How to Decide if an Investment Property is the Right Decision: The BRRRR Method
Investing offers the potential for consistent income and long-term financial gains, but it's a decision that requires careful thought. Whether you're stepping into property investment for the first time or adding to your portfolio, conducting a thorough analysis is key. Learning about common strategies like the BRRRR method can help you assess whether a property investment aligns with your financial goals.
The BRRRR Method
The BRRRR method is a popular strategy in real estate investing, especially among those looking to build wealth through rental properties. But is it the right approach for you?
What Is the BRRRR Method?
The BRRRR method stands for Buy, Rehab, Rent, Refinance, and Repeat. It’s a strategy designed to allow investors to recycle their capital quickly, enabling them to acquire multiple properties without needing to raise new funds for each purchase.
How Does the BRRRR Method Work?
The process begins with purchasing a property, often one that needs significant repairs (Buy). The investor then renovates the property to increase its value (Rehab), after which they rent it out to generate income (Rent). With the property now generating cash flow and having appreciated in value due to the renovations, the investor can refinance the property (Refinance), typically pulling out their initial investment. Finally, the process is repeated with a new property (Repeat).
Economic Considerations
The BRRRR method is a model that many people utilized during the stage of the most recent real estate cycle when interest rates were low. Before you acquire a property you’ll want to talk with your bank or mortgage broker to confirm where rates stand and how much money you’ll be able to pull out of the property on a refinance. In recent years, lenders have made changes to prohibit pulling out as much equity from a refinance as investors were used to seeing, so you’ll want to make sure you are looking at the full picture of the debt piece before you jump into buying a property.
In addition, during a high interest rate period you’ll want to pay close attention to the holding costs for the property. A lot of investors have seen that properties that need rehabbed are not necessarily discounted enough in purchase price to offset the high holding costs of the debt during the rehab and rent phase. This doesn’t mean you should pass on purchasing an investment property to rehab and rent, it just means you’ll want to run the numbers very carefully on the the purchase price for the property, the renovation costs, confirm how much money you’ll be able to take out of the property on a refinance, the anticipated mortgage payment once renovation is completed and finally your anticipated rental amount to be sure you are making some profit - or if you can - break even on the ownership and maintenance of the property with the expectation that interest rates won’t be high forever and you’ll eventually be able to refinance into a lower rate, all while writing off from your taxes, the higher interest rate that you’ll be paying.
Maximizing the BRRRR Method in a High Rate Environment
In a high interest rate environment you should consider all of the places that you can squeeze on cost savings. Obviously, you’ll offer on the property for the lowest price you can, but consider looking for properties that have been sitting on the market for several weeks, or properties that were pulled from the market and have been listed again, which is likely because the prior contract fell through.
If you do not have your broker license to purchase the property on your own behalf, would the broker that you are going to work with agree to share the commission they are going to collect with you?
Consider shopping around to different mortgage brokers and banks for the best rate that you can get. You’ll also want to make sure the broker is giving you the full picture of the costs to arrange the debt for the property so you can compare different brokers the same. Brokerage fees and rates can vary widely.
On the construction phase of the project, consider whether there are any aspects of the rehab that you can forego altogether OR delay - for example if the house is going to be a rental, do you need to spend much money on the landscaping or installing a fence - or would simply cutting the grass, removing or trimming some shrubs and putting down new mulch get you the same rental income. You should assume renters aren’t going to take care of the landscaping except in a minimal way, even if they are required to under their lease.
For the rental phase, were you planning to hire a property manager to lease and/or manage the property for you? Is it possible for you to lease it or manage it yourself? If the property is located out of state or not close to where you live, you may not be able to cut this expense from your budget, but it’s certainly a good idea to shop around extensively to find someone that will rent your property for the best rate to maximize your return.
Can the BRRR Method Work For You?
The BRRRR method can be a powerful strategy for those willing to take on the challenges of property rehab and who have the ability to manage multiple rentals. However, it requires a significant amount of capital upfront, as well as time and effort to oversee the rehab and tenanting processes. It’s also crucial to have a strong understanding of the local real estate market to ensure that the refinanced value will be sufficient to pull out your initial investment.
When considering property investment, it's essential to understand the strategies and tools at your disposal. The BRRRR method and the 1% Rule both provide useful frameworks for assessing potential investments, each with its own benefits and challenges. Evaluating your financial position, risk tolerance, and current market conditions is key to making an informed decision. Additionally, seeking advice from a real estate expert can offer valuable insights, helping to ensure your investment aligns with your long-term financial objectives.