Posted on: 9 September, 2024
The BRRRR method has emerged as a popular alternative to traditional house flipping investment strategies. Here’s why.
The COVID-19 pandemic, energy crisis and economic downturn has turned the global housing market on its head. While in the UK, experts believe house prices are set to fall by the summer of 2024 and, globally, the housing bubble ‘has begun to deflate’, others predict there are still challenges ahead for the housing market in the coming years.
The recent fluctuation of the housing market has led many to question whether it’s the right time to consider investing in real estate, and to review alternatives to traditional investment strategies. This has led to the popularisation of the BRRRR method.
What is BRRRR?
BRRRR stands for Buy, Rehab, Rent, Refinance, and Repeat. This real estate investment strategy focuses on buying, renovating, renting and refinancing distressed and poorly maintained properties to allow further investments in property.
How does BRRRR work?
The BRRRR method is a step-by-step approach that, when followed correctly, allows real estate investors to quickly build a portfolio:
1. Buy
The first step of the BRRRR strategy is to purchase a distressed property that has potential. This could be simply that it’s undervalued, located in an attractive area, or that the purchase price can be cheap due to the amount of work required.
You’ll need to conduct thorough analysis and calculate the potential renovation costs to ensure you’ll achieve a satisfactory profit margin. The 70% rule – not buying a distressed property for more than 70% of its value post-renovation – can be an effective guideline at this stage.
2. Rehab
The next stage of the BRRRR method is to renovate the investment property in order to increase its value. The work required in the rehab process can range from structural improvements and updates to aesthetic and environmental optimisations, like retrofitting, that can justify higher monthly rent rates.
As stated above, the balance here is to ensure you’re not overspending but are sufficiently renovating the property to attract potential tenants and boost its appeal.
Learn more: A guide to retrofitting (and how it could help us reach net zero)
3. Rent
Once you’ve finished renovating the property, you’ll want to start renting it out. The amount of prior research and analysis you’ve put into this project will determine your success in this stage.
Naturally, you’ll want to find renters with a good credit report, no history of criminal activity or eviction and positive references. The amount you charge should be enough to attract high-quality tenants while also bringing a return on investment for the initial purchase and renovation costs incurred earlier in the process.
4. Refinance
Refinancing is the process of replacing an existing mortgage with a new one and ultimately extending terms so that they’re more favourable. In cash-out refinances, the new mortgage will be worth more than your previous balance, and you’ll receive the difference in cash.
The money you gain from a cash-out refinance can then be used to purchase another distressed property in a similar condition to the first. You’ll need to have owned the property for a certain period before you’ll be able to complete this step of the process.
5. Repeat
After the refinancing stage is complete, you’re ready to repeat the process with your new property, as you did before.
Is the BRRRR method effective?
Adopting BRRRR is an effective way to scale your real estate portfolio quickly, but as with any investing strategy, it isn’t without its potential risks and downsides.
Pros
Often requires little investment (and can be scaled quickly)
If the property is low enough in value and you do enough work in the renovation process, you can expect to make a healthy profit from a small investment.
Can be scaled quickly
BRRRR is a repeatable real estate investing process that is easy to scale. Once you’ve been through your first property, all that is required is to follow each of the steps again and apply your learnings from the first investment.
Opportunity for consistent cash flow
If you’re able to attract and secure a high-quality tenant, you’re well placed to generate a steady cash flow.
Offers a high return on investment
If followed correctly, the BRRRR approach can offer significant return on investment. If the cost of the distressed property is very low, there’s potential to generate a positive cash flow from it over time.
Can be run on autopilot
Compared to the work required in traditional house flipping, BRRRR can be run on autopilot once you find an effective system that works for you.
Cons
Loans can be expensive
Depending on the size of the loan you take out and your ability to make a profit from your initial investments, you can be stuck with growing bills and an interest rate.
Overestimating returns (and underestimating the cost of repairs) can impact short-term equity
There’s always the risk that, despite your best calculations and predictions, a property appraisal isn’t as high as you expected. Overestimating the after-repair value (ARV) of your property can also have an impact on short-term equity.
Similarly, underestimating initial rehab costs, the need for future repairsand failing to predict further additional costs can impact or potentially eliminate your short-term equity, at least until property prices increase.
Passive income isn’t a guarantee
While an ideal scenario would see the BRRRR strategy deliver a passive income stream, this unfortunately isn’t the case for all investors. Not all property investments are the same – as such, making a success of BRRRR in the long-term will require time and patience.
Competition is high
The booming popularity of the BRRRR method is making it an increasingly crowded market, as more and more investors recognise it as an effective way of generating steady income. To overcome this, you’ll need to look for strategic and creative solutions.
Repairs can be costly
If you own a rental property, you’ll be responsible for repairs, which will be inevitable over a certain time frame. Repair costs can quickly mount up and eat into your profit, depending on your rental income and if extensive repairs are required.
BRRRR vs house flipping: what’s the difference?
While BRRRR and the house flipping strategy are very similar in that they both involve renovating properties with the goal of increasing market value, there is one key difference. While BRRRR generates profit through renting, house flipping means selling the property.
There are advantages to both approaches. House flipping can be a faster way to build wealth, as selling a property will help you scale faster and give you faster returns than BRRRR.
In contrast, BRRRR offers more long-term benefits, as you get to keep the properties you invest in and obtain the profits of their long-term appreciation – as well as your rental income. Unlike house flipping, it can also generate passive income.
Who is the BRRRR method most suitable for?
Whether you opt for the BRRRR approach, house flipping or a traditional buy-and-hold real estate investing strategy depends on various factors.
If you’re looking at investing in the real estate market as a long-term endeavour and have the time and patience to make it work, the appreciation on top of passive income you’ll gain make BRRRR the best approach for you to adopt.
