The BRRRR method is a fantastic way to build wealth and generate cash flow through the ownership of a portfolio of rental properties. Many real estate are investors are familiar with the strategy thanks to Brandon Turner from Bigger Pockets, who coined the term.
Unlike flipping properties (rehabbing and selling for a quick profit), BRRRR is not a get rich quick scheme. You won’t make $40,000 in four months using the BRRRR, but over time you’ll build wealth through asset appreciation, debt paydown, and rental income yield.
The residential rental market currently offers an attractive market to purchase assets as long as you are disciplined when you buy and achieve a strong basis. There are several reasons you should consider building a rental portfolio and adding the BRRRR method to your toolkit:
Minimal cash / strong returns – if done correctly, you should be able to cash-out refinance most, if not all of your equity. The result is that you will own an asset without tying up any of your cash.
Low interest rates – there is no better time to lock-in low, long-term interest rates for single family homes. Rates from private lenders are now starting at 4.25%, which is the lowest we have seen it. We don’t know where rates will go over time, but we do know that this is very cheap capital.
Build wealth –BRRRR method allows you to capitalize on the work you did to acquire and improve the value of the property for years to come. If you flip it and sell, you need to redeploy your capital into another deal. There is uncertainty around finding another quality deal, and your cash also might be sitting on the sidelines earning no return while you search for the next investment.
Strong housing market – The U.S. housing market is showing continued strength and attractiveness as an area for investment.
The U.S. is short on housing and it will take years for builders to catch-up. This is likely to prop up valuations for the housing market.
Strong demand is driving up single family rents, with a 5.3% rise from April 2020 to April 2021.
Large players such as Offerpad and Opendoor are deploying large amounts of capital to buy single family homes.
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Buy
Arguably the most important step, finding quality deals and purchasing them at attractive prices will set you up for success.
It is possible to find properties that are listed on the MLS, but many will not make the cut. Most have already been improved, which means you won’t have an opportunity to create value through a rehab or renovations to the property.
It may be obvious, but most listed single family homes are purchased by homeowners who are making emotional decisions to purchase – they probably don’t care what it could be rented for. In short, they can pay more than you can afford to.
Most real estate investors that are building rental property portfolios source their deals off-market. Either they have their own proprietary deal flow or they work with wholesalers who are able to assign over purchase contracts. Many of these deals require improvements before they could be rented which gives you the opportunity to create value in the renovations.
Working with an experiencedhard money lendercan help you determine the After-repair Value (ARV) of the property and provide financing to quickly close on the property. Learn more about working with a hard money lender.
You can also use the 1% rule to help you determine if the rental property is a good investment. This rule stipulates that the monthly rent divided by your cost (purchase and rehab) should be greater than or equal to 1%.
This is just a rule of thumb but it can be helpful to quickly screen deals and rule out those that don’t pencil.
Rehab
Look for target BRRRR method properties that are in need of a rehab or renovations. This allows you to create value and build equity. It also may help you pull out some of your cash when you refinance into a long-term rental loan.
For example, let’s say you buy a property for $150,000 and complete $25,000 of renovations. Your cost is $175,000, but the property is likely worth more, say $225,000. You’ve created $50,000 in value – some of which you can access during the refinance.
Getting underway at a recent BRRRR project
Rent
As you begin to wrap up your BRRRR project, start getting prepared to list the property and find a tenant. The last item you will need is to take pictures, but there are a few other things you can get started before you finish. Some long-term refinance lenders require a lease to be signed before the refi can be completed, so these actions can help to speed up the process.
What listing service are you going to use? Zillow is the most popular with our borrowers, but there are many options. It also doesn’t hurt to use more than one and get set up in advance.
How are you going to screen tenants? What due diligence items will you require? Are you going to allow pets?
Have your listing description ready. What amenities are you going to feature?
Refi
The refinance process for the BRRRR method can actually begin before you finish your rehab project and have a lease signed with the tenant. You generally have two options for lenders:
Conventional / bank lenders – these are the same types of lenders that you would work with for a regular mortgage. They may have slightly cheaper rates, but they are going to be slower and require more borrower requirements, such as verification of income.
Hard money / private lenders – rates from these lenders may be slightly higher, but in recent months they have become much more competitive. Currently interest rates for 30-year fixed loans are starting at 4.25%. Hard money lenders are also going to be much faster. These refinances can be done in just 2-3 weeks and is usually determined by how fast the appraisal can be completed.
Begin working with your selected lender early to complete any necessary paperwork and document collection. Some of these items include disclosures, entity documents, bank statements, and a loan application. The last items to be completed will usually be the appraisal report and a signed lease (if required from your lender).
Repeat
Hopefully by now you bought well, executed your project efficiently, and worked with an experienced lender that can help you take advantage of great long-term interest rates. With the value you created from the BRRRR method, you should have been able pull out your cash with the refinance and use it to pursue your next deal.
Now you own an asset with little if any cash tied up that will appreciate over time, provide a steady income stream, and help you to build wealth.
Longleaf Lending can handle all of your funding needs for the BRRRR method.
