How To Keep From Freezing While Using The BRRRR Method for Creating Real Estate Wealth

Snowman sitting on park bench

If you’re at all familiar with, then you’re familiar with the BRRRR method of building real estate wealth.

For those of you who simply think I’m referring to buying properties in cold climates, I’ll explain.

BRRRR is an acronym for Buy, Renovate, Rent, Refinance, Repeat. The idea is to buy a property you can add value to either by renovating it or increasing rent. Because the duplex either needs a lot of work or is in dire need of updating and/or repairs, is lower than it would be if it was in great shape with market-rate rents.

Doing those improvements makes the property worth more than you paid for it. Ideally, the property will appraise for at least 20-25 percent more than the total of what you paid for it, holding costs, and costs or repairs.

This value over and above costs allows for the property to be refinanced with all of the original capital invested taken back out and the equity created by its increase in value to serve as the down payment.

Once the original capital has been refinanced out, the investor may take the funds and go repeat the process on another property.

This practice is wonderful when it works. To ensure it does, however, it’s important to:

  • Know What It Will Be Worth. This starts with working with an experienced Realtor who can tell you what the property would sell for after renovations. This is commonly called the After Rehab (or Renovation) Value or ARV.
  • Double Check the Cost of Renovations and Add Room For Surprises. If you aren’t experienced, it’s easy to underestimate the costs and amount of time it will take to rehab a property. While using a contractor will be more expensive than doing it yourself, getting estimates from a couple of them will help you understand not only the costs involved but also whether the projects are best left to professionals. Once you’re confident of the total, inflate it by 10 to 15 percent to accommodate the unexpected surprises that always come with any home renovation project.
  • Include Holding And Closing Costs As Expenses. Remember, in addition to the purchase price, you also had loan origination, bank, title and insurance fees that were added to the total of your purchase. And whether you borrowed the money for the project from a bank or hard money lender, or paid cash, there are monthly costs that occur while you’re working on improving the duplex. These include mortgage payments, taxes, insurance, lawn care and snow removal and utilities.
  • You Must Own The Property For Six Months Before You Can Refinance. One of the biggest advantages of owning 1-4 unit properties is the ability to pay the loan off over a 30-year term. This reduces monthly payments and often comes with a lower down payment requirement than a commercial loan. However, most of these loans require that the property must have been owned by the borrower for a minimum of six months. There are always exceptions out there, and commercial loans with amortization periods of 20 – 25 years and minimum down payments of 20-30 percent don’t carry those restrictions. However, the ability to take less cash out of the property and reduced cash flow from higher payments usually make it a less attractive option for most investors.

I love the BRRR strategy. It’s a great way to build wealth. Just make sure you take the warm weather gear of research and knowledge before you