What is a BRRRRkey?
In case you prefer a text explanation instead…
You’ve probably started hearing or seeing this “BRRRR+turnkey” model of buying turnkeys. Maybe you’ve seen it as the BRRRRkey model. Either way, what the heck does it mean??
Let’s start by explaining the BRRRR and turnkey models of investing individually.
BRRRR: It is a terribly annoying acronym that stands for Buy – Rehab (or Renovate) – Rent – Refinance – Repeat. This is a very traditional method of investing and is considered a “value-add” model. What you’re doing in this model is buying a property that you can add value to, in order to increase equity in the property. The process looks something like this:
- Buy a distressed property
- Rehab or renovate the property (this is where the value gets added)
- Rent the property to tenants
- Refinance the property (now at the higher value)
- Repeat the process so you can continue to snowball your investments by adding value, pulling your money back out, and rinsing and repeating as long as you can so you maximize your portfolio.
It’s a similar model and premise as flipping properties, but instead of selling the property once you add the value, you keep it and have renters in it.
Turnkey: If you’re reading this article, you’re probably familiar with turnkey rental properties. The two big things about turnkeys is that 1) you aren’t doing any of the work yourself and 2) you aren’t buying the property until you’ve had a chance to confirm everything is as advertised. When you do buy the property, you’re getting a property that has been freshly rehabbed (or renovated), has paying tenants in it, and has property management set up to manage the property on your behalf. That is what the turnkey provider companies are offering you.
What you need to know about this model is: the turnkey company is the one purchasing the distressed property and rehabbing it. They are using their own money for this. Therefore, they are holding all the risk (because it’s their money in the pot). You as the investor have minimal risk because you don’t have to close on the property until you’ve verified everything is as advertised, as already mentioned.
So then what is a BRRRRkey property?
You’re basically combining the two methods. You still have all the work done for you (the turnkey part), but you’re the one financing the distressed property and rehab (the BRRRR part). Remember that in the standard turnkey model, the turnkey company is funding all of that, not you.
Advantages & Disadvantages
The main advantage is that unlike with the standard turnkeys, you have the ability to force appreciation. With a standard turnkey, you’re already paying market value and there’s nothing you can improve on the property, so there’s really nothing you can do to increase the equity in the property. But since you’re the one funding the project with the BRRRR+turnkey model, now you are the one who gets to keep the forced appreciation that comes from that rehab.
It seems like the golden ticket, yes? Well it can be, but the major downside is that now you are the one holding the risk. If anything crazy goes on during the rehab, or if for some reason tenants can’t be placed at the estimated values or the property value doesn’t maintain along the way, it’s your money at risk. And while it’s great to have someone else do all the hard work for you with the rehab and tenant placement and such, you’re also trusting other people to perform as expected—while your money is on the line.
One more small disadvantage for some of you is that cash is required for purchasing the distressed property and funding the rehab, so it’s a higher entry investment opportunity. But if you have that much cash available for investing, it can be a great opportunity.
Minimum requirements, purchasing information, & payment schedule
- Minimum $90,000 cash- CASH ONLY, no financing.
- Cash can be retrieved after cash-out refinance.
- All rehabs are completed by a licensed general contractor (no B-team rehabs!)
- Rehabs ≤ 4 months (if rehab takes longer than 4 months, provider will pay you full rental amount every month despite vacancy)
From the Seller:
- Discounted price to cash buyers for funding the acquisition and renovation
- 120-day renovation period guaranteed
- Renovation cost guaranteed
- rental guarantee (starting after 120-day renovation period) until qualified tenant in place by preferred property manager at preferred PM rate of 7%
- 6-month scope-of-work warranty
- Immediately: $5,000 earnest money to be paid with signing contract
- At closing (which is fairly immediate):
- Asset cost + $3,500 closing costs + 50% construction
- (earnest money payment goes towards this payment)
- 2nd 50% of construction gets paid at intervals until rehab is completed
- At end of construction: Buyer orders a 3rd party inspection of property. TK provider will correct all items in inspection report at their own cost
The market: Baltimore
Baltimore is smoking hot. It is one of the only healthy real estate markets that can produce a 10%+ cap rate on a quality 100K+ single family rental property in today’s market. Baltimore rents have been increasing year over year (Realtor.com) and, while home prices are rising as well, they are still below the pre-recession peak (FHFA.com) which means you can still buy low and rent high to maximize your cash flow margin. And over 50% of residents in the city of Baltimore rent (compared to 36% national average) so, as unemployment remains below the national average, this produces high rental demand and a substantial pool of qualified tenants.
- Home prices are still well below the pre-recession peak (FHFA.com) which means optimal price to rent ratios.
- Unemployment rate below the national average (BLS.gov)
- Job creation is attracting quality tenants as Baltimore was named one of the “Top 5 Best U.S. Cities to Find Work” (Careerist.com).
- Median household income in Baltimore MSA is 30% higher than national average (Census.gov)