The BRRRR (Buy, Rehab, Rent, Refinance, Repeat) Method! - House of AC #2
The BRRR method (Buy, Rehab, Rent, Refinance, Repeat) is an excellent way for first-time real estate investors to get their hands dirty and make some money. House flippers and renovators also use this method. And so do some of the most profitable real estate moguls.
The premise of the BRRRR method is that you’re taking a home that needs work, and you’re adding value to that home. If you see some homes being sold for 75 percent to 100 percent more than other homes in the same neighborhood, there’s an opportunity for the BRRR method. You want to look at homes that will double in value.
Finding a Good BRRRR House
Use Zillow or another tool to locate homes in neighborhoods cheaper than other homes. This might be because they’re smaller, have less bedrooms or bathrooms, or need more serious renovations. Before buying, ensure there isn’t a safety concern with the house that brings down the price. For instance, you wouldn’t want to buy a house in a flood plain.
Next, check Zillow for comps in the area. Are there houses that are slightly bigger going for more? Are their kitchens renovated? Are they move-in ready? All of these make a price difference. Spending a few minutes on comps can help you decide what direction you want to take your house. A house is a good bet if several similar houses are going for 75 to 100 percent more than your house.
Running the Numbers on a BRRRR House
Let’s say you found a house for $150,000. A 25 percent down payment is going to be $37,500. I like to do a 25 percent down payment because I’ll get better terms on my loan.
If you don’t have at least a 20 percent down payment, there are hard money lenders that will lend to you for a year with a higher interest rate. But it’s best to save until you have that 25 percent down.
That means that your loan amount is going to be $112,500. And your monthly mortgage will be $625.
Let’s say, conservatively, adding extra space to your home is going to cost $62,500. You’re at $100,000 invested in this house.
Getting the BRRRR Method Deal
Our house is now a $300,000 home. We’ve put in $62,500 to make it a 3-2, or a 2-2, or a 3-1. Any of those could have bumped the home purchasing price up. However, there are always hiccups, so you might have an inspector say after appraisal that its After Rehab Value (ARB) is only $287,000.
Next, you would go to refinance the home. The banks don’t like being on the hook for 100 percent of the home’s value, so they will require you to keep some equity in the home. Again, I always plan for 25 percent. If it comes out to only be 20 percent, then I win. But I don’t want to be banking on that to get the deal done.
25% of Equity
Refinance Loan Amount
Now here’s the fun part. The new loan company will pay off your old loan of $112,500. And then give you back the $100,500. You’ve essentially paid nothing for this newly renovated home.
Rent and Repeat
Depending on your market, you’ll be able to rent out your house for $1,500-$1,800 conservatively. You’ll want to do rental comps in the area to ensure you’re pricing it reasonably. But I like to think about it like $500 or $600 a bedroom on my rental units. After mortgage and property maintenance, you’ll have $50-$150 a month cash flow. From a free house. That’s not a bad deal.
The best thing about this method is that you can take the same $100,000 you invested in that first house and put it into a second house. If you do one or two of these a year, you’ll increase your cash flow to a couple thousand a month—all on the same $100,000 investment from the first home.