House Flipping & BRRRR 

The Difference Between BRRRR & Traditional Buy-And-Hold

The Main Difference Between The BRRRR Investment Strategy And Traditional Buy-And-Hold Investing Is The Way The Deal Is Financed.

A Traditional Buy-And-Hold Rental Property Is Typically Purchased With A Long-Term Conventional Mortgage For The Purchase Price Of The Property.

With Traditional Buy-And-Hold Investing Your Are Generally Required To Invest A 20 To 25% Down Payment And Then Paying For All The Repairs Out Of Pocket.

The Problem With Traditional Buy-And-Hold Investing Is You Are Financing The Property When The Property Value Is At It’s Lowest, Investing A Large 20%+ Down Payment And Then Investing A Bunch Of Cash Out Of Pocket To Renovate The Property, So You End Up With A Large Chunk Of Cash Stuck In The Deal.

Whereas, With The BRRRR Strategy The Investor Is Often Times Purchasing The Property With Cash Or A Short-Term, Interest-Only Bridge Loan. Once The Property Has Been Renovated And Rented Out To A Long-Term Tenant The Investor Refinances The The Property To Cash Out Their Money Invested In The Deal.

Generally Lenders Will Allow The Investor To Refinance The Property At 70 To 75% Of The After Repair Value. By Refinancing The Property When The Property Value Is At It’s Highest The Investor Is Able To Get Much More Funding  To Help Cash-Out Their Money Invested In The Deal.

With The Less Cash Invested In The Deal, The Investor Is Able To Reinvest The Cash In Other Deals!

THE BRRRR Method Strategy:

The Process Of ‘BRRRR’-Ing A Property Is Broken Down Into Three Phases:

Phase 1: Buy And Rehab (Short-Term Sweat Equity)

Phase 2: Renting The Property (Long-Term Cash Flow & Equity)

Phase 3: Refinance & Reinvest (Reinvestment & Portfolio Growth)

Phase 1: Buy And Rehab (Short-Term Sweat Equity)

The First Phase Of A Brrrr Deal Involves Buying A Distressed Fixer Upper Property At A Discount And Making Smart Renovations To Increase The Property Value And Add Sweat Equity To The Deal.
You Also Want To Buy The Property At A Big Enough Discount So That When You Refinance The Property You Can Cash-Out All (Or Most) Of Your Cash Invested In The Deal.

– How Much Should You Pay For The Property To Achieve Your Desired Sweat Equity?
– How Much Should You Pay In Order To Cash-Out All Funds In The Deal?

Example
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As an example, let’s say you find a fixer-upper property for $500,000 that needs $100,000 in repairs that has an After Repair Value of $750,000. It’s going to take 4 months to get the property rehabbed and ready to be rented.

Purchase Amount = $500,000
Buying Costs (2.0% of Purchase) $10,000
Repairs = $70,000
Holding Costs (4 months x $3,000/month) = $12,000

All in Costs = Purchase + Buying Costs + Repairs + Holding Costs
All In Costs = $500,000 + $10,000+ $70,000 + $12,000
All-In Costs = $592,000

How much cash will you have invested in the deal if you can refinance the property at 70% of the ARV? (After Repair Value
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Refinance Amount = After Repair Value * 70%
Refinance Amount = $750,000 *80%
Refinance Amount = $600,000

Cash Left in Deal = All-in-Costs – Refinance Amount
Cash Left in Deal = $622,000 – $600,000
Cash Left In Deal = $22,000

So if you bought the property for $500,000 you would still have $22,000 cash left in the deal after the refinance. If you really wanted to do a complete cash out and have $0 left in the deal you would need to purchase the property for $22,000 less.

Phase 2: Rent Long-Term

Renting The Property Long-Term

Once You Get The Property Renovated You Will Rent The Property Out To Long-Term Tenants Who Will Pay You Monthly Rental Income To Cover Your Cash Flow.

Phase 3: Refinance & Reinvest

Refinancing

Once The Property Has Been Renovated, Rented And Stabilized The Investor Will Refinance The Property To Cash-Out The Equity And Cash Invested In The Deal And Reinvest The Cash Into Building Their Rental Portfolio.