The BRRRR method is a popular real estate investment strategy.
It is an acronym that stands for ‘Buy, Rehab, Rent, Refinance, Repeat’.
The principle has been used in real estate investment for decades and was originally known simply as ‘buy and hold with refinance’ or sometimes ‘equity recycling’.
But it appears to have morphed into what it is today after being popularized by investor and author Brandon Turner who wrote “The BRRRR Rental Property Investment Strategy”.
The BRRRR method differs slightly from pure flipping or buy and hold strategies.
A basic flip involves buying, rehabbing and selling a property.
A buy and hold strategy seeks to lease rather than sell a renovation.
But the BRRRR method builds wealth by reinvesting equity gained in the initial flip and repeating it, hence creating a faster track to wealth accumulation.
Spelling it out
Buy
Every budding real estate entrepreneur has to start with the B word.
But not all Bs are equal.
The key is to buy below market.
It gives you instant equity because you have paid less than what a property is worth.
The most common way to do this is to identify distressed properties demanding a quick sale and it could be for any number of reasons including dilapidation, financial distress or the need for a quick move.
It can also occur when you acquire a property before it hits the open market and potentially fetches a much higher price.
This is when accessing hard money helps to a close deal quickly.
Rehab
In California, there is so much to consider when assessing the merits of any renovation.
The state’s specific rehab laws have been relaxed significantly in recent times to ease the housing crisis.
But it always pays to know exactly what is permitted by any local government and how long those approval processes are expected to take.
Energy-efficient additions and features to reduce earthquake and wildfire risk are particularly appealing to California buyers.
But inflationary pressures have forced up both labor and building costs.
That’s why it is essential to identify improvements that will significantly value add to your project as opposed to overcapitalizing and being left with cosmetic waste.
Rent
According to RentCafe, only Minneapolis-St Paul has a hotter rental market than San Francisco.
The city’s tech industry and the housing shortage are contributing to booming rental prices with vacancies remaining extremely low.
Multiple other Californian regions have also been identified as having extremely competitive rental markets.
These include:
- Central Coast
- Central Valley
- East Bay
- Inland Empire
- San Diego
- Sacramento
- Silicon Valley
- Orange County
- Ventura County
- Eastern Los Angeles County
- Western Los Angeles County
But tenants in California are protected by some of the country’s strictest property management laws.
That’s why it is imperative to screen them carefully.
Refinance
This is where the magic happens and where you can begin to crystallize profits.
The plan is to refinance based on the new, higher value of your property.
But if you have borrowed from a traditional lender, you could hit a tripwire.
‘Seasoning requirements’ dictate that most conventional loans, FHA loans, VA and USDA loans require six months’ ownership before allowing any cash out refinance.
In contrast, hard money lenders generally allow refinance as soon as improvements are verified.
Repeat
This is where the scalability of your business begins.
You use the cash you pull from your first project to finance the next one.
Recycling capital allows you to scale more quickly, while accessing tax-free money because it is borrowed, not earned.
But it is important not to be shackled by economic winds or poor decisions.
Always be aware of the best available deals, capital competition and region saturation to avoid pulling the handbrake on your expansion goals.
BRRRR method risk factors in California
California is such a unique market in the national landscape with an abundance of opportunities for budding real estate entrepreneurs.
But it is also critical to appreciate all the challenges because to maximize its potential, the BRRRR method relies on properties that generate high cashflow.
The biggest challenges are:
High interest rates – rising lending costs are making rehab projects more expensive and time-sensitive.
Appraisal shortfalls – if you overestimate your ARV (After Repair Value), you stand to forego your profit margin.
Unexpected delays – permitting hold-ups, building delays and vacancy during refinancing all stand to cost you significant sums of money in terms of holding costs.
Underestimating holding costs – loan servicing, insurance, utilities and taxes add up quickly.
Rental issues – government limits on rent charges, complex regulations and tenant issues and disputes can make being a landlord a lot less fun and a lot less lucrative.
Refinancing issues – equity extraction limits or cash-out constraints can severely impact the repeat component of the BRRRR method.
Tips and strategies for California flippers
The most successful flippers in California observe a few basic principles.
Many of these apply regardless of whether the intention is to flip and sell or use the BRRRR method to lease multiple properties.
These principles are:
- always build a buffer of 10-15% into your budget to allow for permit or building delays
- establish relationships with local agents and lenders who have experience in the California market
- prepare multiple exit strategies, giving you the flexibility to deal with any scenario
- avoid over-optimizing by ensuring your numbers still deliver a worthwhile profit even if you encounter delays or economic downturns
Get advice today
The BRRRR method is a tried and true method to upscale your flipping business and supercharge your wealth creation dreams.
But it does require some careful planning and execution.
That means a BRRRR feasibility check from an experienced mentor who has your best interests at heart.
And that’s why all roads should lead you to Equidy.
Equidy has had an intimate and personal history with all aspects of real estate and property development in California for more than 40 years.
If the classic BRRRR method isn’t quite delivering the profits you seek, Equidy can advise about strategies to boost cash flow such as renting by the room or using your property as a short-term vacation rental to boost returns.
Best of all, Equidy is also a hard money lender, offering fast funding and flexible terms to flippers and developers of all kinds.
Hard money is the only money that can promise a flipper approval in as little as 48 hours and short turnaround refinancing.
Equidy stands by their core belief that anything is possible and they are determined to prove it every single day.
Even in challenging economic times, they love to reward entrepreneurship and strive to see their clients realize their wealth creation dreams.
Equidy enjoys long and established relationships with serious investors, sellers and real estate professionals while leveraging their reputation and trust, using clear communication to minimize the risk to all parties.
Contact Equidy today to book your free strategy call.
