The BRRRR Method in Canada

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The BRRRR method is a real estate investment strategy that involves purchasing a property, rehabilitating/renovating it, renting it out, refinancing the loan on the property, and then repeating the process with another property. The key to success with this strategy is to purchase properties that can be easily renovated and significantly increase in landlord-friendly areas.

The BRRRR Method Meaning

The BRRRR method stands for "buy, rehab, rent, refinance, and repeat." This strategy can be used to purchase residential and commercial properties and can effectively build wealth through real estate investing.

This page examines how the BRRRR method works in Canada, discusses a few examples of the BRRRR method in action, and provides some of the pros and cons of using this strategy.

The BRRRR method allows you to purchase rental properties without requiring a large down payment, but without a good plan, it may be a risky strategy. If you have a good plan that works, you’ll use rental property mortgage to kickstart your real estate investment portfolio and pay it off later via the passive rental income generated from your BRRRR projects. The following steps describe the strategy in general, but they do not guarantee success.

1) Buy: Find a property that meets your investment criteria. For the BRRRR method, you should look for homes that are undervalued due to the need of significant repairs. Be sure to do your due diligence to make sure the property is a sound investment when accounting for the cost of repairs.

2) Rehab: Once you purchase the property, you need to repair and renovate it. This step is crucial to increase the value of the property and attract tenants for consistent passive income.

3) Rent: Once the house is ready, find tenants and begin collecting rent. Ideally, the rent you collect should be more than the mortgage payments and maintenance costs, allowing you to be cash flow positive on your BRRRR project.

4) Refinance: Use the rental income and home value appreciation to refinance the mortgage. Pull out home equity as cash to have enough funds to finance the next deal.

5) Repeat: Once you’ve completed the BRRRR project, you can repeat the process on other properties to grow your portfolio with the money you cashed out from the refinance.

The BRRRR method can generate cash flow and grow your real estate portfolio quickly, but it can also be very risky without diligent research and planning. For BRRRR to work, you need to find properties below market value, renovate them, and rent them out to generate enough income to buy more properties. Here’s a detailed look at each step of the BRRRR method.

Find a fixer-upper property below market value. This is an important part of the process as it determines your potential return on investment. Finding a property that works with the BRRRR method requires detailed knowledge of the local real estate market and understanding of how much the repairs would cost. Your goal is to find a property that sells for less than its After Repair Value (ARV) minus the cost of repairs. Experienced investors target properties with 20%-30% appreciation in value including repairs after completion.

You may consider buying a foreclosed properties, power of sales/short sales or houses that require significant repairs as they may hold a lot of value while priced below market. You also need to consider the after repair value (ARV), which is the property's market value after you repair and renovate it. Compare this to the cost of repairs and renovations, as well as the current property value or purchase price, to see if the deal is worth pursuing.

The ARV is important because it tells you how much profit you can potentially make on the property. To find the ARV, you'll need to research recent comparable sales in the area to get an estimate of what the property could be worth once it's finished being repaired and renovated. This is known as doing comparative market analysis (CMA). You should aim for at least 20% to 30% ARV appreciation while accounting for repairs.

Once you have a general idea of the property's value, you can start to estimate how much it would cost to renovate it. Consult with local contractors and get estimates for the work that needs to be done. You may consider getting a general contractor if you don’t have experience with home repairs and renovations. It's always a good idea to get multiple bids from contractors before starting any work on a property.

Once you have a general idea of the ARV and renovation costs, you can start to calculate your offer price. A good rule of thumb is to offer 70% of the ARV minus the estimated repair and renovation costs. Keep in mind that you'll need to leave room for negotiating. You should get a mortgage pre-approval before making an offer on a property so you know exactly how much you can afford to spend.

This step of the BRRRR method can be as simple as painting and repairing minor damage or as complex as gutting the property and starting from scratch. You can use tools, such as a painting calculator or concrete calculator, to estimate some repair costs. Generally, BRRRR investors suggest to look for houses that require larger repairs as there is a lot of value to be generated through sweat equity. Sweat equity is the concept of getting home appreciation and increasing equity by repairing and renovating the house yourself. Make sure to follow your plan to avoid getting over budget or make improvements that won’t increase the property’s value.

Forced Appreciation in BRRRR

A large part of BRRRR project is to force appreciation, which means repairing and adding features to your BRRRR home to increase the value of it. It is easier to do with older properties that require significant repairs and renovations. Even though it is relatively easy to force appreciation, your goal is to increase the value by more than the cost of force appreciation.

For BRRRR projects, renovations are not ideal way to force appreciation as it may lose its value during its rental lifespan. Instead, BRRRR projects focus on structural repairs that will hold value for much longer. The BRRRR method requires homes that need large repairs to be successful.

The key to success with a fixer-upper is to force appreciation while keeping expenses low. This means carefully managing the repair process, setting a budget and sticking to it, hiring and managing reliable contractors, and getting all the necessary permits. The renovations are mostly needed for the rental part of the BRRRR project. You should avoid impractical designs and instead focus on clean and durable materials that will keep your property desirable for a long time.

Once repairs and renovations are complete, it’s time to find tenants and start collecting rent. For BRRRR to be successful, the rent should cover the mortgage payments and maintenance costs, leaving you with positive or break-even cash flow each month. The repairs and renovations on the property may help you charge a higher rent. If you're able to increase the rent collected on your property, you can also increase its value through “rent appreciation”.

Rent appreciation is another way that your property value can increase, and it's based on the property's capitalization rate (cap rate). By increasing the rent collected, you'll increase the property's cap rate. A higher cap rate increases the amount a real estate investor or buyer would be willing to pay for the property.

Renting out the BRRRR home to tenants means that you’ll need to be a landlord, which comes with various duties and responsibilities. This might include maintaining the property, paying for landlord insurance, dealing with tenants, collecting rent, and handling evictions. For a more hands-off approach, you can hire a property manager to take care of the renting side for you.

Once your property is rented out and is earning a steady stream of rental income, you can then refinance the property in order to get cash out of your home equity. You can get a mortgage with a traditional lender, such as a bank, or with a private mortgage lender. Pulling out your equity with a refinance is known as a cash-out refinance.

In order for the cash-out refinance to be approved, you’ll need to have enough equity and income. This is why ARV appreciation and sufficient rental income is so important. 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.

Lenders will need to verify your income in order to allow you to refinance your mortgage. Some major banks might not accept the entire amount of your rental income as part of your application. For example, it’s common for banks to only consider 50% of your rental income. B-lenders and private lenders can be more lenient and might consider a higher percentage. For homes with 1-4 rental units, the CMHC has specific rules when calculating rental income. This varies from the 50% gross rental income approach for certain 2-unit owner-occupied and 2-4 unit non-owner occupied properties, to the net rental income approach for other rental property types.

If your BRRRR project is successful, you should have enough money and enough rental income to get a mortgage on another property. You should be careful getting more properties aggressively because your debt obligations increase rapidly as you get new properties. It may be relatively easy to manage mortgage payments on a single house, but you may find yourself in a difficult situation if you cannot manage debt obligations on multiple properties at once.

You should always be conservative when considering the BRRRR method as it is risky and may leave you with a lot of debt in high-interest environments, or in markets with low rental demand and falling home prices.

BRRRR investments are risky and may not fit conservative or inexperienced real estate investors. There are a number of reasons why the BRRRR method is not ideal for everyone. Here are five main risks of the BRRRR method:

1) Over-leveraging: Since you are refinancing in order to purchase another property, you have little room in case something goes wrong. A drop in home prices might leave your mortgage underwater, and decreasing rents or non-payment of rent can cause problems that have a domino effect on your finances. The BRRRR method involves a high-level of risk through the amount of debt that you will be taking on.

2) Lack of Liquidity: You need a substantial amount of money to purchase a home, fund the repairs and cover unexpected costs. You need to pay these costs upfront without rental income to cover them during the purchase and renovation periods. This ties up your cash until you’re able to refinance or sell the property. You might also be forced to sell during a real estate market downturn with lower prices.

3) Bad Property Market: You need to find a property for below market value that has potential. In strong sellers markets, it might be difficult to find a home with price that makes sense for the BRRRR project. At best, it may take a lot of time to find a house, and at worst, your BRRRR will not be successful due to high prices. Besides the value you might pocket from flipping the property, you will want to make sure that it’s desirable enough to be rented out to tenants.

4) Large Time Investment: Searching for undervalued properties, managing repairs and renovations, finding and dealing with tenants, and then dealing with refinancing takes a lot of time. There are a lot of moving parts to the BRRRR method that will keep you involved in the project until it is completed. This can become hard to manage when you have multiple properties or other commitments to take care of.

5) Lack of Experience: The BRRRR method is not for inexperienced investors. You must be able to analyze the market, outline the repairs needed, find the best contractors for the job and have a clear understanding on how to finance the whole project. This takes practice and requires experience in the real estate industry.

Let’s say that you’re new to the BRRRR method and you’ve found a home that you think would be a good fixer-upper. It needs significant repairs that you think will cost $50,000, but you believe the after repair value (ARV) of the home is $700,000. Following the 70% rule, you offer to buy the home for $500,000. If you were to purchase this home, here are the steps that you would follow:

1) Purchase: You make a 20% down payment of $100,000 to purchase the home. When accounting for closing costs of buying a home, this adds another $5,000.

2) Repairs: The cost of repairs is $50,000. You can either pay for these out of pocket or take out a home renovation loan. This might include lines of credit, personal loans, store financing, and even credit cards. The interest on these loans will become an additional expense.

3) Rent: You find a tenant who is willing to pay $2,000 per month in rent. After accounting for the cost of a property manager and possible vacancy losses, as well as expenses such as property tax, insurance, and maintenance, your monthly net rental income is $1,500.

4) Refinance: You have trouble being approved for a cash-out refinance from a bank, so as an alternative mortgage option, you choose to go with a subprime mortgage lender instead. The current market value of the property is $700,000, and the lender is allowing you to cash-out refinance up to a maximum LTV of 80%, or $560,000.