The BRRRR Strategy In Real Estate Investing

July 2, 2020, 7:51 a.m.

When it comes to real estate investing strategies, it’s quite an ordeal to determine which ones you can use, and which ones will make a statement. There are, however, a variety of investment strategies to choose from, but none more catchy, creative and full of flair than the BRRRR strategy.
The BRRRR strategy was coined by a real estate entrepreneur, Brandon Turner from BiggerPockets.com, and it stands for Buy, Refurbish, Rent, Refinance, Repeat.

 

At first mention, it may remind you of the sound we make when we're cold, or as if reacting to a Sumerian utterance. (pun intended)  

Although it may be new to PNG real estate jargon, it’s rarely the case among investors in other countries, because it has been around for quite some time.

Speaking of building your rental property portfolio in a short space of time, this strategy is the best way to sustainably bag a rental property.

 

The origin

The BRRRR strategy barely qualifies as a new concept in this era.

Real estate investors of old have been submitting to this model for years under a different theme before the name "BRRRR" bounced into existence.

However, these quirky acronyms have a way of engraving themselves on our minds, and because they're easy to remember, new investors tend to become familiar with them in no time.

 

The essence
  • Purchase a below-market value property or fixer-upper with short-term cash or financing

  • Once refurbishments are completed, put it up for rent

  • When a tenant is secured and an income stream generated, the property can be used as collateral for the next project.

  • As a matter of choice, a new BRRRR investor should be able to get back most or all of their initial capital back, in preparation for the next BRRRR income-producing property 

All in all, the logic behind this strategy is buying a cheap, rundown house, “flipping” it, and putting it up for rent as collateral for the next BRRRR investment.

 

Enter the BRRRR strategy

Real estate investing is seldom trivial within a set time period. There's always a pulse, a happening, a new way of making money; consider sweat equity as a relevant example. More often, you will come across a new strategy or a new approach to making money in real estate; not up, not down, nor left or right, but through investing.

And there are those that actually get imprinted in your mind, because of their name, their purpose, and their proven success. It is among these that you will surely pass by the BRRRR strategy.

This strategy is ideal for newbie real estate investors, and is a concept worth a thought in PNG's very own property market.

 

The specs
 
Let’s look at the specifics:
B - Buy

Purchase an investment property that's in dire need of reconfigurations or value adds. This can vary from minor cosmetics to major repairs and maintenance, even landscaping will factor into this equation - anything that will help bring it up to par, making it livable as well as rentable.

 

R - Refurbish

Just like an ugly duckling turning into a beautiful swan, in a similar fashion, that's what you must do to this unattractive, relic of a property - transform it into a living, breathing, beautifully charming abode. But don't go overboard. Work within your budget so as to be sufficient, not exaggerated. What you should aim for here is to get back more than what you invested in repairs and maintenance, once it goes on rent.

 

R - Rent

At this stage, your once fixer-upper property at below-market value has achieved the move-in-ready title, and is welcoming applications for long-term tenants who are able to take care of it. 

 

R - Refinance

Here, you will want your remodeled property to maintain its new image, because you'd be anticipating a lender to offer a loan of 90 percent that will match the after-repair-value of the property.

If you find a lender that agrees with you, expect them to hire a valuer (at your expense) to give a considerable estimate of your property's value.

What the valuer will do is compare similar properties in your area and how much they're going for on the market, how much you're charging for the rent, and the total cost of the repairs or improvements.

If the valuer offers the bank a much higher appraisal amount than what you originally intended, you’ve got the loan fair and square. Now you’re at a vantage point where you can pay off any loans or mortgages you acquired earlier for the property, plus reimburse yourself for what you invested on repairs and maintenance.

Bear in mind that, to be successful under this strategy, you must first qualify for a loan. Unless you're a self-made billionaire, to qualify for a loan, you must be able to substantiate your income statement and credit history. In fact, there are certain creative ways to work around this, however, they're way beyond the scope of this overview.

Needless to say, don't let these details discourage you. It only takes a mixed dose of open mindedness, creativity and enthusiasm to overcome whatever that stands between you and prosperity.

 

R - Repeat

If you’ve made it this far, that means you still have some finances remaining. You’ve got two choices: 1) Spend it carelessly, or 2) Invest in another BRRRR.

Imagine if you continued this trend within a year or two, having several BRRRR properties to your credit? You can picture the rest. 

 

Who should use the BRRRR strategy?

Let’s get this straight - the BRRRR strategy is not for those who want well-appointed or fully renovated properties, ready to be purchased and rented out.

 

This strategy works best for those who prefer:
  • Projects and project management

  • Seeing the life cycle of things from start to finish

  • A bit of uncertainty around construction dates and budgets

  • To grow their real estate investing portfolio very quickly

  • To truly learn the ins and outs of real estate investing (with the BRRR method, you tackle several different hurdles involved with real estate investing)

 

The BRRRR strategy example

Assume that you paid K80,000 for a property below market value worth K120,000 (only an assumption). Then you chipped in another K15,000 for repairs and maintenance. This leaves you all-in for K80,000 on a property worth K120,000. 

Applying the BRRRR method, the refinance part comes after the refurbishing of the property. Your lender will base the property’s value on the initial price of K120,000 and not the K80,000 you paid for. At a 90% loan-to-ratio, you could easily refinance and recover K108,000 (or 90% of K120,000). As it stands, you only spent K95,000 (K80,000 + K15,000) to buy and remodel the house, so now you’re left with K13,000 (K108,000 - K95,000) in the deal.

Now, if you compare this to the traditional method that involves down payments, you wouldn’t recover much of the capital that you put into refurbishment. 

More will be discussed in a later article. 

 

Bottom line

Many real estate investors - overseas - have struck gold with this strategy. You get what you give, and this strategy can be your friend or foe, depending on how well you understand its schematics. On the whole, it's an incredible way to build wealth in real estate, as well as your real estate portfolio.

The best part is that in the long run, you will come to consider leaning towards lower risk strategies like what is known in real estate calculations as the Rental Debt Snowball.

Most importantly, however, is to get your remodeled property rented, because if you don’t then you’ll only end up with a growing list of debts to pay, as well as digging your own grave.

Nevertheless, these concepts may be foreign to PNG's property market but they're worth bringing to light. After all, “ideas” are bulletproof - they cannot be killed, only be accepted or ignored.