You’ve probably heard about the “Brrr method”—I’ve been seeing an uptick of social media mentions lately, too. It seems that just about everyone is touting it as some kind of “magic formula” for growing your real estate portfolio. After all, it looks straightforward enough: just buy, rehab, rent, refinance, and repeat. That’s why we refer to this method with an acronym—Brrrr.
It turns out, though, that the acronym is more apt than you would think. If things don’t go as planned, as often happens with real estate investing, this Brrrr method can leave you out in the cold. And, not just that: You could end up both cold and broke.
Look, I’ve been a professional real estate investor for almost too many years to count now and have seen the same story played out over and over. Let me walk you through how this Brrrr method works—and where you can get tripped up.
Buy, Rehab, Refinance, Rent, Repeat: What Could Go Wrong?
The Brrrr method is more than just a cheesy acronym. The idea is that you can build passive income over time. You essentially leverage the upside potential of a property you rehabbed to get refinanced. Then, you use that capital again to invest in other deals.
It’s not quite as catchy as those promises of “real estate investing with no money” touted by some of those gurus, but it can be close. Think of it like investing with less money. What intrigues investors about the buy, rehab, rent, refinance, and repeat strategy is that almost none of your own cash is at stake while building a rental portfolio and getting on the cha-ching side with a steady monthly income. Or, at least that’s the idea.
But, there’s a lot that can go wrong at each step of the seemingly easy process. Let me walk you through it.
1. Buying your first house
So, you find a house and get really excited that you may be able to finally land your first deal. It might be old but, with a little sprucing up, it could really be something to build on. And, the homeowner seems eager to get out from under it. So, you start calculating the numbers on it. That’s where the first mistake is often made. From there, it can get worse.
To understand what you should offer the homeowner, you first need to understand the cost to get the house ready for tenants. That can mean itemizing everything from a new roof right down to the kitchen sink. Remember, the house needs to be habitable but not too fancy. The rehab plans need to be budgeted carefully for the neighborhood.
Then, you’ll need to know whether the rental can deliver a decent cap rate. You’ll want to be careful not to develop a pie-in-the-sky view of the returns you can get on the house because that’s where you’ll get caught in a domino effect of bad decisions. When you misjudge the market and think you can get a lot of rental income out of a house, you’ll overpay for it. If you’re really unlucky with numbers, you’ll also want to put more money into the rehab than the market will bear out. And, good luck convincing a lender that you have everything in hand.
To avoid all of this and offer the right price-point for the house, you’ll likely need the help of an experienced mentor. Be careful picking one of those, too, though. You need someone who is as invested in your achievements as you are.
2. Conducting the rehab
Undertaking a rehab is another point in the buy, rehab, refinance, rent, repeat process where your pocketbook can begin to pinch—a lot. The project might be anything from a “lipstick” rehab with a fresh coat of paint to a total gut job involving breaking down the entire walls to create a different layout. Regardless, you’ll need to fully understand what you are getting into and plan this part out carefully.
Doing a rehab can be like peeling back the layers of an onion. And, sometimes, it really can make you cry. Suppose you buy a house thinking that you just need to put down some new flooring. But, when you start removing the old flooring, you find an expensive surprise: mold. Here’s where you have an ethical choice. You can either “forget” that you saw the problem and get comfortable with your new status as a slumlord, or you can do the right thing and remediate it.
In the long run, it’s probably cheaper to just fix it. The turnover of renters when they find the mold is going to cost you. And, it might just cost more than money. Your local reputation is on the line, too.
You’ll be better positioned to be proactive about the rehab costs if you have a network of other local investors to rely. They can recommend reputable contractors who will give you the straight-up skinny on any rehab your investment house needs.
3. Getting it rented
By now, you’re in neck-deep with this buy, rehab, rent, refinance, and repeat strategy. The rent amount that you can get is dependent on neighborhood comparables. I hope you didn’t overspend on the rehab because you surely won’t recoup the pocket change with increased rents. The rent amount that the house can command is a critical factor in determining what you can refinance for. And, the lender won’t help you with that problem.
Renters, on the other hand, will be happy to pay “just” market value for your over-rehabbed house—just be sure that they are able to pay on time, every time. That is what the lender will be looking at as well. You’ll want to be sure that you can cover monthly operating expenses such as maintenance and property taxes in addition to the mortgage payments. The regular stream of income you receive from your tenants should be able to generate positive cash flow after you make these payments.
Again, this is where a solid network can come in handy. Finding the right renters isn’t as simple as putting an ad on Craigslist and going with the first decent-looking folks to respond. You’ll need to thoroughly vet the potential renters and one of the best ways to do that is by knowing someone who knows them.
4. Refinancing the house
OK, you’ve got renters that seem reasonable—now it’s time to refinance. But, don’t start licking your chops over the next deal you’re going to buy just yet. Some lenders have a waiting period of at least six months to ensure that you have built enough equity for making the move from a short-term hard money loan to a cash-out refinance loan. You won’t be able to refinance if you have a potentially negative cash flow because of low margins after general holding costs are covered. This, again, puts you in a difficult position. You will be stuck with a higher-interest hard money loan.
I hate to sound like a broken record but if you are going to do this buy, rehab, rent, refinance, and repeat strategy, it’s really important that you have a mentor and a network to help you along. Early bad decisions in the process can multiply quickly, leaving you in a cash-flow bind. Without good guidance, you won’t make it to the “repeat” step.
Repeating the Brrrr Process
If you made it this far, you’ve done well. But, if you are new to real estate investing, it’s pretty likely that you stumbled a time or two. Perhaps your rehab costs went north or you didn’t qualify for the refinancing you had planned because your margins went south. If you take a look at each of the steps, you’ll see that the common theme for making the right decisions is getting a mentor and a network that has your back.
But, where are you going to find that?
Well, it turns out that getting both is probably the easiest step of the buy, rehab, rent, refinance, repeat method. You see, being a part of the nationally-known and trusted “We Buy Ugly Houses®” team makes it simple. From day one, you get comprehensive training on how to buy houses at a price that makes sense and a dedicated mentor to guide you through each challenging deal. You also become a part of a network that has bought over 110,000 houses since 1996.
Ready to finally start building your real estate portfolio? Get in touch with HomeVestors® today to learn more about all the support you can get.
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