02 Jun Understand the BRRRR Strategy – Pros & Cons Guide
The BRRRR Strategy is a popular way of real estate investment in which you withdraw funds from one property to invest in another. The abbreviation BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. For new real estate investors, the BRRRR approach may appear to be an almost certain way to generate money. Because it is presented as a formula, it is often assumed that you cannot lose if you follow the formula. However, nothing, especially BRRRR, comes with assurances.
Before you go into this specific real estate investment approach, here’s what you need to know about the BRRRR strategy’s advantages and downsides.
The Pros of the BRRRR Strategy
The BRRRR technique is popular due to its effectiveness. While it is becoming more popular, clever real estate speculators have been using it for decades. When everything goes as planned, it’s a tremendous leverage mechanism that allows investors to build up a great portfolio of real estate assets fast and cheaply.
Return on Investment is Infinite
Isn’t there no better ROI than when your original investment is zero? This is doable with the BRRRR method because you will use the money you withdraw from your first investment property to put down on the next one, and so on. You’ll have little to no cash left in your deals after you draw it out. As a result, your returns on that attribute are now infinite.
Scalability – BRRRR Strategy
Scaling your real estate business using BRRRR is quite simple. You can begin with relatively few assets and gradually increase both the number of investments and the overall value of your portfolio.
Capture Of Equity
When the BRRRR approach is followed effectively, you may constantly refinance your rehabbed homes to collect between 20% and 30% equity per property. That’s amazing given the very short time frame in which your equity capture will occur.
The Drawbacks of the BRRRR Strategy
Unfortunately, the hazards of the BRRRR approach are typically underestimated. New investors who enter the market are susceptible in ways they may not be expecting. Here are some disadvantages of the BRRRR approach to be aware of.
Rehab Lasts Longer Than Expected
When you choose a contractor for your renovation, they will tell you an estimated time frame for completion. Timelines are frequently extended for a variety of reasons. Unexpected issues might arise and go undetected until the rehab process is well started. Other instances, the contractor proves to be untrustworthy. Other occasions,
property damage or thefts may result in setbacks. Timeline extensions are a modest risk if you have regular financing. However, if you’re using hard money with a high interest payback schedule, this danger might signal financial disaster.
Costs Exceed The Budget
Another downside of the BRRRR technique is the risk of going over budget. When it comes to real estate, time is of the essence. Rehabilitation costs might quickly add up. Unexpected events that disrupt your timetable might also devastate your finances. Of course, if your budget is depleted, the entire BRRRR method is doomed.
The most serious possible disadvantage of the BRRRR approach is a negative appraisal. A poor appraisal is one that does not correspond to your predicted after-repair worth. You won’t be able to refinance unless your appraisal is extremely near to what you expected, and you may also have difficulty repaying your lender. You can wind yourself owing more than the house is worth. Obtaining poor appraisal is both the most dangerous risk and the worst-case scenario for real estate investors employing the BRRRR approach.
Within the BRRRR strategy, there are risks and advantages. It’s worth using this strategy as long as you recognise that there are no guarantees. Simply be prepared to problem solve so that unanticipated surprises do not derail your financial strategy. We are Mortgage Broker for Real Estate Investors at Kenady Fundings so get advice about using the BRRRR strategy.