BRRRR (Buy-Rehab-Rent-Refinance-and-Repeat) Advice
by Tod Snodgrass
This real estate investing concept is not new. It has been around for a very long time. Done right, it is a tried and true method for investing in real estate. But it is, at the same time, a somewhat complex and sophisticated investing system that requires a fair amount of ready capital to it pull off.
Whether it is your own cash, a joint venture or the money comes from an equity investor or a loan (debt) BRRRR is usually best employed by seasoned, experienced investors—those who have successfully done a good number of wholesale contract flips, built up their cash reserves, and then (when they are ready) leap into the buy/rehab-fix/flip side of the real estate investing business.
Most smart RE investors use a combination of outside (debt or equity) capital + their own money. Buy-Rehab- Rent- Refinance-and-Repeat really only works if you have a proven track record since banks are reluctant to lend money to inexperienced players; most equity and joint venture types are even more cautious.
Cheap Price vs. Good Value
It all starts with due diligence. Before you consider purchasing a property, make sure (as much as humanly possible) that at the end of the BRRRR process (months long in most cases) that a profit will be waiting for you. Just because you can acquire a property at a super low price does not mean that it will wind up being a good deal. Often, a lowball price probably means there is something wrong—sometimes REALLY wrong—with the property.
This highlights how important initial inspections are to ensure you don’t buy a lemon. Beyond the initial purchase price, funds you will need, money for the rehab work is also required for, among other things:
1) New doors and/or windows; 2) Paint (outside and inside), and maybe some drywall repairs;
3) New cabinets; 4) Replacement flooring; 5) Some new appliances in most cases;
6) Bathroom showers that need replacing (if damaged or obviously quite old); 7) Roof repairs
8) Replacement garage door; 9) Electrical or plumbing repairs/upgrades; 10) General landscaping.
Three Separate Financings Required
The first (and biggest cost in most cases) is for the initial purchase of the property. Since most banks won’t loan money on what they view as a “speculative investment”, and assuming you are not wealthy yourself, you are going to need private capital—that is money that comes from individuals with whom you have, or can develop, a personal and hopefully ongoing business relationship. Again, this money is just for the initial purchase, be it debt, equity or a JV deal.
FYI: The problem with debt is that the servicing costs, during the time you are rehabbing the house, and the added time to put the house on the market and sell it, can quickly eat away at even the most well-thought-out finance plan. Equity does not require any monthly payments. JV deals can go either way.
The second round of financing you will need is for the rehab/fix portion of the job. This can easily run into thousands or even tens of thousands of dollars in total. The third money need (if you are using borrowed money to finance the deal) is debt service costs that you run up during the months it takes to complete the full BRRRR cycle.
For example, if it is not unusual to pay a private debt investor an annual interest rate of 10%-14% and maybe 2-4 points. Some cost less, some cost more. So, for every $100,000 you borrow, over the course of say 6-9 months, the costs can equal $10,000 or more, in total, for financing costs alone.
Doing BRRRR is NOT for newbies or the inexperienced. You should have several flips under your belt first; save up our money; learn as much as you can about rehabbing before embarking on any fix/slip deals, etc. and last MAKE SURE that you have adequate money resources lined up well in advance of the purchase of the property to cover it, and the rehab/fix costs, and the debt servicing costs as well.
Profit Comes First: Last, carve out how much profit you need to make on the deal, and work backwards (reverse engineer the costs) from there. If it doesn’t pencil out the way you want, move on to another deal that does make economic sense.
[Editor’s note: this article is a reprint from Tod’s monthly newsletter which you can subscribe to by emailing him at firstname.lastname@example.org.]