The BRRRR strategy combines the house flipping strategy and the buy and hold strategy for optimum results.
BRRRR is an acronym for buy, renovate, rent and refinance, repeat. You can look at it as flipping a house to yourself and holding it long term.
It can be a quick and practical way to grow your real estate portfolio.
With a Fix and Flip you get all your capital and profit back, usually within six months with the potential for a nice profit. The risk factors are high with this strategy because you are timing the market which increases your exposure to market shifts, especially since you have to repeat the process over and over.
With buy and hold investment properties you typically have less rehabbing to do. You have to pay an initial down payment but you get cash flow right away once you put in a tenant. Then you have to wait for your equity to grow.
With applying the BRRRR Strategy you buy a property that is below market but has potential. This is the BUY phase in BRRRR.
Properties using this strategy are typically funded with a hard money bridge called a “Fix-and-Flip” loan. These short term (usually with 9-12 month terms) provide for acquisition and rehab budget. When the property is fixed you will refinance at the higher After-Repair-Value (ARV) with a 30-year mortgage and repeat with the recycled down payment capital.
You use your rehab budget to make the property look great. Just as when you flip – you are making a neglected property into an attractive property. This is the RENOVATE phase in BRRRR.
Your rehabbed property attracts a high quality tenant and you RENT (the third phase in BRRRR) at market rates.
The less time you are without a tenet, the better. You never want a rental property to have a negative cash flow. With that said, you want to screen your tenets very thoroughly. A vacant property is still better than one with a deadbeat tenant who won’t pay his rent and damages your property
So now have a quality property and a quality tenant.
Six months later when your property is re-appraised at a price higher than the total of your purchase price and rehab expense -now you have equity. This is when you REFINANCE (the fourth phase in BRRRR) for lower payments and greater cash flow.
Some banks and other conventional lenders require a “seasoning period” – which means how long you must own a property before they will lend on the new appraised value – but most private real estate lenders are willing to lend on the appraised value as soon as the property has been rehabbed and rented. In order for the BRRRR strategy to work, you must borrow on the appraised value.
Most lenders will refinance a property for around 70% of the new, enhanced value of the fixed property.
The BRRRR strategy can then be re-employed to allow you to scale your real estate business at a faster pace. This is the REPEAT (and final) phase in BRRRR.
The final R emphasizes the most powerful aspect of the strategy: when done right, much of your capital gains from a project can be extracted within months and plowed back into new rental deals.
An often overlooked technique used by experienced BRRRR investors is the portfolio or “blanket” landlord loan that will allow you to squeeze even more accumulated equity out of you growing five or more property portfolio using a cash out refinance.
With the BRRRR strategy, the end result is multiple stabilized rental properties that provide a continuous cash flow and equity value that can increase with time.