The BRRRRR Strategy, otherwise known as the BRRRR Method, describes a strategy and framework used by investors who wish to build passive income over time by ‘rinsing and repeating’ or circulating the use of their capital throughout various different investment opportunities.
The popularity of the BRRRRR method skyrocketed in 2021 as Canadian home prices soared. A major epicentre for this spike was in the Greater Toronto Area also called the GTA(Hamilton area included) as savvy real estate investors sought out new investment strategies that would allow them to build their portfolios at an accelerated pace.
The BRRRRR (Buy, Rehab, Rent, Refinance, Repeat) strategy acronym represents steps that should be implemented in the exact order they appear.
Here are those steps:
B is for buying a distressed property.
R is for rehabilitation of the property through cost-managed upgrades and renovations (some may call this flipping a distressed property).
R is also for renting out that shiny, just-like-new property.
The third R is then getting a cash-out or refinancing on it.
The last R is for repeating the process to fund further rental property investments.
Buy, Buy, Buy.
When searching through realtor.ca, keep in mind that this phase serves as the crucial decision point and affects the investment outcome. Be sure that you are working with a trusted professional in the industry with a proven track record of experience in utilizing this strategy.
There is a confluence between making sure a property represents a strong investment agreement and guaranteeing it performs well as a rental property. This is a very fine balance and should remain the governing principle that directs the project.
This will require intensive analysis, which includes calculating the cost of renovations, estimating monthly rental expenses, and confirming that the resulting rental income will provide a sufficient profit margin. It is important to perform your analysis based on the current values that are present in real-time, so as to ensure your BRRRRR project has a successful ROI.
Researching the finest rental markets and making sure the purchase price includes enough of a buffer to account for renovation costs are two ways to ensure the successful performance of a rental property. The 70% rule provides an estimate for the cost of repairs and after repairs, is a frequently used guideline by investors. Hamilton is often heralded as one of the ‘finest’ real estate markets if you are looking to find the next investment property that will allow you to ‘rinse and repeat’ your money.
The 70% Rule.
The 70% rule is a good ratio to help investors gauge the viability of investments when they're scouring real estate listings for potential opportunity properties.
Basically, the rule says real estate investors should pay no more than 70% of a property's after-repair value (ARV) minus the cost of the repairs necessary to update the home to rentable or saleable condition.
Go To Rehab.
Once these necessities are satisfied, updates or renovations that add value to a property (therefore warranting the increased rental rate) may be considered.
On the other hand, investors are cautioned not to make any excessive upgrades that will cost more than what can be produced through rental income and to avoid so much customization that the rental unit only appeals to a narrow client profile that limits the potential tenant pool. Another sage piece of advice that was put forth by Adrian Pannozzo. Mr. Pannozzo is a retired Peel Regional Police Sargent and current investor-focused REALTOR ® who has built a net worth of over $50 million in real estate holdings in under 10 years by following the BRRRR method of investing with his organization Executive Properties Capital. Adrian cautions investors to be careful about whom you trust to perform such extensive renovations to your investment property. Whilst all steps in the BRRRR strategy are important to perfect as much as possible so as to avoid unexpected issues, the “Rehab” piece of the equation is quite arguably the most crucial piece of the puzzle. It is pivotal to ensure that you are working with an experienced, reliable, and results-driven team.
We at Canadian Real Estate Wealth further turned to Adrian Pannozzo for his expertise on what renovations bring the biggest returns on investment. Here are Adrian’s recommendations for savvy renovation investment, “High quality and strategic renovations yield above-market rents for your investment property as well as AAA professional tenants who will pay above-average rental rates and respect your property as their own.”
The Rental Phase.
The investor can then carry out the rental phase of the process after the property's rehabilitation phase is finished. This involves the careful selection and screening of potential tenants, controlling turnover, and attending to maintenance and repair requests. An investor will often determine whether their methodology includes enough due diligence to be effective.
Some potential pain points include vacancies, poor renters, or rental bills that surpass the cash provided. All these pitfalls can swiftly drive a house underwater, raising the danger of foreclosure. This is not intended to deter investors from becoming a landlord or exercising the BRRRRR method, but just to underscore the significance of running the statistics and careful analytics before making any investment decision.
A Third R Is A Charm.
Once a property has been sufficiently refreshed and rented, it’s time to formulate a plan on how to refinance it. Some banks will provide a cash-out refinance, while others will just offer to pay off outstanding debt. Vanessa Pannozzo is the Director of Operations for Executive Properties Capital. Canadian Real Estate Wealth asked Ms. Pannozzo which of those two options is the best strategy for investors.
Here are Vanessa’s insights:
A cash-out refinance would be the ultimate strategy to employ when completing a refinance on a BRRRRR. A successful BRRRRR should yield most, if not all, of your initial capital (including down payment, renovation, closing, and carrying costs) at the end of the project. This is something that Executive Properties Capital specializes in.
Expecting Perfection Is A Recipe For Failure.
Perfecting the BRRRR Method will not happen overnight. Investors should anticipate having to face quite the learning curve, this was something that Adrian struggled with as he first began to build his reputation in Hamilton. They can rely on encountering some difficulties and bank on the fact that mistakes will be made. Those mistakes may possibly even be beyond their very first BRRRRR cycle. The secret is in the repeating. They can apply their experience and newly acquired wisdom when tackling their second, third, or fourth property, and forward.
Those wondering how to build wealth in real estate should consider this unique framework. Above and beyond understanding the analytics, which is extremely important, know that mistakes will be made. Learn from those mistakes and put best practices in place to prevent them from being duplicated. In so doing, this technique may fill both your coffers and your personal accomplishment bucket; now that is a very high ROI.