Why We Love the BRRRR Strategy
I am writing this article from a room at one of our rehabbed rental properties here in Bogota, Colombia a day after touring properties in the city for investment including what will be the largest arena once it opens in October 2020 in all of South America. Life takes us to interesting places. The freedom and opportunities real estate investing brings are countless. What is the best strategy for using real estate to fulfill your dreams of building an awesome portfolio for properties and achieving financial freedom?
It has to be the BRRRR method.
If you are not familiar with the BRRRR strategy, it stands for buy-rehab-rent-refinance-repeat (BRRRR). BRRRR essentially works like this – you BUY a great deal under market value that you can then REHAB to force a ton of value and increase your equity that you later RENT to a tenant who will give you cash flow during the ownership period that you eventually REFINANCE by getting a loan from a bank on what is now a beautifully rehabbed house and with the money you receive from the bank in that refinance you are able to REPEAT the process and use the same cash that you used for the first deal to acquire your next (i.e., recycle your cash deal after deal).
Today, I want to cover the reasons why the BRRRR strategy truly is so powerful for growing your portfolio. If you are not already aware of this method of real estate investing or its compounding effect, I am confident this article will help you grasp its power.
1. You do not need a war chest of cash to begin
People often think the only way they can BRRRR is if they have a huge bank account of ready-to-deploy capital. Of course that is a wonderful option, but that is not the case. Just a few ways to get startup capital to begin with BRRRR: (a) use your cash; (b) get a short-term hard money or private money loan from the many lenders who will fund these kinds of BRRRR projects; (c) pull cash from the equity in your home or another property you own in the form of a home equity line of credit (HELOC); (d) partner with someone with cash; (e) seller finance the acquisition (i.e., pay interest and principal to seller like you would a bank); (f) lease to own (i.e., lease the property from the seller with the option to buy at a set price once you have more cash); (g) refinance an existing property you own to pull cash out for this project; and (h) so many others…
As you can see, the options for getting started are tremendous. They may require some effort and creativity, but what good things in life come easy? Chat with us if you have questions and would like to explore how you might be able to go about these financing options. But, most importantly, get started – if you need to save more money or start conversations with potential lenders, now is the time to get started so you are ready when a great deal comes along.
2. Incredible wealth building potential
We have covered this in past articles. But the point is this – with BRRRR you can build huge amounts of equity without investing huge amounts of cash. If you can do one BRRRR deal every 6 months by buying a property, rehabbing it, letting the value of the property appreciate and then pulling my money out through a refinance loan, I can multiply my equity and thus my net worth tremendously. Just think about if with each project you do you can generate a modest $25K in equity. That is $50K a year in initial equity that you have in projects that should grow over time and that you can continue to repeat. I think for most of us, the time and effort it will take you to do two deals a year is well worth an additional $50K added to your net worth in such time, year after year.
3. Cash Flow
Simply stated, BRRRR is the best strategy for deriving both the long-term benefits of real estate (net worth growth) and short- to medium-term benefits in the form of cash flow. Many of us invest in real estate for financial freedom. What does financial freedom essentially mean – replacing the income derived from your day job plus providing any additional cash you need to live the life you want with income from passive sources, such as the cash flow coming from your BRRRR rental properties. With BRRRR, you can get this current cash flow while still holding a property that is likely going to increase in value over time as well as you rent it to your tenants.
4. Someone else is buying this property for you
People often argue that BRRRR is risky because you are taking on debt to complete the BRRRR process. I have to disagree. With a BRRRR deal, you are buying a great deal in a great location that you are going to rehab to the extent that there is going to be high demand for the property from tenants. People love to live in a freshly rehabbed house. Make sure you do your numbers correctly to avoid mistakes here, but any BRRRR should always be done so that the cash flow each month covers any mortgage on the property as well as your expenses. You are going to be renting a newly rehabbed rental property and thus should be able to charge top dollar to a great tenant – BRRRR allows you be picky because you are providing tremendous value by offering a great rental property. Check out our BRRRR analysis solution to make sure you get your numbers right.
5. You can BRRRR with any type of real estate you like
Often BRRRR is associated with just single family houses. This is a misunderstanding. For example, my team is now applying this strategy to a 60 room hotel project in Puerto Rico – we bought it, raised capital to finance it and are now discussing a bank loan to pull our initial cash out of that project and use it for other projects on the island. Sound familiar? The BRRRR strategy can fuel your real estate investing regardless of where your interests in real estate lie.
6. Recession-Proof Investing
As we mentioned earlier, with BRRRR the first key success metric is buying a great deal. What does that mean? You really need to be “all-in” on the deal from a cost perspective – meaning both acquisition and rehab costs – for about 70-75% of the after rehab value (ARV) of a property (i.e., for a property that after rehab will be valued at $200K, you cannot spend more to buy it and rehab it than $150K). If you can do that, you are going to be protected against a recession even if home values drop up to 30% before you lose any cash since you are buying at essentially 70 cents on the dollar from the start. Recessions often also lead to an increase in rental demand as banks become tighter with their lending standards and less people are able to acquire loans for home purchases – you just happen to conveniently have an amazing property that is newly rehabbed available for rent. Buy right, estimate your costs correctly and know your ARV and BRRRR is going to provide you a ton of protection in the case of any recession.
We could certainly go on and would love to continue this conversation with you. We cannot emphasize enough, however, the power of BRRRR as a wealth-building, financial freedom creating strategy.
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