BRRRR Method – A Real Estate Professional’s Thoughts. We invited Logan Freeman – Founder and CEO of LiveFree Investments to write us a guest post explaining the BRRRR method of real estate investing.
If you’ve been around the real estate investing world long enough, you’re likely familiar with Bigger Pockets, which is arguably the largest platform of real estate investors and resources. And if you are familiar with Bigger Pockets, odds are you’ve heard of the BRRRR method, which is Brandon Turner’s coined term for the strategy of Buy, Rehab, Rent, Refinance, Repeat. The BRRRR method is quickly becoming one of the most popularly practiced strategies for investors in SFR’s and small multifamily buildings. The BRRRR method is appealing because it offers an alternative to the traditional method of making a large (20%+) down payment and spending as little as possible to get the property move-in ready. Essentially, BRRRR method works like this:
An example of the BRRRR method:
4 months after owning this property, the owner refinances the property with a bank that let him borrow 75% of the appraised value (the ARV), or .75($110,000) = $82,500. After closing costs you have about $77,500 of net capital recovered to then use towards your next purchase.
At LiveFree Investors, we have successfully completed over 200 BRRRR transactions for our investors buying residential properties. Recently, however, a new concept of the BRRRR method is being applied to commercial properties.
In our market, in Kansas City, SFR home prices have only continued to climb in the 80-130k price range making it harder to find subject properties to BRRRR. While it is possible to BRRRR these more expensive residential properties, the level of effort that it takes to find one of these properties has become increasingly more difficult. As an investment property specialist and investor myself, I started to search for a new model that would allow us to provide our investors a healthy return while being able to return their capital. I believe I have found it in the asset class of commercial properties. And while there may be a higher barrier of entry, this often means lower competition.
Here’s an example of a BRRRR’d commercial deal:
Mixed use building – commercial and event space (with potential residential in basement)
Purchase price – $282K
Loan – $253K
Closing costs – $500
Rehab – $50K
Carrying costs – $5K
Broker fees (for tenants) – $5K
Initial costs – $95K
Refinancing costs
Appraisal – $2,500
Loan fees – $3K
Total costs – $101K
Monthly rent – $4,500
*Cash back from refinance – $68K
Cash out of pocket – $33K
After deducting monthly operating expenses and utilities, this commercial property would net around $1,000 in monthly cash flow and result in around $100K in equity after the refinance. You can see the principles are the same in BRRRRing commercial and residential properties: buy a distressed property below market value; rehab it; get it fully occupied at market rent; refinance; and repeat with your recovered capital. When you don’t let yourself become intimidated by much larger numbers, you stand to invest more and make more in the end.
Some pros to BRRRRing commercial properties:
Some cons to BRRRRing commercial properties:
All in all, BRRRRing commercial properties are much like BRRRRing residential properties, just on a much larger scale and with some nuances when it comes to financing. But when these principles are applied in a prudent fashion, you just may land the deal of a lifetime!
Here at PhysicianEstate, we welcome all physician entrepreneurs to learn about commercial real estate investments, rental property investments, and wealth generation. We encourage all physicians to eventually become real estate physician investors. We know a great deal about Who – What – Why – How.
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Authored by Harsha Moole, M.D., MBBS
Hey there! I hope you enjoyed reading this blog. PhysicianEstate is my brain child and passion project. I run this platform to empower entrepreneurially motivated physicians to make financially educated investment decisions and discuss asset protection strategies. Lots of important but free content here and here! If you have any questions or if you are interested in partnering with me, let’s connect! hmoole@physicianestate.com
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