BRRRR: The Good and the Bad

Image by Nattanan Kanchanaprat from Pixabay

Believe it or not, the popular so-called “BRRRR” method has been around long before people actually started calling it that.  It was the method I used in the beginning of my real estate career — I sort of “discovered” it along the way — and I still use it to this day.

Does that mean it’s the best and only way to invest in real estate?

Not necessarily. There are definite pluses but a few pitfalls as well. As a quick review, here’s what the acronym stands for:

Buy

Renovate (or Rehab, if you prefer)

Rent

Refinance

Repeat

In theory, it’s a process that you can use on repeat to build your wealth. The reality is a bit more complicated. You can definitely make BRRRR work for you, you just have to be smart about it.

What’s Awesome about BRRRR

You don’t need a lot of money to get started! (Remember how I said this was the method I used in my early days?  That’s exactly why).

The idea with BRRRR is that you leverage the capital you’ve put in as a down payment or other means to use on your next property, after you have refinanced.  This is what allows you to repeat the process.

Refinancing your property also allows you to find a better lender and get a better interest rate. 

BRRRR is like a very skilled game of leapfrog. You are able to leverage your first acquisition to buy your next and so forth, without (theoretically) having to sell any of your properties to make your next purchase. 

If you don’t have a lot of capital to invest upfront, but are willing to do the careful work of acquiring the right kind of properties that will allow you to refinance at a rate rate later, BRRRR may be the right method for you.

What the Drawbacks Are

Almost everything good in life comes with a catch. BRRRR is no exception to the rule.

The BRRRR method works really well, but only within certain parameters.  You need to be able to increase the value of your property enough to be able to pull off the trickiest step: refinancing.

You can quickly run into trouble with BRRRR, for example, if your appraiser decides the property isn’t worth as much as you think it should be worth. 

Increasing the value of a property is not a cut and dry, “money = value” process.  Spending $50,000 to renovate your property, in other words, does not automatically make your property worth $50,000 more.

While renovation is important, it’s just as important that you buy a property with good potential in the first place — this includes factors outside your direct control, such as the quality of the neighborhood. 

Also, removing the cash equity from your property to make your next purchase always comes with a risk.  Make sure you have added real value to your property after renovating it, otherwise you will have little to no equity left besides what you originally put into it as cash.

Some Other Things to Think About

One thing that will help you succeed with BRRRR is having a good exit strategy.  By “exit” I am referring to the “refinance” phase — the point at which you are ready to move on to your next property.

Having a good lender (especially on the back end) and having the right conversations with them ahead of time is key. 

Be sure to ask all the necessary questions, such as, “what kind of things are you looking for in the properties you refinance?” and, “how much time needs to pass between purchasing and refinancing?”  

Knowing this information ahead of time allows you to develop a strategy and a realistic timeframe.  It will help you know how to add value to your property and keep you from trying to rush into the next property too quickly.

Just like with any investment strategy, remember to focus on the 1% rule. Cash-flow is the lifeblood of real estate investing. The amount of rent you earn needs to be relative to the cost of renovations.

Conclusion

The BRRRR method is popular for a good reason. It allows investors who don’t have as much cash upfront to still invest in multiple properties and grow their wealth.

However, there are always two sides to the coin. Having less money means more risk at every stage in the process, especially with renting and refinancing. You can mitigate these risks by doing your homework, being careful about your renovation budget, and having good communication with a good lender ahead of time.

Why You Should Always Get a Home Inspection

Luckily for me, one of the biggest mistakes I ever made was early into my real estate career.

It’s such a simple yet important lesson that it would be crazy of me to not devote a blog post to it.

The lesson is this: Always have a home inspection done before buying a property.  There are no exceptions to this “rule.”

Here’s how I learned that the hard way…

In my early days of investing, I didn’t have a lot of money. (Note: it’s way easier to make a mistake or take too big a risk when you are financially inflexible. We’ll talk about this a little bit later).

As a result, a lot of the properties I chose to invest in were big-time fixer uppers.  Nothing wrong with that. The problem was that I tried to cut corners every way I could to be “financially savvy.” 

This tactic backfired on me one fateful day.

A good friend of mine helped me find a property that seemed like a great deal. Together we decided that I didn’t need a home inspection done. This was our rationale:

A home inspection would cost me 500 dollars (back in the 90’s, this was a bigger amount than it is today). To save that valuable money, I wouldn’t pay an inspector — my friend and I would “inspect” the property ourselves. 

After all, we could tour the property and see for ourselves what needed fixing, right? 

For example, we could turn on the faucets to see if the plumbing worked, and check if all the lights turned on.  And since we were going to renovate the whole thing anyway, how much did it really matter?

Fast forward a few weeks…

I got a call from my general contractor who was working on the property. He told me that there seemed to be some sort of problem with the electricity. He was having a hard time getting consistent power to his tools.

Having a bad feeling about all of this, I hired an electrician to come over and take a look. He opened up the service panels and low and behold, about half of them were on the edge of crumbling. It was a fire disaster waiting to happen. 

Needless to say, the power company arrived in minutes and shut the whole operation down. In the end, repairing all the electrical panels cost me far more than the $500 for a home inspection.

If I had paid upfront for a home inspector I would have known about the electrical fiasco waiting to happen. This means that I would have either:

A: Been able to choose to not buy the property after all, knowing it would cost a lot upfront in repairs

Or B: I would have been prepared beforehand and been able to budget for the repair 

What actually ended up happening was me being completely surprised (and then panicking) and having to react without much choice.

A few hundred dollars would have saved me from all that stress, and it would have saved me more time and money in the long run.  Having the information about a property that only a professional can give you puts you in the driver’s seat of decision-making and is well worth the cost.

The Penny-Wise, Pound-Foolish Catch 22

Did I decide to forgo the home inspection because I was simply being cheap? Not exactly.

As I mentioned earlier, I was a bigger risk-taker back in those days because I had way less money. There is a fine line between sensible frugality and unsensible risks. The latter was what I ended up doing.

Real estate investing is a risk to begin with — profitable rewards usually come after taking sensible risks.  On the other hand, it rarely pays to make your choices unnecessarily risky.  Trying to pocket some cash by forgoing a procedure like a home inspection is a classic example of how you can end up, in the long run, actually paying way more money and time than if you had done the more conservative thing upfront.

Bonus Lesson:

There’s actually another “rule” in real estate, related to this, that I may as well mention now:

Do not buy a property “sight unseen.”

The exception to this is if you are a big-time investor backed by plenty of funds, are buying multiple properties, and can afford to have a few of them not be profitable. I am guessing (just a hunch) that this is not the case for you.

Plenty of people buy sight unseen, whether it’s because they are living in a different part of the country or they have too much FOMO and feel like they have to put in an offer before they have time to even head out the door. 

While this can still work out alright in the end, my advice is to never (at least, with very few exceptions) buy sight unseen.

The bottom-line of it all, to quote an old-school maxim: “haste makes waste.”

In more modern terms: Taking extra risks to save money, as well as being in a hurry, are more likely than not going to backfire on you at some point. 

Summary:

  • Do not skip a home inspection under any circumstances. You are not able to fully assess everything that’s right and wrong with a property and thus run serious risks as a result

  • While it’s good to save money where you can, don’t skimp on things (like a home inspection) that will actually save you time and money in the long run, not to mention keep you and others safe

  • Avoid buying a property “sight unseen” if possible. It’s one thing to buy a gadget online; but a property is an enormous investment. Lower the risk as much as possible by keeping yourself fully informed and visiting the property before deciding to buy

The Mentality of Buying

Photo by Tierra Mallorca on Unsplash

Buying a new property is one of the most fun parts of the real estate business.  It’s natural to feel excited — even giddy — about a “good buy” and all the potential that comes with it.

In the excitement of the buying process, it’s all too easy to overlook the “fine print.” There are unexpected costs and factors that will pop up when you buy a property.  Also, consider that a property that seems like a great acquisition may not be quite as great after you’ve done a little more homework.

I’ve made the mistake myself of getting too carried away with the emotional side of buying, only to deal with issues I wasn’t prepared for afterward (sometimes to almost disastrous consequences, I might add).

Few properties are “perfect”, and not every find needs to be a golden opportunity. Just make sure you do your due diligence ahead of time and go in with your eyes wide open.  Here are three factors that will help guide you in doing this.

  1. “Make Me Want to Land”

When I was getting my pilot’s license, my flying instructor shared with me some very interesting advice.  It’s since turned out to be invaluable in how I purchase properties.

“When it’s time to make a descent,” he told me, “your mentality needs to be, ‘make me want to land!’”

At first I thought his words were a bit counterintuitive.  After all, you need to land the plane, right?

But his point was: there are many dangers and unknowns when flying, especially so when landing. You should not actually land the plane until you have checked all the boxes that you’re safe and clear to do so. Even a small mistake could lead to regret or even catastrophe.

While buying real estate (usually) doesn’t come with the same mortality risks, there are still a number of risks involved. Especially ones that are easy to overlook in the euphoria of finding a place that “feels” right.

It’s important to stay as detached as possible all the way until the day you close on the property. You may have heard the advice “don’t fall in love with a home,” and there’s a lot of truth to that.

This doesn’t mean you need to be cynical or cautious to the point of obsession. It does mean doing your due diligence before buying and keeping your expectations neutral. Save that champagne bottle for the day you actually close.

  1. Do Some Deeper Digging

When landing a plane, I had to learn what all the “boxes” were that I had to check to make sure I was safe and ready.

Buying properties also involves boxes that need to be checked. Some of these boxes are easy to overlook or even forget.  Know ahead of time all the things you need to consider so that when you find a property you’ll have your list ready to go (and hopefully you’ll be able to check all the boxes!).

Here are several examples:

  • Migration patterns.  Are more people moving into the neighborhood, or moving out? What has been the migration trend over the years, and is that trend changing in any way?

  • Employment levels. What percentage of the people in the neighborhood are employed?  Employment is related to income, and level of income among residents in turn affects the value of the area as a whole.

  • Availability of housing. How many houses are currently available in the neighborhood?  Are there any more being built (or planned)?  A lack of available houses may indicate demand, but not necessarily.  Make sure you look into the “why.”

  • Cost of purchase vs. Market rent rates.  Is it currently more expensive to rent a home in the area you’re looking at, or to pay a mortgage?  

  • History of the property itself. If the home is cheap but the neighborhood is great, there may be a catch. Having a home inspector visit the property and taking the time to learn more about its history will let you know if there are any red flags.

Have a checkbox ready to go before you even get serious about buying a property.  It will be a valuable resource and streamline the whole touring/inspecting/purchasing process.

  1. Get a Second Opinion

One of the greatest things about investing in real estate is the wide variety of people you meet, many of whom offer a wealth of insight and experience that they’re only too happy to share with you — all you have to do is ask.

Some of the best decisions I ever made were thanks to the help of friends who were investors like me, but with more experience. Their advice was free but invaluable.  

Make sure you take the time to network and surround yourself with those who are more experienced than you. People who have been in this business a long time love sharing their insights and are usually only too happy to help.  Besides, a second (or third) opinion always helps you stay as objective as possible.

Summary

You can stay smart while buying a property and still have fun in the process. In fact, buying a new property, I’d argue, is more fun when you are empowered with the right tools and information going in.

Good investment opportunities come along all the time. Be ready to take the leap, but only after you’ve taken a good look first. Review all the checkboxes until you have no good reason not to land. 

Finally, take the time to talk to mentors and friends who you trust.  They’ll be happy to share their advice and honest opinions. Having trustworthy people to consult is not only a lifesaver, it’s a very meaningful part of the process as well.  Due your due diligence and you’ll be rewarded not just with a good investment, but with peace of mind.