You don’t need a lot of money to invest in real estate. With an asset-based lender like ABL and a capital-light investing strategy, you can start your real estate investing journey in no time. In this article, we’ll explain how to accelerate your profits with the BRRRR method.
The BRRRR Strategy In a Nutshell
BRRRR stands for “buy, rehab, rent, refinance, repeat.” It’s a real estate investing strategy that involves buying and renovating distressed property.
However, instead of reselling the property as you would in a traditional flip, you rent it out to generate cash flow. From there, you refinance the property into a larger mortgage with a private lender like ABL and extract cash to put toward another property, and the process repeats.
The BRRRR Strategy Step-by-Step
Let’s dive into each phase of the BRRRR method in more detail:
Step 1: Buy
Choose a distressed property you can buy at a discount and know how to fix. This helps ensure there’s potential to add value that you can later extract when refinancing. Don’t forget to account for repair and holding costs (loan payments, property taxes, insurance, etc.).
Step 2: Rehab
Rehabbing is the most physical part of the BRRRR process. It involves repairing and upgrading the property to increase its value and make it liveable for future tenants. It can include everything from replacing the roof to painting the walls.
Focus on quality but remember that time is money. The faster you complete the rehab, the sooner it can generate rental income.
Step 3: Rent
Once the property is ready for tenants, list it for rent. Research similar rentals nearby to determine a competitive rate and screen rental applicants by checking their background, income, credit, etc.
As soon as you sign a lease, you can start collecting rent to help offset the property’s expenses.
Step 4: Refinance
Now it’s time to refinance into a long-term mortgage. Typically, lenders impose a 6-12 month seasoning period before considering a refinance. Then they’ll commission a new appraisal to determine the property’s post-renovation value.
Ideally, the property re-appraises high enough that you can pull out much (if not all) of your original investment. However, be careful not to overleverage yourself. Work with an asset-based lender like ABL who will ensure the deal makes sense for you and them.
Step 5: Repeat
Lastly, use the cash from the refinance to buy another property and go through the BRRRR steps all over again. Hypothetically, you could repeat the process indefinitely until you’ve amassed a real estate empire.
Example BRRRR Scenario
ABL funded a BRRRR project in Hackensack New Jersey. The property was purchased for $1,800,000 with a renovation budget of $5,088,289 and a total loan funded at 83% LTC. This left $913,711 cash available for purchase and $4,836,289 cash available for the renovation.
After a 24-month loan period with interest-only payments, the property was eventually valued at $11,700,000, and the borrower held onto it as an income-producing asset using ABL’s refinance program.
Benefits of the BRRR Strategy
Now that you know how the BRRRR method works, consider its benefits:
Boost return on equity (ROE)
When you have a mortgage, you build equity in a property over time as you make payments. However, that growing equity just sits in the property and doesn’t help generate more cash flow unless you pull it out and reinvest it.
The BRRRR method does just that. It helps you capitalize on your equity by spreading it across multiple properties. For example, instead of earning $5K in annual cash flow from $100K in equity, you can earn $10K in annual cash flow from two properties with $50K equity each.
Scale your portfolio faster
Scaling your real estate portfolio can be challenging when you have to save for a new down payment with each new property. However, the BRRRR method avoids this obstacle.
Every time you go through the BRRRR cycle, you gain a new lump sum from refinancing that can cover most or all of the down payment for your next property. In other words, after the first property, you may never need to save for another down payment again.
Build equity and cash flow over time
As your real estate portfolio grows under the BRRRR method, your cash flow and equity will increase. Eventually, it could be enough to achieve financial freedom. The key is to stick with it and let home appreciation and leverage do their work.
Potential Risks of the BRRRR Strategy
Of course, the BRRRR method also involves risk. Consider the following:
Poor financial estimates
BRRRR investing depends on many estimates—from the cost of rehabbing to how much rent the property will command to its after-repair value (ARV). If you get any of these numbers wrong, it could hurt the deal’s performance and even lead to losses.
However, you can mitigate this risk by using a BRRRR calculator and giving yourself enough financial cushion to absorb unexpected costs.
Overleveraging your portfolio
Although the BRRRR strategy is all about leveraging your equity to the fullest, this can be overdone. For example, if your equity is spread too thin across multiple properties, you may experience negative cash flow in months when property expenses are high. Similarly, you may end up underwater on a mortgage if home values drop. Both are precarious situations.
To avoid overleveraging your portfolio, carefully assess the potential of each property and the feasibility of each refinance and work with a trusted private lender like ABL who will help ensure the deal’s financials make sense.
Finance (or Refinance) Your Next BRRRR Deal with ABL
Ultimately, the BRRRR method can be a great way to supercharge your real estate investing returns. However, it takes careful planning and the right partners.
Found the perfect BRRRR property but still need financing? ABL can help. We offer both short-term bridge loans and cash-out refinances into long-term rental loans. That means we can help ensure your BRRRR deal runs smoothly from start to finish. See if you pre-qualify today!