The BRRR Strategy Explained
Early on in my real estate investing journey I had to get really creative because I didn't have a ton of extra capital just sitting around to invest.
It just so happened that when I was just getting started we were in the worst economic recession next to the great depression.
Many thought I was crazy for buying rentals (my family included).
I even got a random facebook message from a girl I went to high school with (that I hadn't spoken to for like 6 years) which included a warning along with a a YouTube video talking about how the world was doomed and that no one should buy real estate because the value was going down.
TRUE STORY... she was seriously worried enough about my investing in real estate to take the time to find a YouTube video to convince me that I was crazy.
Anyway, the huge opportunity I saw in 2010 - 2013 was that properties were being offered at a massive discount, and anything that needed work was an even better deal. Only challenge was in financing those ugly properties, that was until I learned about the BRRR Strategy!
What does BRRR Stand For?
BRRR Stands for Buy-Rehab-Rent-Refinance.
I use to call this strategy the zero down rentals and I believe BRRR was coined by Brandon Turner with Biggerpockets. It has a much better ring to it so I ran with it.
Why Should Investors Use This Strategy?
There are SOOO many reasons why investors should use this strategy.
Infinite ROI interest anyone?
The goal of this strategy is to buy a property that is undervalued (like my ugly properties or it could be a perfectly normal property that you got at a discount for some reason) using a hard money loan at 100% of the value + the renovation costs, then quickly renovating the property to maximize the amount in rent you can charge and then refinancing using the new appraised value and be left with a high cash flowing property with at least 25% in equity and none of your own capital in the deal.
What Do You Need To Do A BRRR Deal?
First things first, you'll need to find a hard money lender that is willing to give you a loan for the entire purchase price along with your renovation budget. They can collateralize your bank account, like mine did as security and release it upon payoff. If you can't find one that's willing to do that you can still move forward you'll just need to do a cash out refinance if you want to get your capital back.
The second person you need is a lender who can do a rate and term refinance of the hard money loan with no seasoning requirement. A seasoning requirement is an overlay used by some lenders who want to see at least 6 months of ownership before using the new appraised value. I use Caliber Home Loans exclusively for conventional loans because they are very pro-investor and do not have seasoning requirements.
Next you'll need someone to do the renovation, and quickly since you'll be paying interest to a hard money lender at a hefty rate. You can do the work yourself, or hire a contractor to do it.
Last you'll need an investor savvy agent (only way I buy my investment properties) to source deals for you. They will be able to estimate the after repair value for you so that you can have an idea of if the property will appraise for what you need it to.
How Do You Find A Hard Money Lender?
Depending on the area you're looking in, we may be able to provide you with some contacts for hard money lenders who offer BRRR financing at 100%.
Another option is to look on Biggerpockets or google and see if you can find a local company.
Be sure to make sure that the company you're working with is reputable and has a track record of doing loans. If they do not record the paperwork right, the refinance may not go well.
How Does The Refinance Work?
The conventional lender will order a new appraisal after the tenant has moved in and all of the work is done.
They will be able to use 75% of the new appraised value for the new max loan amount.
For example, if you have a hard money loan of $125,000 and the new appraised value is $200,000 then the new max loan amount can be $150,000. Since you only owe $125,000 you can choose to leave the new loan amount at $125,000 (plus refinance costs which you can roll into the new loan) or you can do a cash out refinance and pay yourself $25,000.