The BRRRR Strategy

The BRRRR Strategy is widely considered the most efficient form of investing in real estate, and has 5 distinct steps. Buy, Rehab, Rent, Refinance and Repeat.

Identify undervalued and distressed properties in an area with a strong rental market.

Ideally these properties will need fixing up, giving you excellent potential to add value to the property.

After selecting one property that fits your criteria, you will be ready to apply for a bridge loan.

Once you have finalized the purchase, it's time to start adding value by fixing up the property. You must make the property livable and appealing to future tenants.

After the Rehab is looking spiffy, now is the time to put it on the rental market and advertise to prospective renters.

Be sure to screen your tenants to avoid problems such as damage, non-payment and vacancies.

Getting the units rented will stabilize the property and will help for the next step of the process.

Once the units are rented and you've owned the property for 6 to 12 months, it's time to transition from your hard money loan to a traditional 20 to 30 year fixed loan at a lower interest rate.

If you are a first time home buyer and your credit score is subpar you could consider using anFHA Loan.

Since the bank has now appraised your property at a higher value due to your rehab, you'll now have more equity in the property that is eligible to be pulled out.

1. No Money, No Problem
   With limited capital required to implement this strategy, it is great for cash poor investors.
   
   The main focus is on finding undervalued properties and adding value to them.
   
   This can create a strong return on investment.
   
2. High ROI
   Since little capital is required, once the property is rehabbed and rented, the cash flow should supersede the debt service required on the property.
   
   This will create an asset that generates a mostly passive monthly income, with little money invested, translating into a high ROI.
   
3. Increased Equity
   Through the rehab procedure of the process, the investor should be able to capture increased equity in the property since it will be in better condition and command higher rents.
   
   Additionally, there is the added bonus of owning the property free and clear in 30 years, after the mortgage is completely paid off.
   
4. Reliable Tenants
   Since you recently remodeled the property, you have a higher likelihood of attracting a higher quality of renters.
   These renters are less likely to mistreat or disrespect the property and will pay rent on time.
   
   This in effect will allow you to meet your monthly mortgage payments.
   
5. Scalable
   As mentioned before, this process can be repeated over and over again, making it scalable.
   
   You can also achieve economies of scale via owning a large number of rental units.
   
   Spreading out the cost of your maintenance and management team across multiple properties will make your business more cost effective and efficient.

1. Over Estimating Rental Revenue
   If you over project your rental income for a property it will delay the time in which you can pull cash out and start your next project.
   
2. Expensive Hard Money Loan
   When purchasing a property, if you don't sufficient funds a hard money loan will be needed.
   These interest only bridge loans can carry a rate of 8% to 15% annually.
   
   If you make mistakes along the way and the project is delayed it will be costly and ultimately have a negative impact on your ROI.
   
   Therefore, it's in your best interest to transition out of this loan as quickly as possible.
   
3. Appraisal Risk
   If the property does not appraise well after the rehab process this will make it difficult to repeat the strategy, due to you not having extra equity in the property to cash-out and use for you next purchase.
   
   Hence it is crucial to be well seasoned.
   
   It could be advantageous to learn as an apprentice under another investor, helping to learn the ins and outs of the business before going it alone.
   
   You will also gain invaluable business contacts.
   
4. Too Highly Leveraged
   One major advantage of real estate over other assets is your ability to leverage properties and gain access to more capital for additional projects.
   
   However, a drop in the real estate market could create financial issues.
   
   If your rental income is not able to service the debt, you will be underwater on the property and could be subject to foreclosure.
   
5. Vacancies
   If there is a drop in the real estate market, you may not be able to achieve your desired rental income, therefore causing vacancies.
   
   If this problem subsists, for a long period of time, it would create a risk for foreclosure on the property.

Hopefully this article helps to clarify the benefits and risks of the BRRRR strategy. If you have any questions or comments be sure to let us know.