This is a story of how I tried the BRRRR Method (which stands for Buy, Rehab, Rent, Refinance, Repeat) and how I would like to change the acronym to the much more marketable ABARRRR Method. Doesn’t that just roll off the tongue? The BRRRR method was brought to my attention by a friend, but the original concept I believe came from the Bigger Pockets podcast and community.
My wife and I had equity in our primary residence from following the Dave Ramsey advice with laser like focus, paying off our home mortgage over eight years. But what I realized after it was paid was that my lawn really didn’t feel any different under my feet, as Dave Ramsey had said it would. Our house was paid off, but they money was stuck. It was lazy – sleeping in a hammock and sipping lemonade – and not working for us at all. Dave Ramsey on his radio show would tell folks that if they did not like having their home paid off, they could go out and get another mortgage. So, we did.
We took out a home equity line of credit (HELOC) and looked to buy a property in cash outright. We bought a single-family home that we converted into a triplex. To fund the extensive renovation, we took out some Roth IRA contributions along with other savings from our day jobs. This was for the first R (Rehab) in the BRRRR method. It took longer than expected to complete the rehab and then another couple of months to secure tenants in all three units to achieve the second R (Rent) in BRRRR. Then we went to the bank for a cash out refinance, the third R. The bank appraiser appraised our new triplex below what our investment was in the project and we received 80% of the bank appraised value. While not what we hoped, at least we were able to refinance the property with enough cash out to pay off our home equity line of credit. The ideal plan is to try and get all of your cash out with even additional funds from forced appreciation to invest in the next deal.
Given our experience, I would like to propose the ABARRRR Method and add “Appraisal” and “Advertise” to the acronym.
A – Appraisal: The appraisal needs to be an after-rehab value (ARV) appraisal, and it would save any future real estate investor from starting a rehab where they cannot recoup their investment.
B – Buy: Run your numbers and make sure you get a good deal.
A – Advertise: Advertising right after purchase (rather than when renovation is complete) speeds the process of finding renters by gathering a list of interested tenants early.
R – Rehab: Do what’s necessary based on your ARV and projected rent.
R – Rent: Take your time to find a great tenant!
R – Refinance: If you stayed within your budget and your ARV was close, this should be straightforward.
R – Repeat: Time to do it again!
So, ABARRRR: After-rehab value Appraisal, Buy, Advertise, Rehab, Rent, Refinance, Repeat. I don’t think this is going to go viral on the interwebs.
The happy ending of the story is that we have a very good quality triplex that rents for top dollar. It carries a low interest rate, and we have 40 to 50% equity in the rental property. So even less-than-ideal investments can be profitable. Essentially, we redeployed our home equity into an income producing rental property, so it is not lazy any longer.
Please understand that I cannot give you specific investment or legal advice, just guidance in these areas, and you should consult a professional licensed in these areas for specific advice before making any final decisions.
