What is the BRRRR strategy?
Several strategies exist for analyzing potential real estate investment opportunities, many of which I have discussed over the years. The BRRRR strategy is more of a process that, if followed, can grow your portfolio of properties.
BRRRR is an acronym for Buy, Rehab, Rent, Refinance, and Repeat. Let’s take a look at each step.
Buy
Regardless of the strategy used in analyzing potential investment real estate to purchase, buying the right property at the right price is the most critical element. The BRRRR strategy is a cash-out type scenario in purchasing a value-added property.
There are several ways to add value to a property, with the most basic method being rehabilitating a distressed property. We will be considering a single-family house in our discussion. Still, typically this method could be applied to other types of property.
Knowing the market area you are considering, the potential rent, and the value of stabilized houses in good condition is essential. Learning this information will give you the groundwork to build off in determining the price to pay for a distressed house.
Rehab
After finding a house to purchase, the key is having trades professionals available to quickly provide you a rundown of the costs and timeline to make the house ready to rent.
Analyzing the purchase price, rehab costs, potential rent, and expenses will allow you to determine the property’s monthly cash flow and future value.
The costs and timeline are critical to thoroughly investigating the hidden defects. There may also be issues with updated building codes and requirements imposed by the city or county.
Rent
In your preliminary work, you already know the market rent for the property. Still, timing is a factor as the market changes significantly if your rehab takes an extended time. In the past few years, several issues attributed to factors that affected renters and landlords alike. The market is robust currently in my area with a scarcity of houses available, but this could always change.
Refinance
Interest rates are increasing and are more than double what they were a year ago. Plus, rates are usually higher for investment property. Having a relationship with a lender will help you quickly keep abreast of the market in a purchase and a refinance.
Unless you have several hundred thousand dollars or more in cash for the purchase, you will pay off the first loan when you refinance. Keep in mind two aspects of financing; first, there are many costs associated with securing a loan that will diminish your profit. You pay these costs when you purchase, and then you will pay again in a few months when you refinance. Second, some commercial real estate loans have a prepayment penalty.
Repeat
To make the BRRRR strategy work, you need to have increased the value of the house significantly enough to warrant refinancing to pull money out to purchase your next property. Keep in mind cash flow as if your rent income does not cover all your expenses; it was probably not a good investment.
Burt M. Polson is the CEO of ACRESinfo.com, a commercial real estate brokerage company, and CEO of StoneMarkerInvestments.com, a private equity real estate fund. Call him at (707) 254–8000 or email burt@acresinfo.com and burt@stonemarkerinvestments.com.
