value, renting out the property, refinancing to recoup the initial investment, and using the profits to repeat the process with new real estate.
How the BRRRR Method Works
The BRRRR approach comprises 5 key components that contribute to the strategy’s overall viability.
Buy
This phase encompasses a number of steps and considerations, including assessing the property’s post-repair value and gauging the property’s rental prospects. It also ultimately involves buying a distressed property with the potential to rise in value.
This is also the time to carefully examine the property to make sure it is a sound investment and offers the opportunity to generate more equity.
Rehabilitation
In this phase, the investor prioritizes essential repairs to ensure that the property is safe and functional. Following that, they will make high value-add renovations to heighten the real estate’s worth.
Rent
There are factors that must be considered when establishing the monthly rental rate, including making sure mortgage payments, insurance, property taxes, and maintenance costs are covered, while still making a profit.
To ensure consistent revenue flow, it is important to conduct thorough tenant screening.
Refinance
There are requirements for cash-out refinance, which provides a lump sum upon refinance loan closure. With this kind of refinance, once loan proceeds pay off the mortgage — including closing costs and any prepaid items such as homeowners insurance or real estate taxes — any remaining funds go to the borrower.
Requirements for such a loan include a good credit score — generally 670 and above — and rent payments that are high enough to cover the mortgage. They also include a low debt-to-income (DTI) ratio, which is one’s monthly payments divided by their gross monthly income. Generally, a low ratio is under 36%.
Also, before a cash-out refinance can be pursued, there may be minimum limits for tenant occupancy and property ownership.
The advantages of a cash-out refinance include potential tax favorability, a relatively low interest rate, and control over one’s financial timeline.
Repeat
There are steps to follow when repeating the process, including evaluating the recently completed project to see what went well and what can be improved upon.
Using the experience and insights from the initial project, the investor can leverage the cash obtained through refinancing the initial rental property to fund more investments.
The investor should also work on building systems, since they help accomplish goals by repeating, over and over, the same process. In doing so, they reduce mistakes and stress levels. Documenting systems means less fretting about something being missed, overlooked, or forgotten.
Ultimately, the success of the BRRRR strategy is reliant upon careful planning, informed decision-making, and the input of professionals during consultations. Remember, every property is different, which is why “process” is so important.
BRRRR Method Example
Say an investor is interested in a property in an up-and-coming neighborhood. The $100,000 price is under market value because renovations are needed. The investor commences to:
- Buy. The investor buys the property for $100,000, using savings and a loan for financing.
- Rehab. Some $300,000 is allocated for renovations. After updating the bathrooms and kitchen and repainting the property, and improving the landscaping, the property’s value rises to $160,000.
- Rent. Now that upgrading is complete, the property is ready for tenants. Monthly rent is set at $1,200, which is appropriate for the area and property type.
- Refinance. The investor seeks to refinance, using the leverage of the property’s increased value. They get a new mortgage at 75% of the property’s new value — $120,000. The new loan clears the balance of the first mortgage and returns some cash to the investor, which means they partially recoup renovation costs.
- Repeat. Newly equipped with insights gained from the experience, plus equity, the investor is now set to repeat the process. Using refinancing funds, in addition to a loan or savings, they can buy and rehab another property, further growing their real estate holdings.
BRRRR Pros and Cons
As with any other kind of investment approach, there are potential benefits and drawbacks to BRRRR.
Pros
Prospective BRRRR benefits include secondary income from rental streams, wealth building through leverage of initial investment, and continuous equity growth through rehabilitation. Equity and cash can also be quickly built, and the method’s repeatable nature allows investors to systematically grow their portfolio.
Cons
As for potential drawbacks, there may be high starting costs and challenges identifying suitable real estate. Investors should also consider the relatively risky nature of real estate investing as well as the time commitment required. Further, deteriorating market conditions could hamper additional investments, and a longer time horizon may be required.
BRRRR Method Alternatives
While popular, the BRRRR strategy is not ideal for every real estate investor. Some investors are more suited than others. There also are other ways to invest in real estate without the hassles of the BRRRR approach.
Who Should Use BRRRR?
The investment approach is generally better suited for those with … risk tolerance, access to renovations capital, and a willingness to do thorough market research.
An important positive is that the strategy can be used by novice as well as experienced investors to great benefit, as there exists the potential for steady passive income.
Who Should Not Use BRRRR?
Those who cannot, or do not, wish to invest time in finding suitable properties, rehabilitating them, and then acting as landlord for multiple properties simultaneously may want to pass on using such an approach.
The strategy may also not work for those who lack knowledge and experience in real estate, nor for those who do not have a good eye for what needs rehabbing. Investors will also need to be able to assemble and work with a team of skilled experts.
If the investor determines that BRRRR is not for them, they are viable investment options in real estate in which the strategy is unnecessary.
Take the leading alternative investment platform Yieldstreet, which offers a range of highly vetted, private-sector commercial real estate opportunities that once were the exclusive province of the 1%. Such opportunities include a growth and income real estate investment trust, or REIT, and real estate equity offerings.
In addition to potentially providing steady passive income and protection against inflation, investing in real estate also serves another crucial purpose — diversification. Establishing a modern portfolio with a variety of assets, including those that are not directly linked to volatile public markets can improve returns and mitigate overall risk.
Alternative Investments and Portfolio Diversification
Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.
Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.
In some cases, this risk can be greater than that of traditional investments.
This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.
However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.
Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $5000.
Learn more about the ways Yieldstreet can help diversify and grow portfolios.
Summary
By employing the BRRRR strategy, real estate investors can build wealth and equity, and create passive income streams. However, they should consider whether they have the risk tolerance, capital for renovations, and time commitment needed. If they do not, there are other ways to invest in real estate in which the BRRRR approach is unnecessary.
Disclaimer: All securities involve risk and may result in significant losses. Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information. Diversification does not ensure a profit or protect against a loss in a declining market.
What's Yieldstreet?
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.
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