Are people getting rich using “the BRRRR method of real estate investing”?
Quite simply – yes.
But is this possible for you and me?
Possibly. Let’s find out!
But first, let’s improve our understanding of the BRRRR method of real estate investing.
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So You Want To Invest In Real Estate?
When it comes to buying fixer-upper property, real estate investors tend to have two strategies to choose from – “buy-and-hold” or “fix-and-flip.” Both can be great retirement investments.
Many neophyte investors find house-flipping attractive due to the prospect of “fast money.”
Renovation is expensive, especially if your target market is families looking for a home to live in. Costs can spiral out of control. If the property does not sell quickly, you may be on the hook for months’ worth of mortgage payments, property taxes, and insurance payments, eating into your profit.
“Buy-and-hold” is the “safer” strategy. Property tends to appreciate over the long-term, and ideally your tenant’s rent payments will cover your mortgage and other expenses, hopefully with a little extra profit.
But this method takes patience. Other than a trickle of rental cash flow, you won’t see big cash returns until you sell the property. That sale is probably years from now!
What if you only have enough money for one down payment?
Are you stuck being the podunk landlord of one rental house for three years or more? Is there any way to speed up the process?
What Is The BRRRR Method Of Real Estate Investing?
The BRRRR method of real estate investing is an ingenious solution to help you accelerate your real estate wealth using the less-risky “buy-and-hold” strategy.
Essentially, BRRRR enables you to quickly amass a portfolio of rental properties – a dozen or more – with only one down payment.
“BRRRR” is an acronym. A clumsy acronym that evokes frigid temperatures, but it gets the point across. Here’s what it stands for:
- Buy. Use your down payment budget to acquire a fixer-upper property at a discounted “as-is” price.
- Renovate. Fix the property up. Note that smart landlords spend less on renovations than a homeowner or house flipper might, because tenants don’t need the most high-end finish-outs. Skip the granite and marble countertops. The extra rent won’t justify the expense.
- Rent. Find a qualified tenant, screen them for their criminal and rental history, and execute a lease for the newly-renovated property.
- Refinance. Not that it is renovated, your property should be worth more than you paid for it. Refinance the purchase loan to a larger loan, and pocket the difference.
- Repeat. Use the cash from the refinanced loan as the down payment for another fixer-upper property.
An Example Of BRRRR Investing In Action
Step 1 - Buy
Suppose Martha has $50,000 to invest. On Elm Street she finds a motivated seller willing to let the property go “as-is” for $150,000.
Investment property usually requires a 20% down payment, so Martha will put $30,000 down and borrow $120,000. So far, so good.
Martha knows that in its top-dollar condition, the house on Elm Street will sell for $250,000. Should she “fix-and-flip” the property? That’s a $100,000 margin!
Step 2 - Renovate
Martha decides not to fix and flip the property. She believes that to appeal to discerning homebuyers in the neighborhood, she would have to go for broke on kitchen and bathroom upgrades to get top dollar. It would cost $30,000.
Martha will only have $20,000 left after the down payment. Even if she had the extra $10,000, it would be a risky proposition. If repairs go over budget… she is in trouble!
But if she only spent $15,000 on a more basic renovation, she could make the house attractive to a tenant and charge enough rent to cover her mortgage and expenses. Martha decides to use the BRRRR strategy of buying and holding the property.
Martha puts $30,000 down, borrows $120,000 for the bank as a mortgage loan, and buys the house on Elm Street.
Her projected $15,000 renovation budget turned out to be low – the renovation ended up costing $20,000. But remember, she had $50,000 to invest. Between the down payment and the renovation she maxed out her budget, but it worked out.
Step 3 - Rent
Now that the house is renovated, Martha screens prospective tenants and finds a good one. The tenant’s rent payment covers her mortgage payment, property taxes, insurance, and ongoing maintenance costs with room to spare.
Step 4 - Refinance
Now Martha goes back to the bank and applies for a refinance loan. The bank sends an appraiser out to the property, who compares it to recent sales nearby and concludes that the house has a value of … $250,000. Just what Martha calculated!
The bank agrees to lend up to 80% of that value as a new mortgage – a $200,000 loan. Remember, Martha only borrowed $120,000 with the first loan.
Martha accepts the $200,000 refinance loan, pays off the initial $120,000 loan, and has $80,000 in her pocket! She got back her down payment and renovation cost, plus $30,000 extra!
Best of all, she still owns the house on Elm Street, collecting the rent and enjoying appreciation. In a few years, she can sell or refinance again and take out even more cash.
The Final Step Of The BRRRR Method?
Buy. Renovate. Rent. Refinance… What’s the last step?
Martha can now take her $80,000 and go hunting for another fixer-upper house – even a more expensive one in a better location – that she can buy, renovate, rent, and refinance.
Then she can do it again. And again. And again (you get the idea).
If Martha repeats the BRRRR cycle twice a year, she can acquire ten houses in five years, all drawing rental cash flow and building equity, with only her one down payment as seed money.
A typical “buy-and-hold” investor might cycle through one house in this time frame, holding it for five years in hopes of appreciation with the down payment tied up in home equity.
As you can see, this project can theoretically be repeated indefinitely, with Martha acquiring rental house after rental house with no end in sight….
How Many Mortgages Will Banks Let You Have?
… unless the bank cuts you off.
Will lenders really let your average Joe or Jane Investor take out three, five, ten, twenty mortgages?
Unfortunately, eventually, the party will come to an end.
Mortgage lenders won’t lend to you indefinitely. Somewhere north of a dozen investment property loans, most lenders will get skittish and decline to extend you more credit, even secured by more rental homes.
On the flip side, however, BRRRR investing can lead to a very fruitful relationship with a local banker or mortgage lender.
If you develop a track record of success and loyalty with a particular banker, the banker may become your passionate advocate in loan committee meetings. You may find that the borrowing process becomes less invasive and more of a rubber stamp – you get approved quickly and easily, with better terms to boot.
By the time lenders cut you off, as the successful landlord of a dozen or more properties it might be time to graduate to commercial real estate, which doesn’t have the same limitations on mortgage lending.
You might also consider refinancing all your loans into one big (scary) portfolio loan.
Should I Try The BRRRR Method Of Real Estate Investing?
That my friend, is the $1,000,000 (000) question!
In terms of a side-hustle, it’s certainly an intimidating one to start. The sums of money being moved around are enough to make anyone sweat…
There are side-hustles with cheaper entry points that you may want to start with. However if you’re very keen on getting started in retail investing, the BRRRR method certainly has huge potential.
TL;DR – The purpose of the BRRRR method of real estate investing is to acquire rental property quickly, starting with only one down payment. Forget house-flipping – by choosing fixer-upper properties and walking them through a process of Buy, Renovate, Rent, Refinance, Repeat, you can flip one down payment into an entire portfolio or properties within a few short years!
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