(Article) REAL ESTATE - How To Use The BRRRR Method To Buy Rentals With Less Money (STEP - BY - STEP)

B R R R R stands for Buy, Rehab, Rent, Refinance, and Repeat.

Using the BRRRR strategy can be a great way to get started investing in real estate and not use up all your money. It can also be a great way to buy multiple properties when you do not have a ton of cash available.

You may have less cash flow after refinancing a property with this method, but you’ll have more cash to buy more properties which could be turned into cash flow if you wanted them to be.

You can use the BRRRR strategy with residential or commercial properties as well.

What is the BRRRR Strategy Method?

BRRRR strategy stands for:

Buy:

Get a great deal on a rental property that you can add value to through making repairs.

Rehab:

Once you buy the property you need to fix it up so you can easily rent it.

Rent:

Once the property is fixed up, you will rent it and start making money.

Refinance:

Once you rent the property it is much easier to refinance it than if the house was vacant. By refinancing it you can take most or all of your money back out to invest in more properties.

Repeat:

Once you get your money back out, you can find another great deal to buy and repeat the process.

When you buy a rental property most banks will require at least 20 percent down, plus you will need money to make to rehab the property.

£50K and a GREAT / EXCELLENT score will be a good starting point. (I have a video on building excellent credit coming in a few days)

Don’t let £50k put you off, you can make that within 2 - 3 years of working your ass off, being responsible with money and being frugal and by making the sacrifice to live below your means whilst you work on getting the money together.

Don’t rush the process, REAL ESTATE IS A LONG GAME. So be patient

It can be very expensive to get into, but the BRRRR strategy helps you get that money back so you can keep buying rentals.

Properties that work for BRRRR

The first step to using the BRRRR method is to find a property that is priced well below market value. So make sure you scout around and don’t rush for the first good deal you see.

When you refinance an investment property the bank will usually only refinance 75 percent of the value. If you buy a property at full retail value and then try to refinance it, you won’t get much money back out.

If you get a great deal, you could get most, all, or even more money back than you spent to buy and fix up the property.

Here is an example:

• Buy a house for £100,000 that needs £15,000 in repairs.

• The house will be worth £155,000 once those repairs are made.

• When you refinance the house you can get a loan for let’s say £116,250.

• The new loan pays off the first loan you got when buying the house plus all the repairs.

When you get a loan on a property there will be closing costs that consist of appraisals, origination points, lender fees, title fees, and closing fees. You might not get all of your money back in this example, but it would be close. If you did not get a good deal, the method does not work as well.

Here is an example:

• Buy a house for £130,000 that needs £15,000 in repairs.

• The house will be worth £155,000 once those repairs are made.

• When you refinance the house you can get a loan for £116,250.

The new loan covers some of the costs but you still need £28,750 in down payment money and repairs without considering the closing costs.

BRRRR financing options

One of the trickiest parts of completing the BRRRR method is financing the properties. You may actually have to finance the property twice.

Once when you buy it and once when you refinance it after making the repairs. If you have the cash to buy the property and repair it without taking out a loan, great! However, most people do not have that much cash.

When you first buy the property you can use a number of ways to finance it:

1. Conventional bank loan:

You will need to put 20 to 25 percent down, but the interest rate should be comparable to an owner occupant loan. The house cannot be in too bad of condition or the bank may not loan on the property.

2. Local bank loan:

Local banks can be much more flexible when lending on rentals. They will usually have the same down payment requirement as the conventional banks, but they may overlook major repairs. They may also be more flexible with debt to income ratio problems, and limits on the number of mortgages the conventional lenders will let you have.

3. Hard money lenders:

Hard money lenders specialise loaning to house flippers, but the loans can work for rentals as well. The costs are much higher on hard money loans and the interest rates are double what the bank loans will have. The nice thing about hard money loans is that they will finance the repairs in some cases as well.

4. Private money:

Private money usually comes from people you know. A loan from friends and family.

Private money rates can vary greatly depending on the relationship, the property, and many other factors. In some cases, the private money lender may finance the repairs as well.

You will have loan costs when you first finance the property and when you refinance it as well. Make sure you take these costs into consideration

Rehabbing a BRRRR property

Once you have bought the property you will need to repair it. A lot of beginners like to repair properties themselves, but they forget that time is money.

It is also not easy to fix up a house. If you think you are going to save £10,000 by working a few weekends you will be sorely mistaken

I would suggest using a contractor, handyman, or subcontractors to make the repairs on the home. It will save you money and time in the end.

The longer it takes to repair the house, the longer it is before you get money back from the refinance and start collecting rent. Remember that you may not have to make the house as nice as you would if you were flipping it.

Renting a BRRRR property

Once the repairs are made you need to get the property rented. A lot of new landlords will try to rent a house themselves to save money as well.

I think it is easier to be your own property manager than your own contractor, but be careful!

• You cannot be soft on your tenants.
• You must charge late fees no matter what the excuse is.
• You must check on the properties often. Checking the smoke detectors and furnace filters every quarter is a great excuse.
• You can’t be greedy when renting. You are better off getting your pick of great tenants, than pushing the rent and settling for whoever will agree to it.
• You need to make sure you have a great lease and know the landlord/tenant laws in your city, country or state.

If you do not think you have what it takes to be a landlord, get a property manager. This will save you soo much time and hassle.

They’ll find the tenants, collect rent, take care of maintenance issues and are fairly cheap for what they do.

Refinancing using the BRRRR strategy

The final step to completing the BRRRR process is refinancing the property (if you don’t count repeat).

There are many things to consider when refinancing the property and many things that can go wrong. Many banks will require a 6 month or year-long seasoning period to complete a cash-out refinance.

That means they will not lend you more money than the most recent appraisal or sale of the house, whichever is lower, within their seasoning period. If the bank has a one year long seasoning period and you bought the house for £100,000 8 months ago.

You could get an appraisal for £240,000 and the bank would still base the loan on the £100,000 purchase price. Make sure you have a lender who will refinance when you need them to before you start the BRRRR process!

When the bank is deciding how much to refinance the home for, they will have an appraisal completed. The appraisal will determine what the home is worth in the bank’s eyes.

You may think your property is worth £200,000, but if the appraisal comes in at £175,000, the bank is going to use the £175,000 value abs they won’t be open to negotiate.

If you are going to use the BRRRR method make sure you have a backup plan if you don’t get your refinance done right away or don’t get all the money back you were hoping for!

Buying another rental using the BRRRR strategy

The last step in the BRRRR method is to repeat the process again and again. As you can see it may take some time to get your money back out of the property.

I would not count on doing a BRRRR every three months unless you have an amazing bank.

Every rental property you buy needs to be a great rental and have great cash flow. The more money the rental makes every month, the more likely the banks will be to keep lending to you.

If you are having problems finding banks that will refinance rental properties for you, there are national rental property lenders.

They have slightly higher rates but can be easier to work with regarding debt to income ratios, seasoning periods, and other challenges.

What are the pros and cons of the BRRRR strategy?

The BRRRR strategy can be a great way to buy a rental, but then pull your money out to by more rentals.

Disadvantages

• You may not have as much cash flow on your rental because you have a larger loan amount.

• The financing costs of the two loans will add to the bottom line and cost you more money.

• There are risks that the appraisal could come in low or you cannot find a bank to refinance.

• There could be other hiccups along the way with repairing the property or renting it.

Advantages

• You have much less money investing in each rental when you use the BRRRR method.

• You can buy more rentals because you have more capital to invest with.

• Your returns may be higher because you have less money investing in each property.

• Having more properties means more tax benefits, more equity from getting a good deal, more cash flow (hopefully), more appreciation, and more diversification.

If you are getting great rental properties that have a lot of cash flow, it makes sense to use the BRRRR method. If you are buying mediocre rentals with tight numbers, you may be taking some big risks.

“But what about house flipping?”

The advantage of flipping is it can get you more capital to invest in rentals. The disadvantage of flipping is that once you sell a house, it no longer makes you any money. You have to decide which is better for YOU.

Final thoughts on the BRRRR method

The BRRRR method is a great way to buy rentals if you are buying great properties with a lot of cash flow.

It is NOT something to jump into without doing your due diligence on lenders and contractors.

You also have to be prepared if things do not go perfectly. If you must have all the money back that you invest in that house, and you don’t get it because of a low appraisal, it could cause major problems.

Till next time :)