In a fun article about a real estate investor’s awesome deal he made for $1, Brandon Turner describes his process using the BRRRR method; such a good read if you’re interested, How I Bought a Fixer-Upper Fourplex for $1 Down: A BRRRR Case Study. BRRRR is an acronym for Buy, Rehab, Rent, Refinance, Repeat and it is a great method to use when buying rehab properties. Turner explained if perfectly in the article.
“Essentially, it means that you find a fixer-upper property you want to hold as a rental, fix it up, rent it out, and then refinance the loan into something more “long-term.” The reason BRRRR is important is because typically, a bank is not going to lend on the rehab costs for a property, nor are they going to lend on a property that needs significant work. Instead, to BRRRR a property means to use an alternate form of financing for the initial purchase and possibly repair costs, and then later refinance the property into a long-term mortgage. If done correctly, a deal can be purchased for almost no money out-of-pocket.”
Brandon Turner’s experience is a great example of BRRRR. He found a 4 Plex for sale that needed a lot of work. He did some research and after deciding how much each unit could rent for, he totaled up the costs that would be involved, including purchase cost and total rehab costs. He then ran an analysis and found that this property, at the current asking price, was not the deal he wanted. So, he renegotiated a better deal with the seller, and decided to purchase the property. Turner went to a private lender and took out a hard money loan for the majority of the amount needed and used his existing revolving line of credit at his bank for the remainder. He was able to purchase the property and use the rest of the money for the rehab. Once the rehab is done, he will be able to obtain a traditional, long term mortgage at the new, increased value price of the property. The new loan will enable him to repay his private lender and his line of credit in their entireties. This will allow both his private lender and himself the ability to repeat the process all over again with a new property.
Had the option of the private lender not been available, Turner may not have been able to finance the property. Fortunately, he made the financing work in his favor and ended up with a great rental property.
Turner, Brandon (2016] How I Bought a Fixer-Upper Fourplex for $1 Down: A BRRRR Case Study [Blog]. Retrieved from https://www.biggerpockets.com/renewsblog/2016/06/13/bought-fixer-upper-fourplex-1-downbrrrr-case-study/