The BRRRR Strategy: Guide For Short-Term Rental Investors

Quick Answer

The BRRRR strategy involves buying a property, rehabbing it, renting it out, refinancing to pull out your original capital, and then repeating the process to grow your portfolio.

Introduction

Are you an Airbnb or short-term rental investor looking to supercharge your portfolio growth? The BRRRR strategy, which stands for "Buy, Rehab, Rent, Refinance, Repeat," has become increasingly popular among real estate investors in recent years. This proven framework allows you to rapidly scale your portfolio by recycling your capital into new deals.

Whether you're a seasoned investor or just getting started with short-term rentals, this guide will provide you with actionable insights and practical tips to help you grow your portfolio and achieve financial freedom. So, let's dive in and explore how the BRRRR strategy can transform your Airbnb investing business!

What is the BRRRR Strategy?

The BRRRR strategy is a framework for real estate investing that consists of five key phases: Buy, Rehab, Rent, Refinance, and Repeat. Here's a breakdown of each step:

• Buy: The first step is to acquire a property at a discount. This could be a foreclosure, short sale, or simply a motivated seller. The key is to find a deal where you can add significant value through rehab.
• Rehab: Once you've closed on the property, it's time to renovate it to maximize its value. This could involve simple cosmetic updates or more extensive repairs and improvements. The goal is to create a property that commands top dollar in rent.
• Rent: After the rehab is complete, you'll rent out the property to tenants. In the case of short-term rentals, this means listing your property on platforms like Airbnb or VRBO and managing the day-to-day operations.
• Refinance: Once the property is stabilized and generating income, you can refinance it to pull out your original capital. This is typically done through a cash-out refinance, where you secure a new loan that's larger than your original mortgage.
• Repeat: Finally, you'll take the capital you pulled out from the refinance and use it to acquire your next BRRRR property. By repeating this process over and over, you can rapidly grow your portfolio without relying on new capital each time.

The beauty of the BRRRR strategy is that it allows you to recycle your capital and scale your investments quickly. You can accumulate a large portfolio of cash-flowing properties over time by continually reinvesting your funds.

Benefits of the BRRRR Strategy

A key benefit of BRRRR is the ability to force appreciation through rehab. By strategically renovating a property, you can significantly increase its value and command higher rents. This is especially powerful in the short-term rental space, where well-designed and well-located properties can generate substantial nightly rates.

Imagine purchasing a distressed property for $100,000 and putting $50,000 into rehab. After completing the renovations, the property is now worth $200,000. You can then refinance the property to pull out your original $150,000 investment and use that capital to acquire your next deal. Rinse and repeat.

Of course, successfully executing the BRRRR strategy requires careful planning and execution. You need to be able to find good deals, accurately estimate rehab costs, and manage the property effectively to ensure strong cash flow. But when done correctly, BRRRR can be an incredibly powerful way to build long-term wealth through real estate.

Buying the Right Short-Term Rental Property

When it comes to executing the BRRRR strategy with short-term rentals, finding the right property is crucial. Not every home will make a profitable Airbnb investment. Here are some key factors to consider when searching for your next deal:

1. Location: For short-term rentals, location is everything. Look for properties in desirable areas with strong tourism, close proximity to attractions, and good walkability. Analyze the local Airbnb market using our BNBCalc tool to ensure there's strong demand and limited competition.
2. Property Type: Consider what type of property will appeal most to short-term rental guests. Multifamily properties like duplexes, triplexes, or quadplexes can be a smart choice, allowing you to generate multiple income streams. Single-family homes with unique characteristics or amenities can also perform well.
3. Zoning and Regulations: Before making an offer, always research the local zoning laws and short-term rental regulations. Some cities have strict limits on Airbnb properties, while others may require special permits or licenses. Don't get caught off guard by legal issues down the road.

Analyze The Property and Potential Deals

When analyzing potential deals, use the 1% rule as a quick litmus test. This rule states that the monthly rent should be at least 1% of the purchase price. For example, a $200,000 property should be rented for at least $2,000 per month. For short-term rentals, you can modify this to a 2% rule, to account for the higher income potential and expenses.

Another critical step is estimating your rehab costs before making an offer. Work with a contractor to walk through the property and create a detailed scope of work. Factor in any necessary upgrades to make the property shine as a short-term rental. Then, build these costs into your offer price to ensure you're getting a good deal.

When it comes time to finance your purchase, you have several options. If you're just starting out, conventional mortgages are a good choice. As you scale, you may want to explore more creative financing options like private money or hard money loans. These can offer more flexibility and faster closing times, allowing you to snap up good deals quickly.

Ultimately, the key to buying the right short-term rental property is doing your due diligence. Analyze the market, run the numbers, and have a clear plan for rehabbing and managing the property. By following these guidelines, you'll be well on your way to acquiring your Airbnb investment.

Rehabbing Your Short-Term Rental

Once you've closed on your short-term rental property, it's time to start the rehab process. This is where you'll really be able to force appreciation and maximize your returns. Here are some tips for successfully rehabbing your Airbnb investment:

1. Focus on the Right Upgrades: Not all renovations are created equal. For short-term rentals, focus on upgrades that will impact guest experience and nightly rates. This could include creating an open-concept floor plan, upgrading the kitchen and bathrooms, adding unique amenities like a hot tub or game room, and improving the curb appeal.
2. Create a Detailed Scope of Work: Before starting any renovations, create a detailed scope of work outlining every project you plan to complete. This should include a timeline and budget for each item. Be sure to prioritize projects based on their potential ROI.
3. Hire the Right Contractors: Unless you have experience with construction yourself, you'll likely need to hire contractors to complete the rehab. Look for contractors with experience working on short-term rentals who can complete the work quickly and efficiently. Get multiple bids and check references before hiring anyone.
4. Obtain Necessary Permits: Depending on the scope of your renovations, you may need to obtain permits from your local building department. Be sure to research the requirements in your area and factor permit fees into your budget. Failing to obtain necessary permits can result in costly fines and delays.
5. Focus on Durability: When selecting materials for your rehab, prioritize durability over luxury. Short-term rentals experience a lot more wear and tear than traditional homes. Choose flooring, countertops, and furniture that can withstand heavy use and are easy to clean.
6. Create a Cohesive Design: To make your short-term rental stand out, create a cohesive design throughout the property. Choose a color scheme and style that flows from room to room. Incorporate unique decor elements that reflect the local area or property's history. A well-designed space will photograph well and attract more bookings.
7. Don't Forget the Exterior: The exterior of your short-term rental is the first thing guests will see, so don't neglect it in your rehab. Focus on improving the curb appeal with fresh landscaping, a new coat of paint, and welcoming outdoor living spaces.

Once your rehab is complete, it's time to stage the property for guests. Invest in high-quality furniture and strategically place them, linens, and decor that will make your space feel luxurious and inviting. Hire a professional photographer to capture stunning photos for your Airbnb listing.

Renting Your Rehabbed Short-Term Rental

Now that your short-term rental property is rehabbed and ready to go, it's time to start generating income. Renting out your property on platforms like Airbnb and VRBO can greatly maximize your returns and create a steady cash flow.

One of the biggest benefits of short-term rentals is the potential for higher nightly rates compared to traditional long-term leases. By offering a unique and well-designed space in a desirable location, you can command premium prices and keep your occupancy rates high.

To get started, create a listing on Airbnb or VRBO that showcases your property's best features. Invest in professional photography to capture stunning images of your space. Write a compelling description that highlights your property's unique amenities and location. Be sure to include all the key details guests will want to know, such as bed configurations, parking information, and house rules.

When it comes to pricing your rental, do your research on comparable properties in the area. Look at factors like location, size, amenities, and time of year to determine a competitive nightly rate. You may want to consider using dynamic pricing tools that automatically adjust your rates based on demand.

Once your listing is live, managing your short-term rental effectively is important to ensure a positive guest experience. This includes promptly responding to inquiries and booking requests, providing clear check-in instructions, and being available to answer any questions during a guest's stay.

Turnover and cleaning between guests is another key aspect of managing a short-term rental. Hire a reliable cleaning service or develop a thorough cleaning checklist to ensure your property is spotless for each new guest. Consider using keyless entry systems or lockboxes to streamline the check-in process.

Maintenance issues can also arise more frequently with short-term rentals due to the higher turnover rate. Be prepared to handle any issues promptly to minimize disruption to your guests' stay. Having a network of trusted contractors or handymen on call for any necessary repairs is a good idea.

Finally, be sure to familiarize yourself with any local regulations or restrictions around short-term rentals in your area. Some cities require special permits or have limits on the number of rental days per year. Failure to comply with these regulations can result in fines or even the shutdown of your rental property.

Refinancing to Pull Out Your Capital

Once your short-term rental property is up and running and generating steady income, it's time to move on to the next phase of the BRRRR strategy: refinancing. Refinancing aims to pull out your original investment capital so you can recycle it into your next deal.

Typically, investors will wait at least six months after purchasing a property before refinancing. This gives you time to complete the rehab, rent the property, and generate income. It also allows time for the property's value to increase, which is key to a successful refinance.

When refinancing a BRRRR property, you'll typically use a cash-out refinance. This means you'll take out a new loan that's larger than your original mortgage and use the extra funds to pay back your original investment. The new loan is based on the property's after-repair value (ARV), which should be significantly higher than your purchase price, thanks to the rehab work you've done.

To qualify for a refinance, you'll need to show the lender that your property is generating sufficient income to cover the new mortgage payment. This is where having a few months of strong short-term rental income can be very helpful. Be sure to keep detailed records of your bookings, nightly rates, and occupancy rates to share with the lender.

There are a few different financing options available for BRRRR refinances. Conventional mortgages are a popular choice, especially for newer investors. As you scale your portfolio, you may want to explore commercial loans or portfolio loans, which can offer more flexibility and better terms for multiple properties.

Another option is to use a home equity line of credit (HELOC) to pull out your capital. This can be a good choice if you have significant equity in the property but don't want to do a full refinance. Just be sure to factor in the variable interest rates and shorter repayment terms of a HELOC.

Whichever financing route you choose, be prepared to provide extensive documentation to the lender. This may include proof of income, tax returns, property appraisals, and rental agreements. Working with a lender with BRRRR investing experience can help streamline the process.

Repeating the Process to Grow Your Portfolio

The true power of the BRRRR strategy lies in its repeatability. Once you've successfully completed one cycle of buying, rehabbing, renting, and refinancing a short-term rental property, it's time to do it all over again. You can rapidly scale your portfolio and build long-term wealth by continually recycling your capital.

After pulling out your original investment through a refinance, you'll have a significant chunk of capital to work with. Use this money to acquire your next BRRRR property, following the same criteria and due diligence process as before. Look for properties in desirable locations with strong short-term rental demand and potential for forced appreciation through rehab.

As you take on more projects, it's essential to develop systems and processes to streamline your investing. This could include creating a standardized rehab scope of work, working with a dedicated team of contractors and property managers, and using software tools to automate your bookings and guest communication.

One of the biggest advantages of focusing on short-term rentals for your BRRRR investing is the potential for strong cash flow. Unlike traditional long-term rentals, which may only generate a few hundred dollars per month in profit, short-term rentals can produce significant income. This cash flow can be reinvested into your business to fund future deals and accelerate your growth.

As you scale, you may also want to consider bringing on partners or investors to help finance your deals. This can allow you to take on larger projects and grow your portfolio even faster. Just be sure to structure any partnerships carefully and work with experienced legal and financial professionals.

Another key to successful scaling is having a long-term mindset. BRRRR investing is not a get-rich-quick scheme but a proven strategy for building wealth over time. By consistently executing the process and reinvesting your profits, you can create a portfolio of cash-flowing assets that will serve you for years to come.

It's also important to have a clear exit strategy in mind. While short-term rentals can be a great way to generate income, they also require active management and can be subject to changing regulations. As you grow your portfolio, you may want to consider selling off some properties to free up capital or exchanging them for more passive investments like multifamily apartments.

Wrapping Things Up

The BRRRR strategy is powerful for building wealth through short-term rental investing. By following the steps of buying, rehabbing, renting, refinancing, and repeating, you can create a growing portfolio of cash-flowing properties that generate income and appreciate in value over time.

Whether you're a seasoned investor or just starting out, the BRRRR method is a proven path to financial freedom. So what are you waiting for? Start searching for your next deal today and take the first step towards building your short-term rental empire!

FAQs

What Makes the Brrrr Strategy Well-Suited for Short-Term Rental Investing?

The BRRRR method allows investors to force appreciation through rehab, which is especially effective for short-term rentals where well-designed spaces can command higher nightly rates. Additionally, short-term rentals' strong cash flow potential can help investors recycle their capital more quickly.

How Long Does Each Step of the Brrrr Process Typically Take?

The timeline can vary, but generally, it includes buying (1-3 months), rehabbing (1-6 months), renting (1-2 months), and refinancing (1-2 months). The full cycle often takes 6-12 months.

How Much Capital Do I Need to Get Started With Brrrr Investing?

The amount needed can vary widely depending on your market and the types of properties you're buying. Generally, you'll need funds for the down payment, closing costs, and rehab expenses. Many investors start with at least $50,000-$100,000.

Can I Do Brrrr Investing if I Have Bad Credit?

While having good credit makes it easier to secure financing, there are options for investors with bad credit. These may include partnering with other investors, using hard money loans, or seeking out creative financing strategies like seller financing or lease options.