BRRRR is a synonym for buying, rehabbing, renting, and refinancing an investment property. The BRRRR method is a real estate investing style designed to build equity in the asset, leverage up, take the equity out, and at the same time create a portfolio of income streams overtime.
The concept sounds universal and straightforward, but does it work everywhere? Several hurdles come to mind if someone is looking to use this in Australia.
The goal of applying the BRRRR method is buying properties that need some tender loving care, then fix them up and lease them out. On completion, instead of selling the property with the uplift in value resulting from the work, equity is taken out via regearing the property. The newly renovated property becomes the foundation of the investor’s real estate portfolio. The strategy is to continue to repeat this until there is a portfolio of stabilized property.
BRRRR method is a popular way to invest in real estate with new investors because it is simple, and it is most suited to those that can manage the renovation works.
The Yields For Australian Property Is Too Low
The BRRRR calls for retaining the asset after completion as an income source. Australia, the property yields in the capital cities are in the low 3 – 4% gross yield basis, which is on par with the investment loan cost. After deducting property expenses (property management, land taxes etc), the property yield is often negative. This is what is called a negative geared property.
Because the starting rental yield of the investment property in Australia is much lower than the interest costs, there is a limited positive cashflow after completing the works.
Artificial Ceiling on Investment Property Loans
A fundamental assumption from applying the BRRRR method is refinancing is the primary way to extract the value created after renovation works.
The big 4 Australian banks regulated by APRA dominate the Australian property financing market. APRA sets the broad range of how many investment property loans the big four banks can issue and, based on the market conditions, tightens or loosen the underwriting standards.
Lending for investment property is based on the borrower’s income as much as the renovated property’s potential.
The BRRRR method from a financing perspective could work for the first two or three projects depending on the investor’s income. The investor will then reach the servicing threshold from a bank lending perspective, which will limit their access to any additional leverage.
BRRRR Method Australia Adjustments
Australian real estate investors using the BRRRR method need to make some adjustments to address the two main constraints that exist locally.
Overcome the limited yield by investing in higher-yielding metro or regional locations. If the inner CBD locations are trading too tight, properties in the capital cities’ outer regions usually offer a higher rental yield. The downside is it requires traveling in managing the works if the investor is not living nearby and the growth profile for some metro or regional locations is not as attractive as the inner CBD.
Bypass financing constraints by selling the property after the renting stage. Once the refurbishment is complete and the property leased, the investor can capture the additional equity value from selling the property.
The downside of this adjustment is that the continuously selling finished properties means the investors will be asset rich and cashflow poor—the opposite of what the BRRRR aims to do.
A potential solution is investing in commercial real estate assets that typically provide a positive yield after interest cost. It is more suited for those looking for cashflow yielding assets.
BRRRR Method Australia Summary
It will be challenging to replicate BRRRR perfectly in Australia, but with some minor tweaks to the real estate strategy, it can achieve the same outcome: to create wealth in the long run with real estate.