WHAT IS BRRR(R)?
BRRR stands for Buy, Rehab, Rent, Refinance. Another R is sometimes added for Repeat. Here’s the general idea:
1. Buy a house with cash.
2. Fix up the house with cash.
3. Rent the house to a tenant.
4. Refinance all (or most) of your cash out, while maintaining positive cash flow.
The BRRR strategy allows an investor to create or build a much larger portfolio than they would normally be able to with a smaller amount of capital, because they can reuse the capital over and over to buy more houses. A smart investor takes their refinance and buys another BRRR (which explains the addition of the “Repeat” R).
The unique superpower of BRRR is that when done perfectly, it generates an infinite rate of return.
WHAT DOES IT TAKE TO BRRR?
BRRR, like most real estate investing strategies, requires four key team members. These four team members line up with the four phases of the strategy:
1. A broker/acquisition source for the purchase phase
2. A contractor/rehab crew for the construction phase
3. A leasing agent/property manager for the seasoning phase
4. A lender/financier for the cash-out phase
1. Acquisitions and the Purchase phase
The acquisitions agent is responsible for bringing you deals or helping you negotiate deals to buy. The BUY step is exceptionally difficult in the BRRR strategy because of the need for uncommon amounts of equity in a deal. This means that in most cases, you’re looking to buy a house for probably 50-60% (or less) of after repair value. Finding properties that you can purchase for 50% of after repair value can be an enormous task, and without careful analysis and commitment to your numbers you can easily end up inflating your purchase price due to competition in heavy BRRR markets. The need to purchase with a complete plan in place, informed by all factors of every stage of your project, cannot be overstated.
2. PROJECT MANAGER AND THE CONSTRUCTION PHASE
The contractor is responsible for overseeing the completion of the construction phase or REHAB. Their job really comes down to managing the budget, timeline and quality. A smart investor is not going to rely on their contractor in the construction phase to come up with or set expectations for the project, but more just to ensure they are followed out. Again, the most fundamental principle required to make an informed BRRR is to complete all of the estimations and calculations up front in the purchase phase.
3. PROPERTY MANAGER AND THE SEASONING PHASE
The property manager is generally responsible for the day to day operational management of the property in all phases after the completion of construction, both pre- and post- refinance. Ideally, you have already consulted with your property manager in the purchase phase to make sure that the rent rate you are calculating your numbers with is attainable for them in the geographical location of the property. Different property managers may give you different numbers so make sure you are doing adequate research and planning in the purchase phase so that the transition to the RENT phase is seamless. The RENT step is also referred to as the seasoning phase, because holding a property with a tenant in place for a certain time period (generally specified by the bank or local precedent) is sometimes a requirement for refinancing or “cashing out” of your deal.
4. LENDERS AND THE CASH-OUT PHASE
The lender is responsible for providing an opportunity to pull your invested cash out of the deal via a loan or a cash out REFINANCE. As in every step, it’s important to know your refinancing terms before you purchase a property (in the purchase phase) so that you can plan to generate enough cash flow to cover the mortgage payments once your property is refinanced. Your lender will likely also specify your required seasoning period, which is an important step in planning as well.
PROFITS ARE CREATED ON THE BUY, NOT THE SELL
If it wasn’t clear enough throughout the description of these steps, the most important thing you can do to protect your investment is to gather all of the information for every step along the BRRR process before you purchase the property.
Your ultimate exit strategy is to refinance, which is a capital exit strategy that allows you to maintain ownership. This also gives you another final sale exit strategy at a future date, where you could realize any accrued equity appreciation. Like anything, once you make a commitment you’ll have to pay a premium to exit at the non-defined optimal exit points. So if you buy planning to BRRR with just enough money to complete the deal, only to find that any of the other 3 steps in your plan are now altered (like the construction estimate was incomplete or dishonest, or the ARV of the house is not as high as you thought, or the economic terms changed in the market) you could find yourself in a position where you’re losing money in order to get rid of the property.
The point of commitment to the strategy really comes at the BUY stage. Common sense tells us that because of that, you want your planning and analysis to be done completely and accurately in the buy stage.
InvestOKC Realty strives to digitally deliver the objective data a real estate investor requires to completely analyze a deal in the BUY phase, thereby reducing as much risk as possible up front. To learn more about how InvestOKC serves investors and their goals, click here to schedule a consultation.