What is the BRRRR Method in Real Estate Investing & How Does it Benefit Our Investors?
What does BRRRR mean?
The BRRRR Method stands for “buy, repair, rent, refinance, repeat.” It involves buying distressed properties at a discount, fixing them up, increasing rents, and then refinancing in order to access capital for more deals.
Valiance Capital takes a vertically-integrated, data-driven approach that uses some elements of BRRRR.
Many real estate private equity groups and single-family rental investors structure their deals in the same way. This short guide educates investors on the popular real estate investment strategy while introducing them to a component of what we do.
In this article, we’re going to explain each section and show you how it works.
- Buy: Identity opportunities that have high value-add potential. Look for markets with solid fundamentals: plenty of demand, low (or even nonexistent) vacancy rates, and properties in need of repair.
- Repair (or Rehab or Renovate): Repair and renovate to capture full market value. When a property is lacking basic utilities or amenities that are expected from the market, that property sometimes takes a bigger hit to its value than the repairs would potentially cost. Those are exactly the types of buildings that we target.
- Rent: Then, once the building is fixed up, increase rents and demand higher-quality tenants.
- Refinance: Leverage new cashflow to refinance out a high percentage of original equity. This increases what we call “velocity of capital,” how quickly money can be exchanged in an economy. In our case, that means quickly repaying investors.
- Repeat: Take the refinance cash-out proceeds, and reinvest in the next BRRRR opportunity.
While this might give you a bird’s eye view of how the process works, let’s look at each step in more detail.
How does BRRRR work?
As we mentioned above, BRRRR works by targeting below-market-value properties in growing markets, making repairs, generating more revenue through rent hikes, and then refinancing the improved property to invest in similar properties.
In this section, we’ll take you through an example of how this might work with a 20-unit apartment building.
Buy: Property Identification
The first step is to analyze the market for opportunities.
When property values are increasing, new businesses are flooding an area, employment appears stable, and the economy is generally performing well, the potential upside for improving run-down properties is substantially larger.
For example, imagine a 20-unit apartment building in a bustling college town costs $4m, but mismanagement and deferred maintenance are hurting its value. A typical 20-unit apartment building in the same area has a market value of $6m-$8m.
The interiors need to be remodeled, the A/C needs to be updated, and the recreation areas need a complete overhaul in order to line up with what’s typically expected in the market, but additional research reveals that those improvements will only cost $1-1.5m.
Even though the property is unattractive to the typical buyer, to a commercial real estate investor looking to execute on the BRRRR method, it’s an opportunity worth exploring further.
Repair (or Rehab or Renovate): Address and Resolve Issues
The second step is to repair, rehab, or renovate to bring the below-market-value property up to par -- or even higher.
The type of property that works best for the BRRRR method is one that’s run-down, older, and in need of repair. While buying a property that is already in line with market standards may seem less risky, the potential for the repairs to increase the property’s value or rent rates is much, much lower.
For instance, adding additional amenities to an apartment building that is already delivering on the fundamentals may not bring in enough money to cover the cost of those amenities. Adding a gym to each floor, for instance, may not be enough to considerably increase rents. While it’s something that tenants may appreciate, they might not be willing to spend extra to pay for the gym, causing a loss.
This part of the process -- fixing up the property and adding value -- sounds straightforward, but it’s one that’s often fraught with complications. Inexperienced investors can sometimes mistake the costs and time associated with making repairs, potentially putting the profitability of the venture at stake.
This is where Valiance Capital’s vertically integrated approach comes into play: by keeping construction and management in-house, we’re able to save on repair costs and annual expenses.
But to continue with the example, suppose the school year is ending soon at the university, so there’s a three-month window to make repairs, at a total cost of $1.5m.
After making these repairs, market research shows the property will be worth about $7.5m.
Rent: Increase Cash Flow
With an improved property, rent is higher.
This is especially true for in-demand markets. When there’s a high demand for housing, units that have deferred maintenance may be rented out regardless of their condition and quality. However, improving features will attract better tenants.
From a commercial real estate viewpoint, this might mean locking in more higher-paying tenants with great credit scores, creating a higher level of stability for the investment.
In a 20-unit building that has been completely remodeled, rent could easily increase by more than 25% of its previous value.
Refinance: Take Out Equity
As long as the property’s value exceeds the cost of repairs, refinancing will “unlock” that added value.
We’ve established above that we’ve put $1.5m into a property that had an original value of $4m. Now, however, with the repairs, the property is valued at about $7.5m.
With a typical cash-out refinance, you can borrow up to 80% of a property’s value.
Refinancing will allow the investor to take out 80% of the property’s new value, or $6m.
The total cost for purchasing and fixing up the asset was only $5.5m. After repairs and acquisition, then, there was a gain of $500,000 (and a new 20-unit apartment building that’s generating higher revenue than ever before).
Repeat: Acquire More
Finally, repeating the process builds a sizable, income-generating real estate portfolio.
The example included above, from a value-add standpoint, was actually a bit on the tame side. The BRRRR method could work with properties that are suffering from extreme deferred maintenance. The key isn’t in the property itself, but in the market. If the market shows that there’s a high demand for housing and the property shows potential, then earning massive returns in a condensed time frame is realistic.
How Valiance Capital Implements the BRRRR Strategy
We target assets that are not operating to their full potential in markets with solid fundamentals. With our experienced team, we capture that opportunity to buy, renovate, rent, refinance, and repeat.
Here’s how we go about acquiring student and multifamily housing in Texas and California:
Our acquisition criteria depends on how many units we’re looking to purchase and where, but generally there are three categories of various property types we’re interested in:
- Class B and C properties in East Bay, Los Angeles, Central Valley, CA or Austin, TX
- Acquisition Basis: $10m-$60m+
- Size: Over 50 units
- 1960s construction or newer
- Underutilized hotels or hospitality buildings that could be converted to student housing
- Acquisition Basis: $1m-$10m
- Class B and C properties in neighborhoods near Tier-1, PAC-12 Conference universities
- Acquisition Basis: $3m-$30m+
- Within 10-minute walking distance to campus.
One example of Valiance’s execution of the BRRRR method is Prospect near UC Berkeley. At a construction cost of about $4m, under a condensed timeline of only 3 months before the 2020 school year, we pre-leased 100% of units while the property was still under construction.
A key part of our strategy is keeping the construction in-house, allowing significant cost savings on the “repair” part of the strategy. Our integratedsister property management company, The Berkeley Group, handles the management. Due to added amenities and top-notch services, we were able to increase rents.
Then, within one year, we had already refinanced the property and moved on to other projects. Every step of the BRRRR strategy is there:
- Buy: The Prospect, a distressed and mismanaged building near UC Berkeley, a popular university where housing demand is incredibly high.
- Repair: Take care of deferred maintenance with our own construction company.
- Rent: Increase rents and have our integratedsister company, the Berkeley Group, take care of management.
- Refinance: Acquire the capital.
- Repeat: Search for more opportunities in similar areas.
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The BRRRR method is buy, repair, rent, refinance, repeat. It allows investors to purchase run-down buildings at a discount, fix them up, increase rents, and refinance to secure a lot of the money that they may have lost on repairs.
The result is an income-generating asset at a discounted price.
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Investing involves risk, including loss of principal. Past performance does not guarantee or indicate future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. While the data we use from third parties is believed to be reliable, we cannot ensure the accuracy or completeness of data provided by investors or other third parties. Neither Valiance Capital nor any of its affiliates provide tax advice and do not represent in any manner that the outcomes described herein will result in any particular tax consequence. Offers to sell, or solicitations of offers to buy, any security can only be made through official offering documents that contain important information about investment objectives, risks, fees and expenses. Prospective investors should consult with a tax or legal adviser before making any investment decision. For our current Regulation A offering(s), no sale may be made to you in this offering if the aggregate purchase price you pay is more than 10% of the greater of your annual income or net worth (excluding your primary residence, as described in Rule 501(a)(5)(i) of Regulation D). Different rules apply to accredited investors and non-natural persons. Before making any representation that your investment does not exceed applicable thresholds, we encourage you to review Rule 251(d)(2)(i)(C) of Regulation A. For general information on investing, we encourage you to refer to www.investor.gov.