- BRRRR is a new tactic for real estate investing that stands for Buy, Rehab, Rent, Refinance, Repeat.
- It focuses on making profit from repairing and refinancing homes while gaining passive income through rental income.
- Hack the BRRRR tactic by using Ark7 to take care of property management for you so you can focus on saving time and energy.
Today, there are so many tactics and ways to invest. There is a new concept on the rise for its simplicity and efficiency called BRRRR. Tongue twister, right? The full name of BRRRR is Buy, Rehab, Rent, Refinance, Repeat.
This concept was developed in recent years by the largest online real estate investment community called BiggerPockets. It was presented by the hosts of the BiggerPockets Real Estate Podcast, Brandon Turner and co-host David Greene. Each has a strong background in real estate and are authors of best-selling books.
Let’s Break it Down
Buying, repairing, and renting is something that all property investors have experienced, and it’s easy to understand. The step most crucial to BRRRR is the “Refinance” step that refers to the bank’s purchase of real estate as a guarantee, refinance to cash out.
In the process of refinancing, the bank reevaluates the value of the home at the time it is applied for. Therefore, if the investor buys a property with sufficient potential, they can complete maintenance to achieve a larger increase in value. Thus, the refinancing income can be higher than the cost of the initial buying and maintenance investment. This leaves the investor with excess refinancing funds to buy the next property.
Typically, most U.S. banks approve an investor’s application for a loan that covers 75% of the value of a home. When investors buy a house, they can assess the condition of the house and make sure to have their total purchase and repair cost stay within 75% of the house price after repair. This is so the model of BRRRR can be repeated.
For example, suppose an investor looks at a $500,000 property and finds that the value of the property has the potential to reach $1 million at a cost of $250,000 to repair it. If all goes well, investors can have the bank lend them money based on the newly appraised property value of $1 million. If the bank approves a loan of 75% of the value of the property, the investor can take $750,000 for the next round of real estate investment.
That $750,000 in cash is equivalent to the cost of an investor’s first home ($500,000 in purchase and $250,000 in maintenance). During the loan process, the first home is still generating rent and a stable cash flow. This allows the investor to take the money that the bank loaned of $750,000 and put it into a new property to continue generating income.
Advantages of BRRRR
Obviously, by making a reasonable assessment before buying a house, investors’ cash flow will not be affected by the mortgage aspect of the BRRRR strategy. But through BRRRR, investors can gradually build their own “real estate kingdom.” This tactic allows for the ROI, or return on investment to continuously snowball.
Second, the investment risk of real estate is lower than that of other types of investment. Especially for houses where the market is stabilized by other sales and comps around it.
In the actual implementation, many investors will take into account the various risks, leaving room for the valuation of the home.For example, in the case of a $500,000 property, investors will not spend all the $250,000 in maintenance costs, but limit their repairs cost to abor $200,000, leaving room for unforeseen circumstances. The more cautious that investors are when taking valuation of an investment home, the lower the risk.
Finally, real estate is superior to other forms of investing for investors who consider both risk and return. Rent can provide a stable cash flow, and long-term market appreciation can give investors more opportunity for gain.
Disadvantages of BRRRR
First, BRRRR requires a large initial cash investment. The process of buying a home usually involves both a down payment and a mortgage. The loan generates interest and reduces the benefits of BRRRR. Therefore, to make the most of your investment, it is best to buy a home in full cash. However, this is difficult for most people.
Second, in the United States, home construction and maintenance is very complex, at any time there is a risk of high costs and even losses. The construction and repair team often provides an approximate timeline when signing a contract, so if there is a delay due to some unforeseen circumstances, the team is not responsible and has no obligation to rush their work. The loss of cash flow during this period will only be borne by the investors themselves.
At the same time, the cost of the renovation process itself due to shortages and inflated prices can be burdensome on the investor. As we mentioned in our previous article, there is a severe shortage of raw materials for construction affected by the pandemic and the price of wood has tripled from last year. Such a situation may significantly increase the cost of the home renovation, resulting in more than expected costs.
There is also a possibility that the construction team may be difficult to work with and have high starting prices. Shoddy construction practices are not uncommon. Investors have to be extra careful throughout the repair process and try to find a reliable team. This, however, can be difficult and investors should be careful if they adopt the BRRRR strategy.
Third, it is difficult to accurately assess the value and cost of a home, but this step can be the key to the overall strategy. In a series of operations of BRRRR, investors, due to inexperience, incomplete information, and even personal emotional factors, may lead them to underestimate the cost of the renovation, overestimate the value of the renovated house, overestimate the possible rental income, or underestimate the time required to complete the renovation. These miscalculations can significantly reduce the benefits of the BRRRR strategy.
Fourth, dealing with tenants can be troublesome. If the tenant refuses to pay rent or uses the house unreasonably, the investor will have to find ways to collect the rent or legally evict the tenant, or even have to the law involved to get compensation for losses. This requires investors to put in immeasurable time costs and energy.
To sum up, BRRRR, as a real estate investment strategy, is worth trying for investors who have more time and energy and prefer low-risk targets. But for investors who want to invest in real estate as a passive investment and do not want to invest too much energy, it is not so suitable.
So, is there a better option?
Of course there is! Ark7, a real estate securitization trading platform, allows users to truly enjoy the advantages of passive investment. The real monthly rental income cash distribution is earned monthly, and the real estate value-added appreciated income is obtained over time. The housing management problem is solved by Ark7 management.
At the same time, Ark7 relies on a professional real estate investment and management team, which has many advantages over individual investors using BRRRR strategy. First, with Ark7 investment, the capital is very flexible and attainable with shares starting as low as $5.40. Second, the user starts earning cash distributions from the rental income immediately to not waste any time. Third, Ark7 professional housing management team controls the maintenance costs of the house, reduces unnecessary overhead, and improves revenue.