What is the BRRRR Strategy?
What is the BRRRR strategy?
The BRRRR strategy is an acronym that describes a popular investing strategy in Real Estate to buy a property and eventually own the asset with very little of your own money into it. To visualize this strategy we’re going to use an example of a 4 unit property.
What does BRRRR stand for?
Let’s break down each letter.
This is where you’re going to buy a property but not just any property. The property you want to buy is going to be under market value. The reason being, you want to add value to the property when you get to the renovation stage of the strategy. So for our example of the 4 unit property, we're going to assume it’s in rough shape and is getting under market rents at $800 per room, so the property brings in $3,200 a month. Let's also assume that the fixed up market value of the property is $700k. Since it’s well under rented and needs work, we’re able to buy this property for $500k.
You want to do strategic renovations to the property that saves on money but also spices up the property. Focusing on the kitchen, flooring and paint are low cost ways to increase the value of your property. Let’s say you spend $25k per unit, so $100k in renovations.
Now that you have 4 beautifully renovated units you’re going to rent each unit for market rents. We’re also going to assume that market rents are $1,400 per unit meaning our total gross income on the property is $5,600. When you’re choosing renters, you want to qualify them because it’s easy for them to lie on an application. You want to get the following items from them:
- Their employment - call to confirm they’re employed there
- Credit report
- Background check
Now that you have a fully renovated building, with all 4 units paying market rents you now are going to go to the bank and they will appraise it. Let’s say you do so and the appraisal comes back at $700k as anticipated. The bank will give you a mortgage up to 80% of the new value which would be $560k. Now if we remember the total costs that we have into the property are as follows:
Purchase Price- $500k
Closing Costs- $15k
All in costs - $565k
So if the bank is going to give you a new mortgage of $560k you’re going to take that mortgage amount, pay off $560k of your previous costs of $565k which leaves $5k left over.
Now let's assume your expenses are as follows:
New mortgage: $2650
Total All In: $4,050
Total Income: $5,600
Total expenses: $4,050
Total CashFlow: $1,550
This means that you now own this property for $5k of your own money and it produces you $1550 a month in passive income.
Now that you have your original capital back, you can now repeat the process and keep buying more property with it. This is exactly how generational wealth is created.