Have you heard of the brrrr method?
If you’re an inspiring real estate investor, I recommend you bookmark this article and read it a few times.
In this article, we’ll break down everything you need to know about the brrrr method.
Let’s dig in.
What is the brrrr method?
So let’s start from the top; what exactly is the brrrr method?
In short, the brrrr method is a real estate investment strategy that aims to minimize the amount of capital you have left in the deal. The idea here is that it allows you to continue to “BRRRR” more properties and not run out of money to do so.
Advantages of the brrrr method
There are some obvious and not so obvious advantages to the brrrr method.
Let’s dig in to a couple.
Potentially leaves little (or no) money in the deal
When you BRRRR a property, you are typically going to use what’s known as “Hard Money” to acquire the property and to repair it.
As you can imagine, as the risks associated with this sort of project tend to be higher, the terms associated with the hard money loan is going to be pretty steep.
While the terms can obviously vary, we typically like to use a flat rate of 16% for calculation purposes.
Nevertheless, you are typically going to use a hard money loan to acquire and fix the property. Once you’ve fixed the property, got it rented and appraised, you’ll then go to the bank and refinance to cash out a certain portion of the equity you just created.
If you’ve done the math correctly, you’ll pay off your hard money loan completely and be left with 20-25% equity in the property.
Allows you to build a portfolio full of Renovated rental properties faster than other traditional approaches
So let me repeat what I just said above….if you’ve done the math correctly, you’ll pay off your hard money loan completely and be left with 20-25% equity in the property.
There are a few more hidden gems in there though.
- Because you’ve left little to no capital in the deal, it means you can try to repeat the process again and again. Assuming you’re successful, this is a lot faster than simply trying to save up 20% for a down payment every time.
- You are building a portfolio of RENOVATED properties. This means you should be able to get better tenants and lower your maintenance costs for a while.
- You are basically getting 20-25% equity with every property. As you build your portfolio and your tenants pay down your mortgages, that equity grows; allowing you to leverage it if you really wanted.
- Even if you have to leave in some capital, when you run the numbers, you’ll notice that your return on investment is pretty nice. If you manage to get all of your capital out of the deal, your ROI is essentially infinite.
Risks that come with the brrrr method
Alright. So now that we’ve got everyone excited about the brrrr method, let’s bring things back to reality a bit and talk about the challenges associated with the approach.
Will require hard money or a lot of cash
As I mentioned earlier, unless you have a lot of cash laying around, you are going to have to borrow from a hard money lender to acquire and fix the subject property.
The terms with these loans will feel loan shark-ish.
Before you get into this sort of situation, you MUST identify a contingency plan (or multiple contingency plans) in case things go side ways.
If things go sideways, and you can’t make it right with the hard money lender, they are going to force you through the foreclosure process and you’ll find yourself in a tough spot.
Rehab doesn’t go as planned
When brrrr a property, you want to get to the refinance period has fast as humanly possible.
Think about it. If you have a loan with a rate of 16%, the amount of holding costs you will pay each month are pretty intense when compared to the rate you’ll get when you refinance.
Of course, this is a bit more bearable if you are financing the acquisition and rehab of the property with your own cash. However, there are still opportunity costs associated with a delayed rehab schedule.
With that being said, consider the following to help minimize this risk:
- Can your property some how still generate revenue during the rehab?
- Can your rehab project be financed in phases?
- How can you incentivize your rehab team and ensure quality, timely work?
- Should you create a project plan of sorts and identify a literal task list with dependencies?
Appraisal or refinance doesn’t go as planned
Lastly, as you can imagine, this strategy really hinges on the appraisal of the property.
If, for some reason, you’re unable to get the appraisal you need, you are going to be stuck with more money in the deal.
This really comes down to having a clear understanding of the appraisal process and doing your homework on the comps up front.
I don’t want to get too deep into calculating after repair value in this article, however, the below arbitrary screenshot should give you an idea of how to go about this (we’ll write up a deeper dive on the steps for calculating ARV later).
The point here is, you should have a pretty good idea of how the appraiser will go about determining the value of your property once it’s fixed up. Take advantage of that and reverse engineer it before you acquire the property.
Your analysis of the ARV for this property should literally drive your entire brrrr project.
Remember, the goal is to NOT gamble and instead, only make wise money moves.
How to find brrrr Opportunities
One of the biggest challenges with the brrrr method, at least at the time of publishing this article, is that there are not a lot of deals out there that make sense to execute this on.
Of course, that makes sense, right?
In a seller’s market, great deals are going to be hard to find. In a buyer’s market, you’ll find more of these.
Here are a few things to consider when trying to find brrrr-able properties
Know your numbers
This should go without saying but you HAVE to know your numbers.
- What are your acquisition costs?
- What are you rehab costs?
- How long will it take to rehab and how long to refinance?
- What are your holding costs?
- What do your refinance costs look like?
- What is your after repair value?
I could go on and on.
The brrrr method is, essentially, one big math problem.
Get the numbers wrong and you’re in a tough spot.
Get the numbers right and you’ll start building wealth quickly.
Do NOT execute on this strategy unless you know the numbers in and out.
Set up MLS searches with a local Realtor
Once you are comfortable with how the math works and have the tools in place to properly crunch the numbers on deals that come in, you need to reach out and work with a reputable real estate agent who has a track record of working with investors before.
Your agent will set up a number of MLS searches for you to alert you to any opportunities that come on the market.
The trick here is narrowing in on the right queries to use so you can weed out stuff that won’t be a good deal.
This is harder than you think. You really need to get creative in your search queries.
Here are a few searches to consider:
- Homes that have enough square footage to add another bedroom.
- Homes that have been on the market for a long period of time (Good indication that something may be wrong with it. Problems are good).
- Searches with key terms like “issues” and “repairs” that indicate there may be problems
How to Quickly Evaluate BRRRR Opportunities
Even with the best MLS searches, once you have brrrr opportunities coming in, you’ll likely realize that there are too many for you to do a deep evaluation on.
For this reason, you’ll want to establish some general rules of thumb to help you filter out the junk.
Luckily for us, we don’t have to re-create the wheel here.
The 1% Rule
We’ve talked about the 1% rule in the past but it’s certainly worth repeating.
If a property is listed at $100,000, it should rent for at least $1,000 per month. If it can’t already rent for 1% of the asking price, chances are it’s not worth your time.
The 50% Rule
Another general rule of thumb that you can use to quickly evaluate deals is the 50% rule.
The 50% rule essentially says that you can expect 50% of your gross income to be chewed up by the property’s operating expenses.
Here’s an example of how to break it down and use it:
- $2,000 (Monthly rent) / 2 = $1,000
- $1,000 – $500 (mortgage) = $500 (cash flow)
If you have cash flow after you take out estimated operating expenses and your mortgage payment, you pass the 50% rule.
At this point, savvy investors will scream “What about capex, maintenance and management costs!?!?”
Again, these are just general rules of thumb to help you weed out the bad deals.
You only want to dig in on deals that stand a chance at moving forward if you can help it.
Evaluating a BRRRR Opportunity That Passed the Rules of Thumb
As you pass your BRRRR opportunities through your rules of thumb filters, you’ll eventually find some to dig deeper on.
At this point, you need to go all out on your evaluation.
Here at Holland & Picht, we built a literal spreadsheet that helps us run the numbers on these deals quickly.
Before you go see the actual property, open up Zillow and apply some filters to find potential comps in the area. If you find 2 or more similar properties that have recently sold for significantly more than the asking price of your subject property, move forward. If not, stop and ask your Realtor for a 2nd opinion.
At this point, once you’ve identified a property that passes your rules of thumb and has good comps, you’ll want to have your Realtor lay eyes on the property for you or even go see it yourself.
When doing this, you are essentially trying to build a list of things wrong with the property that you may or may not need to fix. The goal here is to get a general idea of what the total repair costs would be to improve the property to comparable properties that recently sold in the neighborhood.
If you run these estimates through your calculator and the numbers work, you can get more serious about getting contractors involved and building out an offer.
Rehabbing and Refinancing a BRRRR Deal
Once you’re in to a brrrr deal that makes sense, executing on your rehab plan is the same as always. We’ve covered this before so we won’t dig in to it much here.
However, just make sure that you EXECUTE on your well thought out plan. Remember, the time is ticking on that hard money loan.
In regards to refinancing, there are a few things you’ll want to keep in mind and check on before you jump in to a project:
- Confirm how much you’ll be able to refinance (it vary between 70-85%).
- Confirm if there is a required “seasoning” period by the bank. If so, this will extend the period of time in which you are working with hard money.
- Confirm the terms.
- Confirm how much cash you need to have in reserves to refinance. This is typically 2-3 months of the expenses.
- Lastly, make sure that you will pass the “housing expense” and “total obligations” ratios required by the bank.
I hope this helps.
The brrrr method is a great investment strategy if you know what you are doing and can find ways to minimize the risks we discussed earlier.
If you have any questions, thoughts or general feedback, we’d love to hear from you.
Best of luck!