Many physicians are eager to invest in real estate, enamored by the idea of passive income and the tax benefits of real estate investing. However, not everyone has endless amounts of capital saved up to invest in rental properties, particularly at early stages of their careers as doctors. Real estate aficionados will point out that real estate investors across professions find ways to scale their portfolios, even without a physician income. One of the most popular ways to do this is the BRRRR method, which stands for buy, rehab, rent, refinance, and repeat. By utilizing this method, many real estate investors are able to scale their real estate portfolios quickly. However, many in our physician community would argue that the risks and hassles of this method, particularly in a high interest rate and inflationary environment, may not make sense for physician real estate investors. Below, we’ll cover what this method is, pros and cons, and what else to consider when deciding if this method is right for you.
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What is the BRRRR Method in Real Estate Investing?
BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. It is a popular method used by real estate investors investing in rental properties to scale their real estate portfolio over time without having to put in as much of their own money as they would if they bought each of these properties simultaneously. This is done by buying a property that may be distressed or whose potential has not been realized, rehabbing the property, renting it out, refinancing the property using a cash out refinance, and then reinvesting the money from the cash out refi into another property, where you will do the same thing. When implemented ideally, this method allows you to keep recycling cash to continue to purchase and rent out an increasing number of rental properties.
Note that while you may think that this sounds like a flip, the idea here is not really to make a quick buck from rehabbing a property, but rather to amass a larger real estate portfolio that you continue to rent out for cashflow.
The Buy, Rehab, Rent, Refinance, Repeat (BRRRR) Method
Let’s dig into each step.
Buy
Buy a property.
As with all things investing, the idea here is to buy low so that you have the largest amount of potential upside.
In the classic sense of the method, you’re usually buying a distressed property at a lower price where you can quickly force appreciation by some quick ‘rehab’ or renovations. However, you could also buy a property in which you see the ability to force appreciation by doing something like adding an accessory dwelling unit, adding an extra bedroom, or otherwise creating value in the property that didn’t previously exist.
Whatever you buy, you always want to make sure that the rental property is one that will cashflow, as you want to buy assets, not liabilities.
While doing your due diligence, you should consult with an investor-friendly real estate agent who can help you determine both what the future value of your property (also referred to as after-repair value, or ARV) will be after you’ve rehabbed it, as well as how much they think you’ll be able to rent the property for after repairs, so you can plug these into your cashflow calculators to assess cash on cash return on investment projections. Many investors follow the 70% rule, saying that you should not pay any more than 70% of the anticipated ARV when you place your offer.
Rehab
Do the renovations. Most physicians who do this method will engage a team of contractors rather than do this themselves. Depending on how distressed the property is, you may find yourself doing a lot of extensive rehab. Again, it’s very important to factor these estimated projections into your purchase price when calculating your ROI from the rental property, so you may want to take your contractor to the property to help you guesstimate prior to placing your offer.
When deciding what to rehab, it’s important to focus on the things that are 1) necessary to pass inspection and bring a property up to code, and 2) the things that will add the most value to your property. There’s no shortage of things that can make a property look better, but remember that this is an investment, not your personal home. Focus on things like kitchens, bathrooms, adding bedrooms, appliances, energy efficiency, and curb appeal that will increase the appraisal value and/or increase how much you can charge in rent.
Rent
After the rehab is done, it’s time to rent it out and get that cash flow going. Compare monthly rents with other similar properties and set a rent that will hopefully offset your fixed monthly costs for owning the property and then some. A real estate agent can help you with this, as well as looking for similar properties on rental websites or sources like Zillow. Once you have established a fair price, find a tenant, do a background check, and get them moved in.
It’s important to know that most lenders won’t do a refinance until there are tenants in place and the property is cashflowing. Take your time on this though - it is not prudent to bring in just any tenant, as this could result in mistakes that you will regret in the long term. It can be hard (and costly) to evict bad tenants, or they could damage your property. Don’t skip the usual steps of running a background check, getting references, making sure they have a steady income and the ability to pay the rent, and ensuring that they have a good credit history and history of making rent payments on time.
Refinance
You usually can’t refinance a property right away if you don’t have equity in it, but once the property is actively cashflowing from renters renting the property, you can start the process of finding ways to refinance the debt you’ve taken on to this point. Assuming you have the required credit score and debt to income ratio, in the BRRRR method, this is often accomplished via a cash out refinance.
For those not familiar with cash out refinancing, you are actually swapping out mortgages from the original mortgage to a new larger mortgage that reflects the new value of the home. The new larger loan pays off the first mortgage and associated closing costs, and gives you the remaining money, which likely approximately reflects the difference in value after the rehab. This may be with a new lender, and with new terms, and could mean a change in your monthly payments or terms of your mortgage. However, you will have some money that you walk away with, ready to invest elsewhere.Learn about refinancing a mortgage.
Repeat
As implied, it’s time to repeat the cycle over again with your cash from your refinance, deploying that into a new property.
Resources and PSG Perks to Learn More about BRRRR
Book: Buy, Rehab, Rent, Refinance, Repeat: The BRRRR Rental Property Investment Strategy Made Simple - this book by our partners at Bigger Pockets is a great resource for diving deep into the topic
Investor Agents: Real estate agents for physicians, including resources to find a real estate investor agent
Real Estate Courses: Visit our page on real estate investing for physicians for PSG special discounts on courses to help you get started with investing in real estate.
Forum: BiggerPockets has a great forum and a podcast for learning more about real estate investing. They also have self guided and interactive bootcamps and can help connect you to investor agents. Take 20% off of a Pro Membership with our discount code SIDEGIGS.
Pros of the BRRRR method
Some of the pros of doing the BRRRR method are pretty straightforward and include some of the conventional reasons to invest in real estate, including passive income, appreciation, tax benefits, and diversification of income streams and your investment portfolio. The below are additional pros of BRRRR above and beyond normal real estate investing perks.
Less money needed to invest in multiple properties and scale your portfolio
If you buy a distressed property, you’ll have to pay a lot less to get it. And going forward as you scale your portfolio, you’ll have less money you need to save up to put towards down payments, since you’ll be recycling the same pot of money.
Higher IRR and return on investment (ROI)
Since you’re putting less money down and keeping less money in each deal, the cash on cash return on each property will be much higher. If you take out all the money you put in, you can actually hit the famed idea of ‘infinite returns’ if you hold the property indefinitely!
A freshly rehabbed property will hopefully make that property more passive
Since you’ve freshly rehabbed the property, it will have newer everything, resulting in less maintenance requests or expensive repairs.
A freshly rehabbed property will yield a tenant base that is willing to pay more in rent
Many like to rent a newer, more modern property, but not everyone can afford one. A property that’s newly rehabilitated will likely command a higher rent price, as well as more stable tenants that can afford to pay the rent, decreasing some of the potential hassles associated with being a landlord.
Risks and Cons of the BRRRR method
As you can imagine, there is some risk and hassle involved in this situation when compared to investing in real estate in a more passive way, such as passively investing in a real estate syndication.
Rehabs take work
Many physicians are seeking real estate investment opportunities because of the opportunity for passive income, so just the thought of having to coordinate a rehab can be overwhelming and unwanted. There are ways to mitigate this, including hiring a project manager, but ultimately if it’s your property, you will likely have to get involved in some nuances and decisions that may be annoying. If you want to be more hands on to minimize the costs of the project (nobody will protect your money like you), you’ll be the one dealing with contractors and unexpected issues or during the rehab. This could include things like realizing your plans aren’t compliant with codes, you forgot to get a permit for something, or that they discovered mold or termites. Again, most physicians rely heavily on their team to address these issues, but even then, while the rehab is going on, you should expect to be contacted by the team conducting the rehab.
Unpredictability of the appraisal process and potential for stuck money
Ultimately, you’re going to have a hard time guaranteeing what the final appraisal price comes back at, and if for some reason the appraisal comes back with a value lower than expected, you could end up not being able to take your money out, thus interrupting your BRRRR cycle.
Unlike the many creative ways you can come up with to finance a rental property, classically, cash out refinances require that you keep 25% of the loan to value in the home. Therefore, the rehabbed property must appraise for an amount that is proportionately greater than the amount that you put into the rehab. This generally requires that you bought the property at a low enough amount (which is why being distressed helps) and that you had an accurate idea of what your rehab costs would be. If your project goes over budget, you may find yourself not having the ability to refinance, thus keeping your money stuck in the project.
Unknown or Unexpected Rehab Costs and Timeline Add Uncertainty
While you should do your due diligence prior to purchasing the property about how much it will cost you to rehab the property, ultimately, until you actually finish renovations, you won’t know how much it will cost you. There can be unexpected (and unwanted) surprises with damages being more extensive than initially thought, materials or labor may cost more than expected, and the renovation may take longer than projecting, both delaying your ability to take your money out of the property and resulting in more months that the house goes unrented, further decreasing your returns.
Additionally, though ideally, you’re able to finance the down payment and rehab costs yourself, if you find yourself needing some money to finance the renovation because it goes over budget, short term loans can be very expensive both with closing costs and interest rates.
Refinancing costs and rules
Every time you secure financing, there is a cost associated with it, so you will have two sets of closing costs, one for the original mortgage, and the other for the refinance. Don’t underestimate how much these will add up between fees, the costs of the loans, permit costs, inspection costs, survey costs, titles, and more.
Also, as alluded to above, for a refinance, banks will usually only lend about 75% of the appraised value, so the value you add to the property must be enough to take your money out in a cash out refinance. The other issue is that some lenders have a rule about how long you must hold the mortgage before you’re eligible for refinance. These waiting periods are called ‘seasoning’ periods, so make sure you ask about them when you’re securing your mortgage. You don’t want this to be the reason that your money is stuck longer than desired, or in the worst case scenario where you’re using short term financing, you don’t want to run out of your financing before you do your refinance.
Can be hard to find properties where this works or is worth the hassle in a high interest rate and high inflation environment
Last, but not least, you need to make sure that this strategy fits your real estate goals. While we hope that this will change if interest rates continue to drop, there’s a solid argument to be made that this method was popularized in the past decade, where interest rates have been historically lower. Especially as home prices have continued to appreciate and material and labor costs have increased, it’s harder to find potential properties where the math works out. Having to buy more expensive properties translates to higher closing costs, high monthly mortgage payments, higher rehab costs, and more money to cover the debt while the property isn’t being rented as renovations are taking place.
Also, even going forward, you want to make sure that the amount you plan on renting this property out for is feasible. If you force appreciation to the point where you have a smaller potential tenant base, you may have a hard time finding tenants that can afford it. Conversely, if you buy a much cheaper property where your required down payment is lower, you still open yourself up to the issues that come along with owning property in neighborhoods that historically are harder to be a landlord in, whether it be because of legal and zoning restrictions, tenant bases where rent collection and evictions can result in both extra time and legal costs, and more. These can easily wipe out the value you derive from the lower cashflow that these properties generate in your life. For example, if you cash flow at $300 a month but have to deal with a legal issue that year, you may not want that property in your portfolio.
Keep in mind that the end goal is to have a portfolio of cashflowing properties, and if you do all this work to have a property that minimally cashflows, you may decide that this isn’t the side gig for you.
An Example of the BRRRR Method
To make this tangible, let’s take an example. Let’s say you have $55,000 to invest and want to buy a distressed property for $115,000. You think you’ll need $20,000 for repairs and labor, which you think will increase the value of your property to $180,000. You put 25% down ($28,750). Between the mortgage payments until you rehab and find a tenant, insurance, closing costs, and the repairs and labor costs, you end up putting in the $55,000. Once you start renting out the property, it becomes cash flow positive. Then you get the property appraised, and it comes back at your ARV of $180,000. You do a cash out refinance for up to the difference between the appraised value and the remaining mortgage (remember, you’ve made some payments already). In this case, you should be able to pull out the money that you’ve invested in the property and reinvest it into another property, but you have a cashflowing rental property that is now generating income for you.
Conclusion
The BRRRR method has been used by real estate investors for a long time, allowing them to scale their portfolio without needing as much upfront capital. While there are cons and risks, for those willing to deal with the uncertainties and hassles of rehabbing a property, it offers the ability to quickly add rental properties to their portfolio without having to save up enough for a new down payment on every property.
However, it’s important to keep in mind that for many physician investors, this method may not make sense when taking into account the pros and cons. Physicians are fortunate to make enough money on a monthly basis that the amount of monthly cashflow that the properties typically employed in these methods will generate may not be worth some of the hassles and risks discussed above. Therefore, we recommend that physicians considering this method run the numbers and think about the downsides in order to decide if using this method will accelerate your pathway to financial independence in a way that is consistent with enjoying the journey.
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