BRRRR: The Good and the Bad
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:
Renovate (or Rehab, if you prefer)
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.
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.