The BRRRR Method
The "BRRRR" Method is really just a new catchy acronym for a real estate investing strategy that's been around for decades. It stands for "Buy, Renovate, Rent, Refinance, Repeat," and it is the fastest way to scale a property portfolio with a limited amount of capital. The basic premise centers around using leverage to recycle the same initial capital, creating income-producing assets that require you to leave very little of your own capital in the deal.
We like this method because it incorporates skills from many investment strategies and combines them to create a sustainable and scalable model for your investment portfolio. Using the same initial investment, you can buy multiple investment properties, and here's how:
1) You need to find a property that you can add value to, usually through some sort of renovation. The key is knowing what the After Renovation Value (or ARV) is going to be.
2) Once you identify the property, you would pay for it using your initial seed investment, and you would renovate it to force appreciation.
3) Once the property is fully renovated, you rent it at market rents (which should be significantly higher than you could have rented it for pre-renovation).
4) When you have a signed lease, you can go to a lender (we can recommend some great ones) and complete a cash-out refinance on the home into a conventional mortgage (typically 15- or 30-year term). The lender will typically lend anywhere from 65-75% Loan to Value on the new value of the home.
5) If you play your cards right, you can recover most (if not all) of the money that you initially put into the deal, and you'll still have 25-35% equity in the home. You then take that money and do the process all over again!
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Key Benefits of the BRRRR Method
The BRRRR method is all about maximizing the leverage that real estate allows.
Scale Your Portfolio Rapidly
Because you're taking advantage of leverage, you can very quickly scale a property portfolio, while still retaining significant equity in each property.
Tenants Pay Your Mortgage
When you rent out your property, your tenant's rent payments should cover most (if not all) of your monthly mortgage cost. So over time, your tenants actually pay down your mortgage for you.
Recycle Your Capital
With the BRRRR Method, you can use the same capital over and over again, eliminating the need to save a ton of money for every new down payment.
Take Advantage of Appreciation
Because you're holding these properties for a long term (as opposed to flipping, for example), you get to enjoy the benefit of appreciation, which is incredibly valuable in a market like Santa Barbara.
Since you are holding onto these properties for a long period of time, you can take advantage of a multitude of tax advantages, like depreciation and mortgage interest write offs.
The BRRRR Method in Action
Hypothetical Property Analysis
3 Bed, 2 Bath property in a good neighborhood
Purchase Price: $1,000,000
The property needs work! Comps in the area have sold for $1.5m when turnkey.
Purchase with $200,000 (20% down)
Renovation Expense: $150,000
Total Out of Pocket Cost: $350,000
Once renovation is completed, you rent the property out for $6,500/month
With the tenant in place, you do a cash out refinance at 75% of the new value ($1.5m) at a 3.2% interest rate.
This would put your monthly PITI (Principal, Interest, Tax, Insurance) payments right around $6,200, putting you about $300/month in the black.
After paying off your initial $800,000 loan, you have $325,000 (or 93% of your initial capital) back in your pocket and ready to re-invest.