What is BRRR?
BRRR is an acronym for a popular strategy among real estate investors. It stands for Buy, Renovate, Rent, Refinance, (and Repeat.)
It’s one of the core strategies I’ve used to build my rental portfolio from 1 property to 28 doors in about two years.
When you put it in acronym form it sounds super easy. In practice, it’s much more nuanced. And in practice it works much differently than in the books.
Many of my clients are also pursuing this strategy. Many have been successful with it. However, in the beginning, I often have to taper their expectations by pointing out some first-hand lessons. Here’s what I usually say…
7 Thoughts On The BRRR Strategy In Birmingham
1. Time Is On Your Side
Buying a BRRR is similar to buying a flip. The trouble with flips is that time is working against you.
With BRRR you put time on your side. Time is a powerful force. With rentals, you put it to work for you. Rents and property values creep higher, tenants pay off your mortgage each month, and you delay or defer taxes.
This is why I love rentals in general. The BRRR method gives you the equity capture benefits of flipping. But unlike flipping, time is your friend.
2. Not easy to find
To truly execute this strategy well, you need to buy houses well below retail value. You can find these houses on MLS, through wholesalers, or through auctions.
They will usually be full of junk, stinky, and need repairs. Those are some good things to look for.
On MLS, look for houses that have been on the market for a while, but aren’t getting much activity. Bonus points if they have no interior pictures.
With wholesalers, you have to network to find them. You have to pay cash, and forego most normal inspections. Also, you have to run your own numbers. Ignore any numbers they give you for construction or appraisal value.
I don’t have much experience with auctions, but I know people that have done well going this route. I think it’s something you need to specialize in if you want to have success.
3. Appraisal Is The Wild Card
The best area’s for BRRR also have high investor activity. There are lots of distressed sales that may get used as comps in a valuation. This causes a wide range of appraisal outcome possibilities.
Here’s another variable that makes it a wildcard. Some commercial lenders will use BPO’s (Broker Price Opinion) or “Automated Valuation Models” instead of an appraiser to make their assessment of value.
As an agent, I know what I can sell a renovated property for. But, appraisers can only go off data. If they pick the wrong data, you lose out.
4. Difficult in C Class areas
I call any area of Birmingham where there are many sales below $50k a C class area. These area’s can be alluring because they are so cheap, but rents aren’t much lower than $90k houses.
The problem is that very few lenders want to make a loan for $50k or less. It’s not profitable for them.
Refinancing one at a time this way is a tough proposition. However, If you’re able to package 3-10 of these houses into a loan, this model can make sense.
5. Don’t Plan To Refinance Out Every Dollar
Because construction and appraisal results can vary, it’s impossible to know that you’ll get every dollar you invest back.
Don’t expect to pull out all invested capital. Sometimes you might. Sometimes you’ll have 20% left in the property.
On the whole, you should be able to accumulate a better quality portfolio with less of your own money invested. To me that’s a successful BRRR.
6. You Earn Your Equity In Ways Other Than Capital Investment
You may not have any money tied up when the project is completed, but it’s not a free house. You earn your equity through time invested doing the following…
- Finding and buying distressed properties below market value. Usually either the house is distressed or the seller is distressed. You have to know what a good price is.
- Doing construction yourself. Either manual labor or general contracting the job.
In other words, it’s a lot of work. And it’s much harder to pull off if you’re new or don’t have a lot of spare time to learn.
7. Don’t Plan To Live Off Your Cash Flow.
Financial freedom is all the rage these days. Rentals can get you there, but it takes years. It takes quantity.
Investors get in trouble when they start living off cash flow. Properties will deteriorate because nothing is reinvested. I see it all the time.
Rentals will build your wealth like nothing else. The BRRR method is especially powerful. But you have to remember it’s a long term game and enjoy the build.
Thanks for reading! I’d love to hear any questions or feedback. CLICK HERE to send me an email!