In the world of real estate, the \u201cBRRRR method\u201d refers to the process of buy, rehab, rent, refinance, and repeat (hence the acronym!). In this investment strategy, a real estate investor will buy and then flip a distressed property, collect rental income by renting it out to a tenant, and then cash-out refinancing the investment property to continue purchasing additional rental properties for investment.<\/p>\n
A key difference between traditional investment property strategies and the BRRRR method\u2014and the reason for many of the BRRRR risks\u2014is the focus on flipping distressed properties before refinancing them to fund additional real estate purchases.<\/p>\n
As a real estate investor conducting the cash-out refinance step in the BRRRR method, you essentially convert your equity into dollars. When you take out bigger mortgages on your rental properties, you borrow more money than what you owe on these investments, which grants you access to your equity. The left-over funds can be used for other purchases such as (but not limited to) additional rental properties.<\/p>\n
While this is an excellent investment method for the right person, there are risks associated with this type of real estate investment strategy.<\/p>\n
Let\u2019s discuss the BRRRR risks you need to be aware of before attempting the BRRRR method of real estate investments.<\/p>\n
1. Renovation period<\/h2>\n
If you\u2019ve ever hired a handy person or a contractor for a bigger-ticket repair or improvement to your own home or an investment property, at some point, you\u2019ve most likely experienced the job taking significantly longer than was originally anticipated.<\/p>\n
It can happen easily, and it\u2019s not always anyone\u2019s fault. Sometimes, property renovations get put on hold because of winter storms, for example. It\u2019s not possible to replace roofs or siding or do outdoor painting when snow is swirling or ice is forming.<\/p>\n
2. Renovation cost<\/h2>\n
One of the most frustrating things that can happen to any investor who owns real estate is an unexpected major expense mucking up their expected rehab costs.<\/p>\n
Major expenses can make the difference between a profitable real estate investment and an unprofitable one. Even as an investor buying a rent-ready rental property, meaning no repairs are assumed to be needed, you should always hire an independent property inspector to thoroughly confirm the condition of the property so that you can be aware of any specific impending major repair costs.<\/p>\n
Anything unknown before you buy a property can pop up later as a major or unexpected repair cost.<\/p>\n
3. Rehab management<\/h2>\n
A downside to a BRRRR is that you need to manage a rehab. You hear that contractors are the hardest people to work with in this business. Finding them is tough, too, and good ones are like gold.<\/p>\n
As a new investor, what makes you think you will find a great contractor?<\/p>\n
If you were a contractor, who would you rather work with a seasoned investor who knows exactly what they are doing or a new investor who will ask a lot of questions and do one or two deals this year?<\/p>\n
It\u2019s not impossible, as a newbie, to find a good contractor, but it is unlikely. Additionally, you\u2019ll need to manage this entire process, which is a lot of work.<\/p>\n
4. Appraisal<\/h2>\n
One factor in a BRRRR or flip, if not the primary factor, is what the property will be worth after you put the work into it: the appraisal.<\/p>\n
Improving the property to increase the appreciation is the whole point of putting in the work. So, back to the numbers. If your property doesn\u2019t appraise at what you expect, you could be looking at a heap of trouble regarding your profit margin. You can probably handle this easier in a BRRRR strategy, as long as the property has cash flow as a rental.<\/p>\n
This assumes you didn\u2019t do any \u201ccreative\u201d financing and\/or didn\u2019t make promises to investors about a return.<\/p>\n
5. Time to rent<\/h2>\n
You obviously won\u2019t be able to rent out the property until that rehab is completed. For BRRRR properties, if you plan to rent it out and then refinance it, a rehab delay of any sort will prolong the time before you can place tenants.<\/p>\n
This timing matters because the refinance depends on having tenants (in most cases), and you won\u2019t start having cash flow until you have tenants living in the property. That means the longer the rehab is delayed, the longer before you start getting your money back out of the project.<\/p>\n
If you have the financial means to handle a delay, then the time to rent isn\u2019t as critical. But it must be considered for a BRRRR property. Along with time being a crucial factor, keep in mind that so is how much you\u2019ll be able to rent the property for.<\/p>\n
6. Rental amount<\/h2>\n
Yes, the rental amount matters. If you are BRRRRing, your initial numbers analysis should include the anticipated rent amount you expect to receive once tenants are in place.<\/p>\n
This matters because you\u2019ll know whether or not the property will have positive cash flow. If you can\u2019t expect cash flow, reconsider your strategy.<\/p>\n
The point of a BRRRR is to refinance the property after it\u2019s been fixed up. But if you won\u2019t have cash flow after you have tenants, you can flip it rather than hold it. Your decisions will depend on why you are doing a BRRRR, but the idea is to rent the property out rather than sell it as a flip. Cash flow is a big part of that equation.<\/p>\n
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![\"how](\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/08\/how-to-invest.png\" "\\"How")
<\/source><\/source><\/picture><\/a><\/figure>\nUncover your investing strategy<\/h3>\n
Everyone knows real estate investing can be a powerful way to build wealth and achieve true financial freedom\u2014but because each person\u2019s journey is different, knowing the first steps to take can be challenging.<\/p>\n<\/div>\n<\/div>\n
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7. Time to refinance<\/h2>\n
If you ask a lender how quickly you can refinance after a tenant is obtained, the answer will most likely be six months.<\/p>\n
With this six-month seasoning period, your money is now tied up for\u2014you guessed it\u2014at least six months. In fact, it is likely going to be longer than that because it is six months after<\/em> the tenant moves in. When you include time for the rehab, we are now talking nine to twelve months before you can move onto the next property.<\/p>\n For example, let\u2019s say you have $100,000 to invest in a BRRRR deal. You will not be able to reinvest that money for at least six to twelve months. The maximum amount of properties you could obtain in one year is two because of that six-month seasoning period.<\/p>\n However, with traditional rental property investing, if you have that same $100,000, you could buy five $100,000 properties with 20% down.<\/p>\n Whose portfolio will have more cash flow? One with five properties or one with two?<\/p>\n What makes a BRRRR investing deal so powerful is the ability to pull your money out and reinvest it. In a perfect world, you\u2019ll be able to do this on every BRRRR deal.<\/p>\n Unfortunately, we do not live in a perfect world.<\/p>\n Pulling all of your money out on a BRRRR is a home run of a deal. You can\u2019t reasonably expect every deal you do to be a home run.<\/p>\n In most cases, after that six-month seasoning period, you will likely leave $5,000 to $10,000 in the deal due to the amount the lenders will allow you to refinance.<\/p>\n Not bad, but you still have to wait six months for refinancing.<\/p>\n With traditional rental properties, you need to save up that 20% to 25% down payment. This may be more difficult depending on the market (say, a high down payment is needed) or the amount of liquid capital you have (low savings rate).<\/p>\n If there are ways you can spend less money and make more of it, do it\u2014and then invest that difference into traditional rental properties.<\/p>\n Are you looking to attain financial independence as quickly as possible through cash-flowing rental properties? If so, BRRRR is not the best real estate investment option for you.<\/p>\n Do you know what the best strategy is?<\/p>\n Believe it or not, it isn\u2019t house hacking (although house hacking is a subset of this category).<\/p>\n If you guessed \u201cgood old-fashioned rental property investing,\u201d that\u2019s correct. Find a property that you can purchase with 5% to 25% down and that you can immediately place a tenant in to start generating passive income.<\/p>\n You could be better off putting your time, effort, energy, and finances into traditional rental property investing. What\u2019s more, the more rentals you can invest in, the better.<\/p>\n8. Limits to the refinancing amount<\/h2>\n
Who shouldn\u2019t use the BRRRR strategy?<\/h2>\n
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