The BRRRR method has gained immense popularity, and I have seen hundreds of people successfully utilize this strategy to achieve their real estate investment goals — and just as many run into problems.
As Ronald Reagan wisely put it, "trust but verify," a principle that many seem to overlook when diving into the real estate strategy we all know as the BRRRR method. Too often, eager investors fall victim to so-called "experts" who rush through crucial verification steps just to close a deal.
Here are some essential things to understand before trying the BRRRR method:
1. Understanding BRRRR and Its Sequence
While the accepted definition of BRRRR — Buy, Rehab, Refinance, Rent, Repeat — remains accurate, the sequence may not always be suitable for every investor. I would argue that the refinance process should be well underway before placing a tenant. This is because the best possible valuation comes when the appraiser sees the property right at completion. All the work is done, the property is professionally cleaned, and the yards are professionally done. The appraiser sees it at its best.
If an appraiser sees the property during construction or a tenant moving in (and they all move in ugly), they are using their imagination. We all know appraisers are supposed to appraise factual property data, but they are human. The best way to avoid human bias is to remove the opportunity for it to be a factor.
I also strongly advise all potential investors in this method to qualify and coordinate well in advance of finding their investment property. Many investors have jumped on the opportunity to participate in the BRRRR method without taking the steps to get the financing they seek for the long-term hold in place. When their money is tied up, they often apply and find that they are unable to qualify and get the financing completed.
Therefore, it's imperative to seek the advice of a competent, investor-friendly lender with a long track record in refinancing BRRRRs before venturing into one. There are many little nuances that can impact the outcome, and a highly experienced lender can give you many details on how to become successful with this strategy.
2. Seasoning Requirements and Lender Selection
Lenders have specific seasoning requirements for loans exceeding the initial home cost investment. Understanding these requirements and how to execute a proper property closing is crucial for maximizing your cash-out financing — ideally, 100% of your initial investment, provided the After Repair Value (ARV) meets your expectations. Working with the right lender can significantly mitigate this risk. My team and I have guided investors through this process hundreds of times, while less experienced lenders have left investors with capital locked up until the end of the seasoning period.
3. Valuation Process
Considering the pivotal role of ARV, BRRRR investors must understand the proposed value at the time of the pitch. Thoroughly reviewing comparable sales is extremely important. Once the real estate source pitching the BRRRR opportunity provides a list of sales, you should scrutinize properties that closely resemble the subject property in terms of bed and bath count. Investigate each property online to assess its condition, both internal and external, at the time of sale. The ultimate outcome of the rehab ("R") must closely mirror the condition of these properties you're using as benchmarks for your valuation.
A common error is relying on a real estate assistant's estimate based on a quick MLS range search as the real value. It is important to identify the most comparable sales, specifically those with similar conditions, to ensure an accurate value estimate.
4. Appraisal Readiness
Another critical aspect of valuation is ensuring that the lender doing the refinance is prepared to appraise immediately after the rehab is complete. By "complete," I mean a clean property with no construction debris, a well-maintained lawn, and a spotless interior and exterior. When an appraiser conducts an inspection, you want them to appraise what they see, rather than leave room for interpretation due to construction mess or the disorder caused by a tenant moving in. Appraisers' imaginations can be unreliable, so avoid relying on that as a potential part of your valuation process.
The BRRRR method offers a promising path to real estate investment success, but it requires careful planning, diligence, and adherence to the right sequence of steps. As we've explored, the key to success lies in understanding the BRRRR process, seasoning requirements, lender selection, and the meticulous valuation process.
By following these optimal steps and heeding the advice of "trust but verify," you can navigate the challenges of the BRRRR method with confidence and increase your chances of achieving your financial goals.
About the Author:
Aaron Chapman is a veteran in the finance industry with expertise in complex transactions since 1997. He is ranked in the top 1% of over 300,000 licensed loan originators and closes over 100 transactions per month. Learn more at aaronbchapman.com.
The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.
SecurityNational Mortgage Company, and its loan officers, unless individually licensed and specifically denoted in their credentials, are not qualified to, and are prohibited from representing themselves as accountants, attorneys, certified financial planners, estate planners, investment specialists, or tax experts, and will not advise you in those matters. Always seek the advice of a licensed professional. This article is for informational purposes only, contains the opinion of the author, not necessarily the opinion of SecurityNational Mortgage Company, and should not be construed as lending advice. Loans are subject to borrower qualifications, including income, property evaluation, sufficient equity in the home to meet LTV requirements and final credit approval. Approvals are subject to underwriting guidelines, interest rates, and program guidelines, and are subject to change without notice based on applicant’s eligibility and market conditions. Refinancing an existing loan may result in total finance charges being higher over life of loan. Reduction in payments may reflect longer loan term. Terms of the loan may be subject to payment of points and fees by the applicant. Aaron Chapman, NMLS#267844, SecurityNational Mortgage Company Inc., Co. NMLS# 3116, AZ Banker# 0904315, Equal Housing Lender. Any amounts, figures, payments, or loan terms stated are based on continually changing markets, rates, loan programs, and borrower-specific qualifications, and subject to change without notice. See loan officers featured for a personal consultation and accurate pricing.
The opinions expressed in this blog are the opinions of Aaron Chapman. Such are not the opinions of SecurityNational Mortgage, is informational in purpose, and should not be construed as lending advice. This is not a commitment to make a loan. Loans are subject to borrower and property qualifications. Contact loan originator listed for an accurate, personalized quote. Interest rates and program guidelines are subject to change without notice. SecurityNational Mortgage Company is an Equal Housing Lender NMLS# 3116. AZ Banker #090431