While “BRRRR” might seem like a silly acronym, you definitely shouldn’t discount it! This real estate investment strategy can prove to be extremely successful if you do it right -- and we are here to help. So here’s everything you need to know about using the BRRRR method to build a profitable and expansive real estate portfolio:
What is the BRRRR method and how does it work?
The BRRRR method is a real estate investment strategy wherein you buy a distressed property, rehab it, rent it out, refinance it at a favorable interest rate, and repeat the process time and again to eventually build a top-notch real estate portfolio. With the BRRRR method, you’re trying to achieve a solid stream of passive income in exchange for putting in some work on the front end.
What are the benefits of following the BRRRR method?
The BRRRR method wouldn’t be so popular if it didn’t come with a whole host of benefits. Here are some of the advantages of following this method to build your real estate portfolio:
High return on investment: The goal of every real estate investor is to maximize their return on investment or ROI. The easiest way to do this is to pay less for the property upfront, which is emphasized within the BRRRR method. From there, you can spend some money on improvements and rent it out at a high rate of return.
Quickly build equity: Since you’re purchasing the property in a questionable state and performing the rehab yourself, you can quickly build equity in the home that you can then use to further expand your portfolio through home equity loans or home equity lines of credit.
Attract great tenants: When you appropriately fix up property through the BRRRR method, you’re able to attract great tenants. Great tenants are worth their weight in gold and can make investing in real estate a breeze.
Achieve economies of scale: The end goal of the BRRR method is to own and operate multiple properties within a diverse portfolio. Diversifying your portfolio allows you to lower your average cost per property and mitigate risks.
What you need to know about each step of the BRRRR method
While the BRRRR method may seem pretty straightforward, it’s important to know the ins and outs of this method to give yourself the best chances of success. So here’s what you need to know about each step of this method and how to do it right:
The first step in the BRRRR method is to buy a distressed property at a low cost. At the same time, you need to make sure that the property is worth buying by performing a deal analysis. Sometimes no matter how good the deal may seem, it wouldn’t be worth it in the end -- so try to look beyond the sticker price when considering different properties to purchase.
Once you have purchased a rundown property, you need to fix it up and make it livable again. Not only that, but you should make repairs that will appeal to renters in your area. Not all repairs will pay off, but some tend to offer a high return on investment, including an updated kitchen, renovated bathrooms, and additional bedrooms.
Now that the home is livable and appealing to renters, it’s time to find the perfect match and start profiting from your investment. For the best results, make sure to screen your tenants through a credit report, income verification, and background check.
The next step in the BRRRR method is refinancing -- specifically, cash-out refinancing. This option allows you to use the equity you’ve built on the home to purchase additional properties. In terms of cash-out refinance requirements, you should have a credit score above 620 and a debt-to-income ratio below 50%.
From there, you use the money from your cash-out refinance to purchase a new property and do the process all over again. Over time, you will become an expert investor and build a profitable portfolio that earns you passive income.
Alternatives to the BRRRR method
The BRRRR method isn’t the only one within the field of real estate investing. So what are some alternatives to the BRRRR method, and are they worth your while?
The main alternative to the BRRRR method is what we like to call the “traditional” method. This method involves purchasing a property in good condition before quickly renting it out. This method allows you to collect rental income on the property that you can then use to cover the cost of your mortgage and then some. What you do with the extra money is up to you, but it’s usually a good idea to put it towards paying off your mortgage faster and limiting the accrual of interest.
However, since you’re buying a property in good condition, you’re going to be paying more for it -- both upfront and monthly. This method often leaves you with less leftover rental income at the end of the day. At the same time, this method is easier and takes less effort than the BRRRR method, albeit with a lower rate of return.
How to finance the BRRRR method
If you have decided that the BRRRR method is right for you and you’re ready to get started building your real estate portfolio, your next challenge is financing. How should you finance your investment properties? Even if you have financed primary residence homes in the past, financing rental homes is a whole new ball game.
Here are some different methods that you can use to finance the BRRRR method:
Cash: If you can swing it, cash is probably the best way to finance your real estate investments. Using cash allows you to avoid wasting money on interest and gives you a lot of buying power in a highly competitive housing market.
Conventional bank loans: Obviously, cash isn’t an option for everyone. The most obvious alternative to cash is a conventional bank loan that’s probably quite similar to your residential mortgage loan. At the same time, conventional bank loans for investment purposes often come with different requirements in terms of credit scores and down payments. Generally speaking, you should have a credit score above 620 and be prepared to put down 15% to 20% for a single-unit investment property or 25% to 35% on a multifamily investment property.
Bridge loans: Bridge loans offer flexible and efficient financing for investors looking for temporary funding for an investment property. This type of loan is more flexible than other types since it is a form of asset-based lending that focuses on assets and collateral rather than income and credit scores. Bridge financing allows investors to quickly buy a property before securing permanent financing at a later date. Even though bridge loans aren’t available everywhere, several reputable lenders like Vaster Capital still offer them.
Hard money loans: If you need money fast for a real estate deal and don’t care how much you have to pay to get it, you may want to consider a hard money loan. Hard money loans have some of the highest interest rates around -- sometimes reaching up to 15%. They are also more flexible since they can use the property for collateral in the event of non-payment rather than getting the money directly from the borrower.
Private money loans: Private money loans are given to you by friends or family members to finance the purchase of your real estate investment properties. Again, not everyone has this option, but there are so-called “angel investors” that may provide you with the cash you need in exchange for a stake in your business.
Home equity loans: Finally, home equity loans allow you to use the equity you have built up on your home to finance an investment property. Generally speaking, you need to have at least 20% equity in your home to qualify, and you can borrow up to 80% of your home equity to build your real estate portfolio.
Final thoughts on using the BRRR method to build your real estate portfolio
With the right amount of research, work, and expertise, you can use the BRRRR method to build a successful real estate portfolio. For the best results, you will need to establish a team of professionals to help you along the way -- from contractors to lenders and everywhere in between. We here at Vaster Capital stand ready and willing to help you with the lending aspect, so feel free to reach out to one of our experts for more information about our financing options.