If you’re interested in real estate investments, consider whether adopting the “BRRRR method” is right for you. In this investment strategy, BRRRR stands for “Buy, Rehab, Rent, Refinance and Repeat.” I’ve done this on one of my investment properties and it worked well to not only purchase a cash-flowing rental house, but also to finance future properties. Learn how the process works, its pros and cons and how you might confidently put the technique into practice.
Key Takeaways:
- The BRRRR method is an investment strategy that uses the equity of a rehabbed rental property as the basis for purchasing more properties.
- There are both traditional and nontraditional loans available to finance BRRRR investments, depending on your experience and eligibility.
- Building a real estate portfolio can build wealth and cash flow, but there are also risks to consider.
The Meaning Of The BRRRR Method
BRRRR is an acronym for “Buy, Rehab, Rent, Refinance and Repeat.” This straightforward strategy relies on financing a distressed property, rehabbing it and then renting it. Using the money you pocket from a cash-out refinance on the property, you then finance the purchase of another property to rehab and rent.
The BRRRR method is one of several ways to invest in real estate, and it can be an effective strategy when done well.
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How Does The BRRRR Strategy Work?
The BRRRR method can set up a cycle that generates passive rental income once the renovation process is finished. You may even generate enough income to buy better rental properties with higher profit margins over time. Let’s take a look at the steps it takes to successfully apply the BRRRR method.
Buy
First, you’ll need to find an initial property. A good candidate might be a distressed single-family home that’s below market value. Look for something structurally sound, but in need of renovations, cosmetic upgrades and general TLC. Distressed properties have lost considerable value but potentially have a high after-repair value (ARV). If a property can be renovated with a cost-efficient overhaul, it may make it a good candidate for purchase by BRRRR investors.
Rehab
Next, you’ll need to complete the necessary renovations and make any upgrades. Some homes may need more extensive repairs than others.
Whether you’ve purchased an apartment, duplex, single-family home or condo, you’ll want to renovate the property to include desirable features. Make sure it also meets structural and safety codes and is inhabitable for future tenants.
Rent
Once the renovation is complete, select a rental price and a strategy to find renters. When you vet prospective tenants, check for a good credit history and steady employment. If you can, get references from previous landlords.
As a property owner, running background and credit checks can help you thoroughly screen potential tenants.
Refinance
Once you’ve accrued enough equity in the home, the next step is to refinance with a cash-out refinance. The goal is to get a new mortgage for a higher loan amount than the existing balance, and then use the leftover cash to finance your next property.
Most lenders, however, require that you keep 20 – 25% equity in the home. That means you can apply to borrow 75% – 80% of the appraised value.
As an example, let’s say your existing mortgage balance on an investment property is $150,000 but the appraised value is $300,000. If your new lender allows a 75% loan-to-value ratio (LTV), you could apply for a new mortgage of up to $225,000. After paying off the original mortgage balance of $150,000, the new $225,000 mortgage would leave you with $75,000 in cash to use as a down payment on your next investment property.
Note that your mortgage payment on the original property will now be higher, so it’s important to make sure your rental income covers the extra cost. You can also see why the BRRRR method works best with fixer-upper properties: The sooner you boost the after-repair value, the sooner you’ll have enough equity to refinance and start your next project.
Repeat
Once you cash out your equity, you can use the funds as a down payment on another investment property. The idea is to continually repeat each step of the BRRRR method in order to build your real estate investment portfolio over time.
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Example Of The BRRRR Real Estate Method
Consider this scenario: You purchase a fixer-upper for $100,000 with a 20% down payment. You’ll pay $20,000 out of pocket and take out a mortgage for the remaining $80,000.
Next, you spend $30,000 rehabbing the property, hoping your renovations and repairs double the property’s value to $200,000.
Here’s a breakdown of the financial details:
- Sale price: $100,000
- Down payment: $20,000
- Total loan amount: $80,000
- Rehab costs: $30,000
- After-repair value (ARV): $200,000
- Monthly rent after repair: $2,000
A year or two later, you apply for a cash-out refinance that is 75% of the home’s after-repair value of $200,000. In this case, you could potentially cash out $150,000.
You use the $150,000 from the cash-out refinance to pay off the original $80,000 mortgage, leaving you with $70,000 (in addition to the monthly rental income) to buy, rehab, rent and refinance another property.
Keeping the BRRRR real estate strategy on repeat helps you create passive rental income while accumulating properties over time. As you can see, this investment strategy can be a powerful tool for real estate investors hoping to steadily grow their income and holdings over the years.
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Financing A BRRRR Investment Property
Investors have several options to finance a BRRRR investment property. Here are some types of home loans BRRRR investors can use:
- Conventional loan: Your standard 15-year or 30-year mortgage with a fixed interest rate, or adjustable-rate mortgage (ARM) with a variable rate after the initial fixed-interest period. You typically need a down payment of 15% – 25%, depending on the size of the property you plan to purchase, and borrowers are permitted to hold up to 10 conventional loans at a time, depending on eligibility and lender criteria.
- Hard money loan: The loan is secured by real property (in this scenario, the distressed home you want to buy), not your creditworthiness as a borrower. Hard money loans are typically short-term loans offered by private investors or specialized companies. Banks don’t offer hard money loans.
- Private loan: Available from private parties who loan money in exchange for higher interest rates or stricter loan-repayment requirements. They are typically faster to secure than traditional financing, which can help investors move quickly on undervalued properties. Note that private lenders may not follow the same strict guidelines as banks, so terms and conditions can vary widely and doing your due diligence is important.
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How Often You Should Use The BRRRR Method
The final step of BRRRR is to repeat the process, but how often should you do this? Consider several factors, such as:
- How much time and money each renovation requires
- Whether or not your existing properties rent out quickly
- The amount of time it takes to build enough equity to repeat the process
- How quickly you’re allowed to refinance your original mortgage
Some lenders require a “seasoning period” before you’re allowed to refinance your loan, which can last as long as six months. That means you’ll need to wait at least that long before you can move onto your next real estate project. If you don’t want any time restrictions, look for lenders that don’t have a waiting period for refinancing.
Also consider your risk tolerance when using the BRRRR method. As your portfolio grows, you’ll have more properties and tenants to manage, along with more potential for loss if there’s a real estate or broader economic downturn.
Pros Of The BRRRR Method
Real estate investors can enjoy several upsides when they utilize the BRRRR method:
- You can generate long-term income that can be more passive than a job
- You can acquire multiple properties more quickly than saving up a down payment for each one
- After purchasing the first property, you need less cash upfront for subsequent transactions compared to buying each property without BRRRR
- You can build equity in your properties over time as property values rise and you pay down the new mortgage
Cons Of The BRRRR Method
As with any real estate investment strategy, simplicity and success aren’t guaranteed. There are several potential downsides to consider, including:
- The cost and effort required to rehab a home could be more than anticipated
- The ability to find affordable properties to renovate
- The owner may need to wait at least six months before they can qualify for a cash-out refinance
- Uncertainty around the future appraised value of the property
- The need to cultivate and maintain strong tenant-rental relationships
FAQ
The Bottom Line: Building A Real Estate Portfolio with BRRRR
The BRRRR method in real estate offers investors an accelerated strategy for generating rental income and growing their real estate portfolios. If you’re comfortable with the risks of renovating and refinancing multiple rental properties, BRRRR might be the right investment strategy for you.
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Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
