How Does the BRRRR Method Work in Real Estate?
Before we go too far, let’s get our terminology straight. The BRRRR acronym stands for Buy – Rehabilitate – Rent – Refinance – Repeat. That’s four R’s in a row and quite an assonance, to say the least. What’s more significant is that this method of real estate investment is quite popular among investors of all ages and capabilities. It turns out the BRRRR method is actually the first of a three-step process that many real estate investors progress through once they get the basics.
Buy Low, Sell High
The goal for every investor remains the same no matter what type of investment they make. Real estate investing is no different from stocks, bonds, and other asset-based investment scenarios. The only difference with real estate is the amount of risk, time, and financial control the investor can exert over the process. Expert after expert in real estate investment say the same thing – the whole BRRRR methodology only works if the property purchase is well below market value. That’s the “buy low” part. The “sell high” part of the deal depends on the investor’s skill at rehabilitating a property within budget and, sometimes, conditions beyond the investor’s control.
The Philosophy of BRRRR
The whole process involved with this type of real estate investing is controlled by the investor. It’s up to the investor’s ability to identify and acquire the right kind of property at the right price. Then it is the investor’s responsibility to identify and acquire the right help to rehab the property. The idea is to raise the level of the property value so that an appraisal of the remodeled real estate will produce a high market value. After the rehabilitation phase has been completed, the investor wants to get a tenant into the property as soon as possible. Rental income should pay for the original mortgage plus other overhead expenses. Once the property’s original mortgage has run for a sufficient period, the next step is to refinance the mortgage for a higher amount due to the increased value of the rehabilitated property. The equity that has been created can be used to make the down payment on another property and the process is repeated.
Cashing out the equity in a property also provides capital gains income to the investor and the return on the investment is partially realized. Partially realized because other profit opportunities occur over time. Positive cash flow from renting the property should produce leftover profit at the end of each month. It may only be a few hundred dollars at first, but it is a profit. The value of the property is expected to appreciate over time as the mortgage debt is paid down, creating an equity opportunity that enhances the investor’s balance sheet. The additional equity can also help fund additional real estate investments.
The Good, The Bad, and The Ugly
Theoretically, the BRRRR method in real estate investment should be a real winner. Buying distressed properties and going through the process should produce a profit at the other end. Unfortunately, that’s not always true. What is true is that by concentrating on the numbers, each step of the process will support a successful outcome. What is equally true is that smart investors understand the variables they can and can’t control that affect the outcome as well. That’s where the bad and ugly come into the picture. Failure to perform the right calculations regarding costs, revenue, and conditions could result in a financial disaster. Bad equals losing money on the investment. Ugly involves losing the investment completely.
BRRRR Best Practices
When smart investors are considering taking the plunge with a property, they know there are some conditions and considerations that must be met before going ahead with an investment. From start to finish and throughout the process, there are some areas of attention that can not be downplayed or diminished. Those areas include:
- Buy Right – Finding and negotiating the right price for a distressed property isn’t as easy as it sounds. Just because a landowner wants to sell a less-than-perfect piece of real estate doesn’t mean they’re willing to give up a lot to get the deal done. Every expert in real estate investing says this is the first and most critical consideration before going forward. with an investment.
- Budget Matters – Keeping expenses low isn’t just for buying the property, it also applies to the rehabilitation phase of the project. Again, smart investment advisers are clear about the importance of sticking to a budget and not deviating in any way. Too many investments go south because the investor thinks they can make up money on the back end of the deal and they discover they can’t, but it’s too late to do anything about it.
- Fudge Factor – There’s an old saying in accounting that goes “overestimate costs, underestimate revenues” and that is particularly true in a BRRRR investment. It’s called fudging the numbers and it’s a good idea to allow for less income and more expense when determining an investment’s viability. Many investors incorrectly calculate the cash flow of an investment and find themselves coming up short each month.
- The X Factor – There’s always the unknown variable that can suddenly appear and affect an investment in a significant way. Think back to 2008 when real estate values went into the dumpster. Nobody could have predicted it happening but happen it did and many real estate investors were on the losing end of the disaster. The lesson to be learned is to be prepared for disaster as best as possible. It might not be a bad idea to find a good clairvoyant or fortune teller.
- Move Quickly – While haste may make waste in some situations, in a BRRRR investment, time is definitely money. The longer it takes to rehab a property and put it back on the market, the less return on investment is realized. Refinancing the property at the earliest opportunity increases investment opportunity. Unless the investor is already well-established and even if they don’t need to worry about time costing them money, the whole idea in the BRRRR scenario is to get to the last R in the sequence – the “repeat” phase.
- Keep Going – Capital Gains taxes can suck the return out of an investment in short order. Flipping real estate creates tax events that can only be offset by reinvesting the capital in another investment. Keeping an eye on the real estate market and staying in contact with resources that provide investment opportunities should be an on-going process. Waiting until a project is finished before looking for the next project can delay the BRRRR process and reduce the value of the method.
The Next Step
If BRRRR is the first step in real estate investing, what is the next step? Many investors would be happy finding a property, rehabbing it and turning it into a money-maker before moving on to the next project. For some investors, that’s not good enough. Many investors find the BRRRR method a little slow and cumbersome which results in moving to the BRRSR method of real estate investment. The difference is the third R isn’t refinance, it’s turned into an S that stands for “sell”. That’s right; selling the property is another way of realizing a return on the investment before moving on to the next opportunity. By selling the property, the investor can cash out of the deal without further engagement. Some investors like the freedom of not being a landlord to benefit from their investment.
The Final Frontier
If BRRSR is the next step in a progression of real estate investment scenarios that start with BRRRR, then BRRHR is the last step. In this process, the third R is replaced with an “H” that stands for “hold”. In other words, once the investments pay off and as they pay off in greater and greater amounts, the ability to self-finance the empire becomes an option. Going through the BRRRR method can produce significant profits that can be utilized to hold onto the real estate without having a mortgage debt to repay. That makes the cash flow from rental property truly significant. At this point, the investor is going to be paying some taxes, but then, that’s the sign of a healthy business. This final step is where many investors want to be when it’s time for retirement.
Make it Happen, Cap’n
Starting with a BRRRR method and progressing to the BRRSR or even the BRRHR methodology starts with conducting proper due diligence and sticking with a program that reduces risks and offers enhanced profitability. Smart investors follow strict protocols they know produce the desired result – a good return. By sticking with a prudent investment scheme and following basic guidelines, a savvy investor can generate a good amount of profit in a reasonable amount of time. Awareness of changing economic conditions, locally, regionally, and nationally, helps ensure a positive result when combined with a focus on budgets and cash flow. The BRRRR Method is a great starting point for newbies as well as for tried-and-true investment veterans. The only question is when are you going to get started?