BRRRR strategy in real estate means Buy, Rehab, Rent, Refinance, Repeat): This strategy involves buying a property, fixing it up, renting it out, and then refinancing it to withdraw your capital out (or at least some of it). This allows you to reinvest that money into another property, effectively growing your portfolio without needing to invest additional capital. However, this strategy requires a good understanding of renovation costs and the ability to manage renovation projects, as well as favorable lending conditions.
Keep in mind this is not investment or financial advice, use at your own risk, and consult with a professional if need be. (I just build the templates)
Relevant Templates:
- Real Estate Models (nearly all of these models have a REFI option on the initial loan in order to account for the above dynamic)
- Apartment Building / Self-storage / Multi-family Underwriting Model
This strategy requires careful planning and execution. Here are some considerations to keep in mind:
- Find the Right Property: The first step is to find a property that you can buy at a lower price, usually because it needs some level of rehabilitation. Properties located in growing or stable neighborhoods with high rental demand are ideal. Remember, the profit in real estate is often made during the purchase, so negotiating a good deal is key. You may get help in analyzing the opportunity with this simple one-page value-add real estate calculator.
- Estimate Rehab Costs Accurately: You'll need a detailed estimate of the rehab costs before purchasing the property. This can be challenging, especially for beginners. Consider hiring an experienced contractor to help with this. Underestimating rehab costs can quickly eat into your profits.
- Get a Good Contractor: Finding a reliable and skilled contractor is critical. Delays and poor workmanship can increase your costs and reduce your profits. Make sure you check references and past work before hiring.
- Understand Financing: Since you'll be refinancing the property after rehab, it's essential to understand how this process works. Consult with lenders to understand their requirements and ensure that you'll be able to refinance. Also, consider the impact of potential interest rate changes on your financing costs.
- Cash Flow Analysis: You'll need to rent out the property after rehab, so make sure there's a demand for rental properties in the area. Research rental rates and vacancy rates. Make sure the property will cash flow positively after accounting for all expenses (including mortgage payments after refinance).
- Time Management: The BRRRR strategy can be time-consuming, particularly during the rehab phase. Ensure you have the time and energy to manage the project, or consider hiring a project manager.
- Refinancing: The refinance phase can be tricky. The property will need to appraise for a high enough value that you can pull out most or all of your initial investment. However, appraisal values can be unpredictable. Also, keep in mind that refinancing typically involves closing costs, which should be accounted for in your initial calculations.
- Exit Strategy: Things don't always go as planned. It's wise to have an exit strategy in case the property doesn't appraise high enough for a refinance, or if for some other reason you need to sell the property.
- Risk Management: Understand the risks involved in this strategy, such as unexpected rehab costs, delays in finding tenants, changes in market conditions, or challenges with refinancing. Have a contingency plan and sufficient reserves to handle these risks.
- Legal and Tax Considerations: Understand the legal and tax implications of buying, rehabbing, renting, and refinancing properties. Consult with a real estate attorney and a tax advisor to ensure compliance with all laws and regulations, and to optimize your tax situation.
Lastly, remember that real estate investing is a learning process. Mistakes and challenges can be valuable learning opportunities. Consider starting with a smaller project to limit potential losses while you're still learning the ropes.
Many of the real estate models I've built are for single project / syndication analysis, but I did build this self-storage underwriting template that lets you see the effect of investing in up to six real estate joint ventures over time. It doesn't have debt assumptions, but does have the ability to see the resulting cash flow buildup from entering a deal, exiting at some point, using that capital to invest in a bigger deal, and so on for up to 6 times across 15 years. It has all the advanced waterfall logic and IRR hurdles so you can see what the investment and returns are like from the GP and LP perspective.
In theory, you could adjust for debt a little bit on the above model by reducing the construction / acquisition costs by the debt amount, accounting for debt service in the opex cost per sq. ft. and then reducing the debt repayment amount from the exit value of each deal.
Now that I am talking about this, I think I will add in debt assumptions to the above model so all of what I just described can be automated.
As an aside, I think a good model that I have not done would be something that is specifically for the BRRRR strategy that shows arbitrarily large new deal activity over time. I have lots of models to look at a single deal that has all the components of BRRR, but not something that has all the components and scales to many deals, like 20 to 50 in a 10 year span. We'll see if I can get something up for this soon.
Article found in Real Estate.
