Building a rental property portfolio is one of the most reliable ways to build wealth, assuming you do it correctly. The goal is to gradually accumulate new rental properties, expanding your portfolio in the process; each new property in your portfolio is both a contributing piece to your total equity and wealth and a source of income, assuming you rent it to qualified tenants.
Real estate is a tricky and complicated field for investors, including the most seasoned investors in the industry, so it’s no wonder why so many people try to come up with simplistic acronyms and processes to reduce and streamline decision making. One of the most popular methodologies to emerge in the last few decades is the BRRRR method.
But what exactly is it? And is it viable for building a rental property portfolio?
The BRRRR Method in Real Estate Investing
The BRRR method is an acronym, with the letters standing for the following steps:
- Buy. The first step is to buy a property, and usually a property that’s in serious need of repairs and upgrades. The goal in this process, as with most real estate investing methods, is to secure a property for a relatively low price, thereby maximizing sale value in the future. There are very few restrictions on which types of properties you can consider in this method, but obviously, you’ll need to prioritize properties that could make for good rentals, properties with low prices, and properties that will be easy to repair and rehabilitate.
- Rehab. After securing your first property, you’ll rehab it. This is arguably the trickiest step, and the one where many people following this methodology fail. The goal is to fix up the property so it looks more attractive to renters and increases in total value. Ideally, you’ll be able to increase the value of the home by more than you spend rehabilitating it, though this isn’t strictly necessary at this point. What’s most important is that you choose your rehabilitation projects methodically and deliberately, selecting only the projects that are likely to increase the home’s value significantly and/or attract better tenants, without spending too much in the process.
- Rent. When you’re done rehabilitating the property, you’ll be ready to rent it. You can advertise the property to tenants who might be interested, screen those tenants, and start collecting rent from them on a monthly basis. At this point, many real estate investors would be satisfied, but under this method, generating cash is just the next step of the process.
- Refinance. After you’ve consistently generated rental income from this property, you’ll be ready to refinance it. Refinancing a rental property can be tricky, as you’ll need to maintain an equity stake of at least 25 percent in most cases – and you’ll need a history of steady rental income to demonstrate your ability to pay off the loan. Still, if you can meet these requirements, you can likely capitalize on your existing equity, take advantage of better interest rates, and gain more flexibility for your next steps.
- Repeat. With the cash you pulled from your refinance, you should have more than enough to secure a down payment on a new property. You’ll follow the same steps in this method for that property, including this one, resulting in an ongoing cycle of new additions.
The Advantages of the BRRRR Method
There are some major advantages to this method that make it viable for many real estate investors:
- A sustainable, repeatable process. Many people are drawn to this process because it’s simple, sustainable, and repeatable. You can focus on one property at a time, keep your risks manageable, and follow the steps even if you aren’t a total expert.
- Multiple ways to make money. The method is also appealing because it offers multiple ways to make money. Rehabbing and supporting a property increases the value of that property and therefore increases your equity stake. At the same time, renting those properties gives you cash flow and monthly profitability. In the long term, this can be an excellent way to accumulate wealth.
- A capital stream for expansion. Collecting rental income and capitalizing on equity through refinancing gives you a capital stream for expansion. Every several months, or at least once a year, you should be in a position to pull out enough cash for the acquisition of a new property.
- Autonomy and control. The BRRRR method puts you in the driver’s seat, giving you autonomy and control over your real estate investments. You choose the properties. You choose the rehab strategies. You choose when to refinance and purchase a new property. You can tailor the strategy to suit your own risk tolerance and investment needs.
- Minimal capital requirements (initially). Many people struggle to save up a down payment for a property, whether it’s their first-time home or a rental property. Once you start building equity, it’s much easier to snowball. This method is appealing in part because it has minimal capital requirements initially; you’ll only need enough to pay for the down payment of a relatively low-value home in need of rehab.
The Disadvantages of the BRRRR Method
However, there are also some drawbacks you’ll need to consider.
- Delicate equations. If you want to make this method work, you need to be able to crunch the numbers. Paying too much for a property, paying too much for the rehab, struggling with vacancies for too long, or miscalculating rent can all result in devastating financial losses. These are delicate equations, and even a single miscalculated variable can spell disaster.
- Rehab woes. Much can go wrong during the rehab stage. If you don’t do enough work, the property won’t be attractive to tenants. If you do too much work, you could end up wasting both time and money. If you choose the wrong projects, the property value won’t increase, and if you do the work wrong, the house could be unsafe.
- Equity accrual. You need a sizable equity stake before you can refinance. This can present multiple challenges, especially if you have a high debt to income ratio. Waiting to accrue equity can be a stressful and long process.
- Refinancing obstacles. Even then, you need to remember that lenders aren’t required to lend you money; if your application isn’t attractive enough, you could be denied, halting the process in its tracks. Plus, there’s no guarantee that financing conditions are going to be better when it’s time to refinance.
Making the BRRRR Method Work
As you can see, the BRRRR method can work for building up a robust portfolio of rental properties. But there are enough pitfalls and drawbacks that you should also be mindful and strategic when approaching it. If you want to make this method work for you, it’s important to work with the best real estate agents you can find – and potentially hire a Houston property management company to take care of your landlord responsibilities for you. This way, you’ll be able to dedicate your full attention to buying and rehabbing new properties. If you’re ready to get started, or if you just have some questions about how it works, contact us today!