Real Estate Investing Using the BRRRR Method: How to Buy, Rehab, Rent, Refinance, Repeat
When it comes to real estate investing, BRRRR stands for “buy, rehab, rent, refinance, repeat.” But what else should real estate investors know about this popular strategy?
First, it’s important to realize that, when you refinance a property, you’re pulling the equity out of that property.
Something critical to this strategy is understanding the differences in how real estate is valued. Most of us are familiar with the idea of “comps,” or comparable properties, which involves evaluating the value of a property based on its neighborhood, similar properties, proximity to schools, and many more factors.
Understanding Cap Rates & the BRRRR Method
For real estate investors, however, it’s all about cap rate, not comps. And a cap rate is a fancy way of saying the percentage of return based on the value of the property. So, if I have a property that’s worth $100,000 and I’m getting $10,000 in my pocket every year (net), that’s a 10 cap property. The easiest way to calculate this formula is to take the net operating income (which is the money leftover after all expenses, like management fees, repairs, insurance, property taxes, etc.) and divide it by the fair market value of the property. That gives you the cap rate.
When you start to utilize the BRRRR strategy with cap rates, there is tremendous potential. Owning real estate is awesome, but owning real estate with too much debt can topple you. Using the BRRRR method could help you avoid that if you know your numbers.
Rehab Costs & Fair Market Value
To start, you usually end up looking for a property where you can buy it and improve it for 75% or less of its fair market value, what we call an “approved value” or “improved value.” Let’s say you buy a property for $40,000 and you know you’ll put $50,000 into improving it. After improvements, you’ve calculated that the fair market value will be $120,000. Using simple math, we could say that 75% of $120,000 is $90,000, so this hypothetical scenario would be right on that line.
In this scenario, if you refinance the property based on its fair market value of $120,000, you’ll have earned 25% of the property as equity. You then refinance the $90,000 you put into the property, and go do this same process again.
Historically, real estate appreciates around 4% per year. As the property appreciates, the fair market value will increase. At that point, you could pull more equity out and start the entire process over again.
The most important pay of using the BRRRR strategy is how you identify and purchase the property. It’s all in the very beginning. It’s critical to know your numbers and make sure you have good financing lined up before you walk through the door.
If you’d like to discuss the best entity structuring to couple with your investing strategy for even greater returns, reach out to one of my Senior Advisors now with a complimentary Strategy Session. On the call, you’ll go over the best tailor-made entity structure for your individual situation. If you’d like, we can help implement it for you, too. You can schedule online or by calling 888.871.8535.