What is the BRRR Strategy?
/So I’ve been hearing a lot about this “BRRR strategy” and decided to do some research to figure out what exactly it entails. I assumed my husband and I were probably using some sort of variation of this strategy in our own investments, but it’s been a trending topic so I decided to check it out.
So for starters, the BRRR strategy stands for BUY, REHAB, RENT, and REFINANCE. I have also seen where some add another R to the end (BRRRR) which means REPEAT. It’s a pretty straight forward concept, but we personally had some variations with the refinance aspect of it. Before I get to that, let’s start from the beginning:
BUY: So the purchase of your investment is the most important part. When you are looking to get into the rental industry with the intent of purchasing more than one rental, you’ll want to make sure you target homes that are either undervalued or require work to gain equity. You’ll also want to think about the extent of the work needed to make it rental-able and how much of that work you can do yourself versus hiring out.
REHAB: When you are rehabbing a rental it is different than rehabbing a flip. For example, if you are remodeling a kitchen or bath in a rental putting in granite counter tops or lavish fixtures typically won’t increase your rental rate tremendously unless you are doing higher end apartments. Whereas if you are flipping, you can place monetary value on the remodel to help gauge the resale and potential profit of the flip. When you rehab a rental you want to keep the apartment nice without killing your budget. Our personal rule of thumb we ask ourselves when doing a rehab is “would we live here?” If we can answer yes to that question we are in good shape. I wouldn’t be satisfied or proud of a remodel if I couldn’t or wouldn’t want to live there myself.
RENT: Finding good tenants can be a challenge in the beginning. Once you get the hang of it, it’s not so bad. To find good tenants we always check the following:
1. Background check
2. Credit check
3. Work history
4. Work reference
5. Landlord reference
We’ve had a lot of success finding and retaining tenants. I believe a lot of it has to do with finding the right person, but also providing a nice place to call home. I firmly believe if you show care and respect for your property, tenants will tend to do the same. Good people don’t want to destroy a nice home. One of my tenants actually said to me, “If you put good out into the world, you will receive good things back”. While it is not always true, I think it’s a good perspective to have.
REFINANCE: So here is where we differ a bit from the conventional BRRR strategy. Typically after we buy (using a loan), rehab (cash), and rent, we will get the apartment reappraised to use that equity we have gained towards the down payment and closing costs of a new property. The usable equity is calculated by taking 70% of the new appraisal value minus the outstanding balance on the property.
E (equity) = (0.7 x A (new appraisal)) – B (outstanding balance). So that is E = (.7xA) – B.
An appraisal is good for a year, so even if you don’t buy a new property right away you will know the amount of equity you have available to use. We will than use cash that we have from our other properties to put towards the rehab. We continue in this cycle.
This is the method we use, but there is also another approach that can be used instead. Rather than taking out a loan to initially purchase a property (as we have done), investors will purchase the property in cash and do the rehab in cash. Then once the property is rented, they will refinance the property to essentially “cash out”. The money they gain will be used towards the purchase of another property. So to break this method down for you- let’s say you want to buy a property in cash for $50,000 and you have to put $30,000 cash into it. So you are all in for $80,000. You get the property reappraised and it is now worth $115,000. So what the bank typically does is takes 70% of the new value of the property and can give that back to you in the form of equity. So basically, you will have your total investment back in equity ($80,500) that you can use towards a new property.
E (equity) = 0.7 x A (new appraisal)
So unlike the first example, there is no balance owed. You will be able to take out a line of credit against the property at 70% of the property’s value and use that money for your next project.
It is important to note that having the property rented prior refinancing is necessary- not only does it appraise better when rented, but you will also have a monthly payment once the refinancing is complete. The loan balance will be manageable and decreases each month as the tenants pay off the balance.
So there are fairly significant differences between the refinancing options, but neither is wrong. It is all about what you are comfortable with and what works for you. Hope this helped clear up any questions you may have had about the BRRR strategy. There is always something new to learn. Best of luck!
