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Defining the BRRR Method & How Investors Use it to Build Equity & Fast Track the Growth of their Portfolio

by | Oct 29, 2020 | Real Estate Investing

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Highlights: 

  • What the BRRR method is 
  • Why you should add the BRRR method to your tool box 
  • Drawbacks and key requirements to BRRR
  • A few tips to ensure a successful BRRR

A lot of people are familiar with fixing and flipping real estate; you buy a fixer upper, make repairs, sell it for a profit. The BRRR method is very similar. Instead of selling, you refinance the property at it’s improved value and hold onto it as a cash flowing rental property. 

Here’s  why it’s referred to as BRRRR

Buy.

You buy a property that needs repairs and improvements that you can add value to. 

Repair.

You make repairs and improvements to improve the condition and appeal of the property. 

Rent.

You rent the property to tenants so you can collect cash flow. 

Refinance.

You refinance the property to pay off your short term loan and recapture your repair costs. The goal is to refinance at a higher value to pull over and above your cash investment. 

Repeat.

Now that the property is repaired, rented, and you have all of your cash out — you repeat the process with a new property. 

HERE’S WHY YOU WANT TO BRRRR

You have a chance to buy a property at a discounted price.

Since BRRR properties need repairs, you will be able to buy the property below the After Repair Value (ARV). Part of making a BRRR work is making sure the purchase price plus repair costs are below the ARV. Just like you would with a fix and flip. 

Here’s a quick example from a BRRR I just marketed: 

Purchase Price  $130,000
Plus Repair Costs $100,000
Total Investment $230,000

 

After Repair Value  $355,000
Minus Cash Investment -$230,000
Investor Equity  $125,000

 

Imagine if you could purchase every property for sixty to eighty cents on the dollar….

That’s exactly why you want to BRRR! In this case, you created $125,000 in equity by making improvements to a distressed property. 

 

Since you’re refinancing instead of selling, you won’t be taxed on the money you get!

Remember, the goal is to refinance over and above your cash investment. You can count on refinancing 75% of the ARV. If the ARV is $355,000 and you’re invested $230,000, then you would have $36,250 after recouping your purchase price and repair costs. That’s an additional $36,250 to use on your next project — tax free! 

 

Here’s an illustration: 

After Repair Value  $355,000
Refinance Loan to Value  75%
New Loan Amount  $266,250
Minus Cash Investment (PP+Repairs)  -$130,000
Equals Cash Back to Investor  $36,250

That’s an additional $36,250 back to you tax-free!*

*Note: The money is tax-free because it’s from the loan proceeds and it will have to be paid back over time. 

 

You can keep more of the money you earn because rental income is taxed at a lower rate than flipping real estate.

On top of getting tax-free money from the loan proceeds, your rental income is taxed at a lower rate than it would be if you flipped the property for a one time capital gain. Flipping is great and I’m not throwing it under the bus because I still think it should definitely be a part of your toolbox, but keeping more of your money… who doesn’t want that? You need lump sum and residual income! That’s a combination of flipping and BRRR investing. 

 

WARNING: Here’s a few key requirements to doing a BRRR you need to be aware of.

You need to make sure you’re qualified for a traditional mortgage loan.

It’s pretty easy to get a hard money loan for a rehab property. Since hard money loans are asset based, the borrower’s credentials are secondary. But the current lending requirements for traditional mortgages are getting more strict by the day. A hard money borrower of mine is completing a BRRR. He’s in the refinance stage. The guy works multiple W2 jobs, has maintained those jobs for years, and he’s getting push back on refinancing. So make sure you meet the requirements before you purchase the property. 

 

You need to make sure your cash-out lender is willing to refinance your BRRR.

This could really throw a wrench in your plans. It could turn your BRRR into a flip. And if you have tenants in place, you might have a challenge selling the property for maximum value. At the time of this writing (Fall 2020), traditional lenders are making it more and more difficult to refinance investment properties. During March 2020 when the virus got really bad, lenders weren’t refinancing investment properties at all for a few months. You need to check with your cash-out lender on requirements to make sure your deal stays a BRRR. 
 

One more tip to ensure a successful BRRR

You need a great team to make the most of each and every BRRR or flip.

BRRR investments require organized effort from a number of people. You may be hiring everything out and simply cutting the check, but you need to make sure your team is suited for each phase of your BRRR. From sourcing the deal, to finding short term money, to hiring a general contractor to make the repairs, and property manager to rent the space, to having a traditional mortgage lender complete the refinance — you need to build relationships with the right people to ensure maximum success. It’s going to take some trial and error. There will be hiring and firing. Your best bet is to start sooner than later. Each deal will become easier than the last. You can become great. After all, you’re just one deal away! 

 

Article Highlights: 

  • What the BRRR method is 
  • Why you should add the BRRR method to your tool box 
  • Drawbacks and important requirements to BRRR
  • A few tips to ensure a successful BRRR

Thanks for reading, please share the article and click the thumbs up. Put your questions below or send me an email at Nico@Cordova1031.com –  I’ll answer as many as I can get to. If you enjoyed the article please consider subscribing for email alerts to be the first to know when a new article is created. 

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