This acronym stands for “buy, rehab, rent, refinance, and repeat.” This strategy has been used to purchase both residential and commercial properties, and it has proven to be an effective way to build wealth through real estate investing.

The BRRRR acronym was created by Brandon Turner, former host of an online show called Bigger Pockets, and he is also the bestselling author of several books on real estate. While Brandon talked about this concept in terms of the United States market, it also applies to Canada. The idea behind the BRRRR method is that you purchase a property, renovate it, rent it, refinance the loan, and then repeat the process with another property.

The key to success here is to purchase properties that will appreciate in value, so that you can later refinance the rental property mortgage and utilize the newly available cash from equity to use as a down payment on your next property. And repeat. And repeat again.

Want to know more about real estate investing in Barrie? Discover the full potential right over here.

The Benefits of BRRRR

The BRRRR method, properly executed, allows you to purchase rental properties without requiring much of your own money. Instead, you’ll use debt to kickstart your real estate investment portfolio and cash in the rewards through passive income. Remember, borrowed money is not taxed money like your own would be.

You’re using someone else’s money in large part to make money for you. That is a big advantage to a tangible asset like real estate compared to other investment types.

An Overview of the System

Let’s say you have $100,000 to invest. You could purchase $100,000 worth of stocks. Alternatively, you can buy $400,000 in real estate with just a 25% down payment. (You might even be able to invest with less, but paying more upfront means you can avoid mortgage insurance and possibly obtain a better interest rate).

A $400,000 investment that appreciates at 6% a year as an average in a balanced market earns an additional value of $24,000 yearly. After one year, that property would be valued at $424,000. If those stocks also appreciated by 6%, this would result in earnings of $6,000, bringing your total investment to a value of $106,000. Either way, you’ve invested $100,000.

However, your return was far greater in real estate. That is the power of leverage! Borrowed capital or mortgage debt substantially increases the potential return due to rising home values. This obviously is not a short-term snapshot of either the real estate market or the stock market (as both are currently volatile). However, over time, the averages prove to be a reasonable assumption. Most investment vehicles simply do not allow you to leverage your results like real estate does!

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Should real estate investments make up part of your portfolio? The posts below can give you some insight:

• Benefits of Owning Revenue Properties
• How Can Real Estate Investing Help Grow Your Wealth Long-Term?
• How Does Real Estate Negotiation Work In Today’s Market?

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The BRRRR method has 5 letters that stand for five steps:

1-Buy

Search for a property that meets the preferable investment criteria. Usually, homes need some repair, causing them to be listed or negotiated under market value. Working with experienced Realtors like the Weeks Group is essential so that the end value, once the cost of renovations is added, is an advantage right off the start. We also call this “forced appreciation”.

In real estate, forced appreciation is when you actively increase the property value. This might be by adding living space to the home, developing the value of the land around it, or improving the structure itself.

A real example from one of our Weeks Group investor clients was that we found a property that didn’t have a kitchen in the house. The current owner was renovating and then ran out of money. The house also had an issue with the roof that needed repair. It sat on the market for a while, and the seller was anxious to sell before the bank took over under the power of sale.

The listing “seasoned” on the market for a while is being overlooked by buyers who do not want to consider adding a kitchen before moving in. Then we hit them with an offer. We negotiated a price that, even with the cost of adding a kitchen and repairing the roof, allowed for an end value that escalated past the cost we paid plus the added costs of renovations. That is “forced appreciation, a great way to buy and a great start to let natural market appreciation work its magic on your asset value and, therefore, equity available.

Searching for your next investment opportunity? Check out our featured listings right here.

2- Rehab

Once you’ve purchased the property, you will need to repair and renovate it. This step is important to increase the property’s value and attract tenants. The right tenants. We advise our clients about which renovations make sense; we guide them to find the right expert trades to get the job done on time and on budget.

Again, using the above example, an end market value was projected using a comparative market analysis. Then, the cost of renovation is deducted, giving the target value for purchasing the unit so that the instant appreciation can be realized and then exponentially growing over time in the market.

The cost of renovations through the process must be managed carefully to stay on budget. This step of the BRRRR method can be as simple as painting and repairing minor damage or as complex and costly as gutting the property and starting from scratch.

3- Rent

Once you’ve finished renovating, you must find good tenants and begin collecting rent. Ideally, the rent should be more than the mortgage, taxes, and maintenance so you can generate cash flow. The only way this would not be the ideal is if the property had a significant opportunity for appreciation to compensate for cash flow shortage.

The Weeks Group has created spreadsheets to calculate all the variables for our clients. If all goes well, the repairs and renovations on the property would demand a higher rent. If you can increase the rent collected on your property, you can also increase its value. This is known as “rent appreciation.”

Rent appreciation is another way your property value can increase based on the property’s capitalization rate (cap rate). The cap rate measures the net operating income of the property, from rent, onsite laundry, etc., against the price of the property. By increasing the rent collected, you’ll increase the property’s cap rate.

This increases how much a real estate investor or buyer would be willing to pay for the property, as the cap rate is a large predictor for them to assess value.

How much do you need to buy a home in Barrie? Find out with our mortgage calculator right here.

Managing the Property From an Arm’s Length

Employing a reputable property management service can efficiently handle tenant interactions and property maintenance, reducing owner involvement. Members of The Weeks Group are landlords.

We use local property management companies and find the small cost to be offset by the huge advantage of arm’s length ownership. Though not entirely hands-off, this approach allows investors to enjoy income streams with less direct involvement.

Once repairs and renovations are complete, it’s time to find tenants and start collecting rent. The rent you collect should cover all the payments, leaving you with extra cash flow each month. Each mortgage payment that you make also increases your house equity. In a way, your tenants are paying for your mortgage and building up your equity!

4- Refinance

Using rental income and appreciation for the property’s value through your home renovations, smart buying, and market growth can refinance the mortgaging or line of credit. Pull out your home equity as cash equal to the property’s value minus the mortgage amount.

Once your property is rented out and is earning a steady stream of rental income, this is an assurance to the banks or lenders that you can then refinance the property to pull out your equity. Pulling out your equity with a refinance is known as a cash-out refinance.

With this, you’ll be borrowing more money than you did with your original mortgage. Or you can do a simple line of credit to be added on top of the mortgage. It depends what the bank will give you the best value for. For the cash-out refinance or line of credit to go smoothly, you’ll need to have enough equity built up.

Most lenders will only allow you to refinance up to 75% to 80% of your home’s value. Since this value is based on the repaired and renovated home’s value, you will have equity just from fixing up the home. Repairs and renos could be an accelerator to value, not simply just the cost added of the renovations.

Do you prefer to ask your Barrie real estate questions face to face? Book a buyer’s meeting right here.

5- Repeat

Once you’ve completed the BRRRR method on one property, you can then repeat the process on other properties to grow your portfolio with the money that you cashed out from the refinance.

The BRRRR method is responsible for many real estate millionaires, but there are also risks you’ll need to navigate and minimize. Cash flow is one aspect to pay strict attention to.

Since you are refinancing to purchase another property, sometimes right up to the loan-to-value limit allowed by your lender, you have little room in case something goes wrong. A drop in home prices might leave your mortgage underwater, and non-payment of rent can cause problems that have a domino effect on your finances.

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Barrie isn’t just a great place to invest; it’s a great place to live. Learn why in the posts below:

• Is Barrie a Good Place to Live With a Young Family?
• Is Barrie, Ontario, a Safe Place to Live?
• Why Are People Moving From Toronto to Barrie?

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Understanding the Risks

The BRRRR method involves a high level of risk because of the amount of debt that you will be taking on. All variables must be considered and factored in to mitigate the potential issues. It can be difficult to find the right property. You’ll need to find a property for below market value that has potential, and it can take a long time and a lot of research of all the listings for the right one.

Besides the value you might pocket from eventually selling the property, you will want to ensure it’s desirable enough to be rented out to good tenants. It can tie up your money. When just starting down the BRRRR path, the down payment for the purchase of the rental property and the cost of repairs can be significant.

Repair costs might also fly above budget, forcing you to come up with up even more cash. You’ll need to pay these costs upfront, and you won’t be making any rental income during this time. This ties up your cash until you’re able to refinance or sell the property.

To succeed, you really need expert guidance to have a good understanding of the market and its potential. The Weeks Group has developed a spreadsheet for our clients that does a complete job of evaluating a potential BRRRR opportunity, along with our expertise as actual long-term investors.

Do you want to know more about the risks and financial advantages of investing in real estate? Our Barrie real estate agents are investors as well, and we are happy to help you explore your options. Reach out to hello@weeksgroup.ca or call 705.721.9111 to begin.