What is BRRR in real estate investing?
We have entered an interesting investment time, cash flow is being squeezed as property prices rise and rental rates stabilize. The cap rates on investments are being reduced and investors are looking for better returns. So what options are available for better returns? There are 3 primary investment strategies that have been commonly used in the past. Turnkey investing for the passive investors, then there is fix and flip and wholesaling commonly used by active investors.
The New BRRR Investing Model
Buy-Renovate-Refi-Repeat. This investment model has been a great hybrid that is appealing to passive investors and active investors alike. The BRRRR strategy is a financial strategy used in the acquisition pace of creating a turnkey investment property
· Typically, You the investors will buy a distressed property with all cash.
· As the investor you will invest with a developer to completely renovate the property to a high rental standard.
· As the investor your total price for the asset and the renovation is generally discounted to reflect the fact that the developer is using the investor’s cash rather than their own. This is a key difference from turnkey. This difference allows you the investor the opportunity to create accelerated equity. This was a once profit center for the turnkey sellers.
· After a lenders mandatory 6-month ‘seasoning period ‘you, the investor can pull out built-in equity using a conventional loan. You can pull out up to 75% of the appraised value regardless of the total price you paid for the property and renovation. Using the BRRRR strategy, you may typically enjoy a 20% return which comes from the discounted price of the property combined with the increase in value of the property.
This model manages to incorporate most of the pros of each investment model as identified below and at the same time eliminate most of the cons to each investing model.
This explains why it has such broad investor appeal.
Typical Investing Strategies (pros and cons for each)
Turnkey investments:
Pro: continue to be a great passive investment where investors can do their initial upfront diligence and then sit back and watch investments perform.
Residual passive income, cash flow come in month after month, year after year.
Low risk as all income and expenses are identified and transparent at the time of purchase.
Con: property prices are on the rise and rents are stabilizing reducing the available cash flow resulting in smaller cash flow.
Fix and flips:
Pro: Proactive investors can be involved in every decision and make adjustments as needed to maintain control over their overall investment.
Return potential tends to be higher as investors make the profits by taking on the role of project manager.
Cons: high risk as the investor assumes all expenses from surprises during renovations risk of increased holding time while marketing for sale and a number of unknown expenses.
No residual income.
Wholesaling:
Pro: Little cash investment needed.
Low risk exposure.
Con: More of a "job based" business.
Income potential is great, but requires constant active involvement to make money.
No residual income.
BRRR model outline
This hybrid investment strategy essentially allows the passive investor to increase Total ROI on a turnkey property by purchasing it like a wholesaler, fixing it like a flipper and holding it like a turnkey investment. Interesting right?
Like a wholesaler buys distressed property for large discounts, the BRRR model does as well.
Like the fix and flipper, BRRR renovates the property using economies of scale buying power as a way to control the process and keep expenses low on renovations.
Like the turnkey investor buys property to hold long term for sustained investment the BRRR model does as well providing for a long term passive investment.
What if all this is done for you using economies of scale buying power, economies of scale renovation pricing and economies of scale property management knowledge and systems?
With the BRRR Model you work hand in hand with a professional BRRR Company and you are able to:
Like a wholesaler: BRRR provides Buys dozens of properties each month using their long term relationships to acquire these properties with cash at steep discounts just as a wholesaler would do.
Better than a Flipper: BRRR then uses their in house trained contractors and their economies of scale buying power to renovate at discount prices. Paying for renovations with draws just as any flippers would do.
The Bonus Benefit: Then you are able to finance the property and appraise it based on a finished property which often appraises 10-20% and more above invested price. Financing 75 to 80% LTV allows you to recoup most or all of your initial investment in which case you have little to no cash investment on a property giving you outstanding cash on cash returns.
The Turnkey Investment: You now own a Strong Cash Flowing Turnkey Investment property which you now have financed and have a nice 20 to 25% equity position on. You can now collect larger monthly residual income on your appreciating asset.
The Benefits just keep on coming with this BRRR model
While I cannot speak for every BRRR model out there, the model that our HTB affiliates use has continuing benefits.
When you are a BRRR company and buy many houses each year and have your own renovation team and property management company, you have a huge knowledge base with incredible economies of scale buying power and you are extremely confident in what you do. You tend to be able to forecast the important things:
You know what to buy
You know where to buy it
You know what to renovate (often down to the studs and everything is new)
You know how long it will take
You know how much it will rent for
You know how much it will be worth after renovations.
It becomes easy to see why active investors as well as passive investors, flippers and turnkey companies all like the BRRR model!
Using the BRRRR strategy, you may typically enjoy a 20% return which comes from the discounted price of the property combined with the increase in value of the property.
Yes. BRRRR is simply a financial strategy to amplify returns, so long as the investor has the requisite cash resources.
Here is an Example of a BRRRR Investment
· Asset Cost $ 50,000
· Renovation $ 50,000
· Total Cost $100,000
You then rent this for around $1,150 per month
In Short you buy, then renovate. After renovation your values have increase both from buying distressed and then further from the improvements you made. You then, after the lenders required 6 month holding period (Renovation time) have it appraised. This increase appraised value allows you to finance 75 perhaps 80%. Of this new increased price.
As you refinance you are often able to recoup most, if not all of your initial investment making this a low acquisition cost over all. Then you are ready for the final R in the BRRRR model (Repeat)
With today’s incredibly low interest rates you can buy these BRRR properties. Refinance them, then rent them out with property management in place and build yourself a great investment portfolio worth owning.
Happy Investing
The author’s opinion cannot be construed as tax or legal advice, and may not represent the views of HTBUSA or its stakeholders. HTBUSA is not a legal service or professional tax service. As with any investment, there is an inherent risk in investing in real estate.