The BRRR Model
A powerful strategy that allows you to create value.
When investors want to take their investing to the next level, they often employ the Buy Reno Rent Refi model. It is a powerful strategy because you are able to create value, and when done right, this can result in getting almost all of your renovation dollars back out of the property… and in a best case scenario, you MAY be able to even get some of your downpayment back! This also amplifies the ROI on the project due to the smaller amount of capital left in the property (i.e. the returns are based on a smaller amount of invested capital), and it allows many investors to roll forward with another project since they got a significant portion of their capital returned. As an example, this effectively means that you are able to invest in a $2.0M for effectively the same amount of cash as if you had purchased a $1.3M property.
While this may seem like a killer strategy, this is not a strategy that is well suited for beginner investors due to the potential pitfalls. Your business model needs to be rock solid and you need to be extremely confident in your financials. And… it goes without saying… you need to be comfortable with large scale renovation projects.
Volition has helped many clients execute on the BRRR strategy in Toronto. In fact, Volition wrote an article about this for HGTV, which you can read about here.
Breaking down the 4 stages:
You need to buy a property that has the potential to be turned into a more expensive property through renovations or other means (such as severance, change of use, etc.). Not every property is a good candidate for this, and in fact, primary residences aren’t always a good candidate for this either. Why? This is due to the fact that YOU will be paying off the increased mortgage yourself… whereas in investment properties, the increased rents will offset the increased mortgage. Other things to consider is whether the finished product can hit the After Repaired Value (ARV) that you are looking for after you put it to highest and best use.
Renovations are the most common means through which investors create value. Oftentimes, you need to be doing large scale renovations in order for it to truly create value. Just doing a light cosmetic renovation may not get you to where you intend to go. This is due to how appraisers valuate your property.
Now that the apartments are nicer, you can lease it out at higher rents. This is important because of the next step
Refinancing at the higher property value means that you do an equity take out. This can result in getting almost all of your renovation dollars back out of the property (or sometimes even more)! This higher mortgage means that you have higher mortgage payments, so that’s why it’s important to get the higher rents which can offset the higher mortgage payments.
The best way to approach a BRRR is to begin with the end in mind. What is the target valuation that you are trying to achieve for this property and can you qualify for the full 80% LTV of that valuation? Then working backwards, you need to ask: what renos are required and expected of an appraiser in order to give me that valuation that I am looking for? Appraisals are such an important part of the BRRR strategy that we’ve written another article about it here. And the next obvious question is how much will a reno like that cost, and how long will it take? And finally, you need to determine the property purchase price you need to acquire at so that the business model works.
There are other things you need to consider as well, such as carry costs, reno budget overages, reno timeline overages, contingency “what-if” scenarios, etc.
Here is a real-life example.