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Real-Estate Investing: 5 BRRRR Strategy Risks to Be Aware of – Business Insider

Posted on December 13, 2021 By Financial independence No Comments on Real-Estate Investing: 5 BRRRR Strategy Risks to Be Aware of – Business Insider
  • BRRRR is a real-estate investing strategy that stands for buy, rehab, rent, refinance, repeat.
  • Many have used it to gain financial independence.
  • Three experts on the strategy say there can be downsides when executing it.

If you’re plugged into the real-estate-podcast scene, you’ve almost definitely heard the term “BRRRR” — short for buy, rehab, rent, refinance, repeat. 

The strategy — in which investors employ cash-out refinancing on a property they already own to purchase new ones — has allowed tons of people to scale their real-estate portfolios without sinking too much, or any, of their own money into the homes. It’s enabled many earning a modest living to build the kind of wealth that allows for financial independence.

There are seemingly countless examples of individual investors who have executed the BRRRR method successfully. Insider has profiled a few, including Kumar Sadaram, Joe Asamoah, and Quentin D’Souza.

But does the method have any potential downsides? Of course, as is true for any investing strategy.

Three well-known real-estate investors who said they’ve executed the BRRRR method successfully — Chandler David Smith, Sam Primm, and David Greene — have touched on its risks. 

The negatives that they’ve warned about are unpacked below.

5 risks associated with the BRRRR strategy

Refinancing is one of the last steps in the BRRRR method. But Chandler David Smith, who started investing in real estate at age 23, said it should be one of the first things investors think about when looking to execute the strategy.

Before buying a property, Smith said, make sure your bank preapproves you for refinancing and know how much of the home’s value it will give you. If you aren’t preapproved and the bank offers less cash-out equity than you had anticipated, then it could be an issue if you need to pay back a hard money lender.

Another crucial thing to pay attention to from the start is the math on a deal, Smith said, especially if you’re borrowing from a hard money lender. He said to make sure you have enough capital on hand not only to buy a property but also to do a proper rehab on it that would force enough appreciation. Smith said to leave room for error to the tune of about 15%. Rent estimates also need to be realistic as rent will play a role in how much a bank will give you back for cash-out refinancing.

Sam Primm, a co-owner of the real-estate firm Faster House, echoed the importance of running the numbers on a property correctly and making conservative estimates.

“If I saw three comparable houses that sold for $200,000, but one house sold for $220,000, I need to be realistic and run my numbers at $200,000 for what the house …….

Source: https://www.businessinsider.com/real-estate-investing-brrrr-strategy-risks-downsides-fail-method-explain-2021-12

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