BRRRR means “buy, rehab, rent, refinance, repeat.” It’s an acronym for the smart investor’s investment cycle and should be repeated in that order.
This method focuses on finding a distressed property that can be purchased at a reduced cost, rehabbing or flipping the property, renting it out, getting a cash-out to refinance, and then using that cash to invest in more properties.
This method is ideal for those who have a good understanding of the rental market in their area as well as rehab costs. Getting good at this method takes some time and has a learning curve, but once done correctly, The BRRRR Method is a sustainable way to buy homes quickly and generate passive income.
When you buy a property, fix it up, improve its value, and then refinance, you’re borrowing against the value of the property at its highest. Done correctly, this allows you to recover more of—or sometimes all of—the money you invested in the property.
Here’s what you need to know.
They say you make your money when you buy, and that’s definitely true. All good deals involve a good purchase, but each bad deal is bad in its own way.
Most lenders will finance 75% of a property’s value, so holders should aim for 75% all-in. And they generally do— because they have some money to leave in the deals and prioritize volume. If that doesn’t describe you, I would argue you should stick with the 70% guideline for two reasons.
Several options can help you purchase a rental property, such as cash, a hard money loan, seller financing, or a private loan. Deciding which upfront financing to use is outside this article’s scope, but what’s important to note here is that different upfront financing options will result in the different acquisition and holding costs. When analyzing a deal, you need to account for those to hit your 70% or 75% goal.
So what’s the key to BRRRR success? Buying properties under market value and never investing more than 75% of the property’s after-repair value (ARV). This ensures you never run out of capital and can continue buying forever.
Let’s start with your ARV. I recommend having a trusted source like an experienced agent, lender, or other investor give you a conservative number they believe the house will appraise for once it’s been repaired the way you intend. Multiply that number by .75. This is your “target.” Your goal is to get the rehab and the purchase price to add up to this target goal.
If you pay too much for a property, there is very little you can do to recover from surprises and problems.
There are two key questions to keep in mind when rehabbing a rental.
If you rehab correctly and make sure you add value when you do, you are pretty much guaranteed to recover your money—and then some. However, unless you buy and hold luxury rentals, generally speaking, these things aren’t necessary:
It’s also rarely worth finishing a basement or a garage for a rental. Instead, consider changes like two-tone paint, refinished hardwoods, and new tile.
And, of course, the house needs to be in good shape. Everything needs to be functional. Being a slumlord and the industry’s reputation will hurt you in the long run.
Of course, your new investment won’t be in good shape when you purchase it. That’s the point! I intentionally look for properties that need massive repairs because I know other investors will ignore them, and the sellers will be more motivated to drop their prices.
Some of the best problems to look for are:
By targeting properties like these and making repairs at below-market value, you can add big equity to your deals.
Banks rarely want to refinance a property that isn’t occupied, so renting your house comes first. It’s critical to screen diligently so you get tenants that will pay each month. But it’s also important on the financing side. While appraisers shouldn’t put too much value on how clean and pleasant the tenant is, everyone is human. First impressions make a difference.
You need to notify the tenant before an appraisal. I always recommend you request interior appraisals versus drive-bys: Appraisers are more cautious and may downgrade your property unfairly with drive-bys. Send out or post a note on your tenant’s door about the date and time and give a reminder call the day before unless your local laws require something else. Tenants don’t need to be present, but you should ask them to clean up and kennel any pets if they aren’t home.
One thing to remember with the BRRRR strategy: Your mortgage will typically be slightly higher than the traditional method because you are borrowing more money against the house. This is well worth it. Capital in the bank can be used to grow wealth, while you can’t use the equity in a property for much. The flip side of this argument is that your cash flow will be slightly lower with the higher mortgage payment.
This means you have to be that much more careful when running rental comps to know what you can expect for rent once you purchase your property.
The 1% rule is a simple metric to identify a property’s positive cash flow likelihood. Basically, if you can rent a property for 1% of the price you paid for it, it passes the 1% rule. This metric is very important for BRRRR investors looking to keep properties as rentals rather than flipping them.
If you buy a property for $100,000 and you can rent it out for $1,000, it follows the 1% rule. Buying a property for $200,000 and renting it for $2,000 follows the rule.
However, the 1% rule isn’t the be-all-end-all rule of BRRRR investments. Think of it as a preliminary screening procedure. There are many other variables to consider when applying the 1% rule, like HOA dues and high property taxes. Also, the more expensive a property is, the less likely it is to conform to the rule. Just because you’re not getting $6,000 in rent for a $600,000 unit doesn’t mean it’s a bad investment. It just means you should dig deeper into the property’s financials to determine if it’s worth investing in.
AFC Mortgage Group can help you find the right financing for each and every deal! Not too long ago, finding a bank willing to refinance single-family rental properties was tough. Now it’s much easier. Still, when looking for such banks, there are a few things that you will need to ask.
The trick to success here is getting as high an appraised value as possible. A big part of success in this area is a combination of how well you rehabbed your property and how strong your initial comps were.
Sinking a lot of capital into a deal and then failing to pull it out is a big problem. I recommend getting pre-approved for a loan before buying.
The “repeat” part of the BRRRR cycle is the most fun. Take everything you learned, gained, and improved upon and put it back into action.
Work on building systems, too. Systems help you accomplish your objectives by repeating the same process over and over. Systems cut down on mistakes and stress. The more documented your systems are, the less you’ll worry about something being missed, overseen, or forgotten about.
BRRRR beats the traditional method of real estate investing because it allows you to recover the capital you left behind.
The traditional method involves putting a percentage of the home’s value down upfront when the home’s value is the lowest. Think about it: Investors are always looking for deals. If an investor does their job well, they pay less for a property than it is worth. Banks base the amount of money they will let you borrow off of the purchase price of a property. If you pay $70,000 for a $100,000 property, the bank lets you borrow a percentage of that $70,000.
The loan-to-value (LTV) ratio determines that percentage. If a bank allows an 80% LTV, the borrower needs 20% for a down payment. Higher LTVs equal less money down for the investor.
This down payment gets left in the deal when you use the traditional method. That means if you pay $70,000 for that $100,000 home and put 25% down, you drop $17,500 for the down payment. You’ll still need money for the rehab.
Every deal is different, but the rehab budget for most houses purchased the traditional way equals 20% of the home’s ARV (after-repair value). In this example, that would be $20,000. Negotiating that cost down half leaves you with a $10,000 rehab budget. When all is said and done, you will have spent $80,000 ($70,000 purchase price plus $10,000 rehab) for an investment property worth $100,000. The good news? You’ve gained $20,000 in equity. The bad news? You dropped $27,500 of your hard-earned money to do so.
Leaving your down payment in the property as equity hurts your ability to buy more properties. Leaving your rehab budget in the property hurts your ability to buy more properties—and discourages you from spending more money to create more equity.
Maintaining investment capital is crucial to finding better deals and growing your investments. Investment masters are active in the game. Using the traditional method, you simply run out of money too fast.
If you want to land hot deals, you must be ready, willing, and able to close. If you’re not in a position to move, someone else will swoop in and buy it before you can.
Traditional method loans slow you down. Lenders require appraisals, and they also require livable properties. Many of the best properties aren’t in great shape, so they’re priced so low!
The traditional method also causes investors to run out of capital quickly, miss out on truly distressed properties, and close slowly. These factors hurt your odds of landing the contract first.
Buying properties under market value is the best way to grow your wealth. In the earlier example, you spent $80,000 on a property worth $100,000. This added $20,000 to your net worth before appreciation, loan paydown, and cash flow.
With every house you buy traditionally, you add another $20,000 to your net worth. Doing this every two months adds $120,000 to your net worth. In a little over four years, you would have accumulated a net worth of a million dollars. Not too shabby—right?
Except you needed $27,500 of cash to add $20,000 to your net worth. This prevents you from buying more, slows your growth, and limits other aspects of investing, like getting the best deals first.
If you want to grow your wealth quickly, efficiently, and safely, you need to acquire cash-flowing rentals—quickly. Think of buying rentals like planting trees. Every year that tree grows, puts off more fruit and increases in value—most of the time. The wealthiest own orchards, not small gardens.
Can you grow an orchard using the traditional method? Maybe if you have a ton of cash lying around. Even then, it would still be slower than with BRRRR.
The BRRRR method is a real estate investment strategy with many risks and rewards. Here are the most notable benefits:
You don’t need to save a large sum of money to start implementing the BRRRR method. Some investors can land deals with no out-of-pocket costs! How much you need depends largely on rehab costs and your loan’s terms. Pro tip: Some construction lenders will require you to provide less down with a full prequalification from a take-out lender.
Your ROI for real estate investing can be astronomical. For example, let’s say Bailey’s total out-of-pocket costs were $10,000 (her cash-out refinance covered her loan and other expenses), and her yearly net rental income is $3,000. She’s making a 30% cash-on-cash return each year. Also, she’ll enjoy that income perpetually as long as she has tenants and manages it as a rental property.
The BRRRR real estate investing strategy is scalable. Once you’ve gone through the initial steps, they become easy to replicate—and each time you do, you’ll become that much wiser and (when successful) more financially comfortable.
Imagine if Bailey expands her real estate business from one investment property to five, each with the same rental income. She’ll be making $15,000 a year from her initial $10,000 investment, and that’s still not including equity gains. Speaking of…
Rental income isn’t the only way to enjoy a high ROI. You’re also building equity—and since you’re rehabbing your property to increase its value—you’re building equity quickly. BRRRR properties are unique in nature. They give you amazing cash-on-cash return investments and can expedite your net worth every time you close. Based on the 70% principal, every BRRRR will increase your net worth by a 30% equity gain.
The velocity of money is more than just a cool term. It describes how you can make the same source of capital work for you over and over again. For example, if you buy a property that earns you a 10% return each year, you’ll have to wait ten years before you get your money back to reinvest again. With the BRRRR method, you can buy a property and pull out 100% of the capital you put into it, then immediately buy another property.
That money adds up. Let’s say James pulls out 100% of his cash from each BRRRR deal he makes, and buys a new property every three months for five years. Let’s assume he averages $25,000 in equity and $400 in cash flow for each home he BRRRRs, and increases the rent by 5% each year for five years. At the end of five years–-even if none of his then-20 properties appreciates in value—James will have added $500,000 to his net worth (20 houses at $25,000 in equity each) and $13,000 in passive income cash flow (20 houses at $650/mo). Go, James!
Once you own multiple rental properties, you can achieve economies of scale. Economies of scale are the cost advantages you enjoy when you become an efficient investor. If Bailey owns five properties instead of one, she can reduce her costs by spreading her risk and lowering her average cost per property.
Owning and managing real estate investment properties can be tricky. With the BRRRR approach, you’ll learn by doing so with minimal upfront costs. You’ll get an intimate knowledge of the real estate market, construction, and design, and learn how to be a landlord. You’ll also gain valuable experience as a business owner for less money than most startups cost.
No investment strategy is without risk. All you can do is mitigate that risk as best you can. Here are a few drawbacks of the BRRRR method you should be wary of:
Once you buy, you want to make your property functional and livable ASAP. Hire a general contractor you trust to inspect the property, then consult with an investor-friendly real estate agent before purchasing. You should know:
Don’t let the rehab phase become your regret phase. When making your budget, you need to be as thorough as possible. It never hurts to increase your total estimations by 10%, or even 25%, if you’re a newbie.
Renovations can easily go over budget, take longer than anticipated, and/or lead to more necessary repairs. Be financially prepared for any potential setbacks. When looking at your next BRRRR property, you can mitigate these risks by adding contingencies to the rehab total and adding an extra month of hold time for delays.
Get your property appraised after the rehab phase is over. If your initial calculations about your ARV were right, then you’re good to go. However, if your ARV goal is $300,000 but it’s only appraised for $275,000, the $25,000 difference cuts into your net gains.
It’s best to get through the rehab and rent phases quickly. The faster you can refinance your property and get a conventional loan, the sooner you’ll stop hemorrhaging money. Pro tip: The benefit of hard money is that you can often put less money down than a conventional lender. On many occasions, they will include the costs of your renovation in your loan.
The BRRRR strategy has at least two waiting periods:
You’ll experience a third waiting period if you have trouble finding tenants. You want to find tenants quickly, but you also need to be selective.
In our house hacking guide, we suggest coming up with some guidelines for your tenants to meet, including:
Once you find the right tenant, your property could generate rental income for years.
If you manage to buy, rehab, and rent your property in just a few months—good for you!
Unfortunately, most refinancing banks will require you to wait six or even 12 months between the time you buy and when you can refinance. If your short-term loan is shorter than your seasoning period, you could end up in trouble. We recommend a short-term loan for at least 18 months, just in case problems arise.
The BRRRR method isn’t for everyone. BRRRR investors need to devote time to identifying worthwhile properties, rehabbing them, and then serving as a landlord for potentially multiple tenants simultaneously. You also need to have knowledge and experience in real estate and a keen eye when it comes to renovations. If you fail to miscalculate market value, rehab costs, or failure to secure tenants when you need them, you can take a loss.
If you’re going to BRRRR, we don’t recommend doing it alone. Work with a team of skilled experts who have the time and know-how to make the most of the BRRRR experience.
You earn your money back for a BRRRR in the refinancing stage. When you work with a lender who offers cash-out refinancing, you can convert your home equity into cash.
For example, Jason purchased a distressed property for $160,000. His combined costs for everything else (e.g. homeownership costs, renovations, etc.) are $40,000, and the home’s ARV is $280,000. When Jason takes out a cash-out refinance, the lender gives him a new mortgage that’s more than his previous mortgage. The extra money first pays off his previous mortgage, but then the rest is his. Jason can take the extra money and invest in a new property, walk away happily, or bank some and invest the rest. In this equation, Jason would actually be leaving the difference of the rehab and purchase price – $4,000 plus the debt costs. He would leave around $10k in the deal.
Since your payday depends on cash-out refinancing, you’ve got to shop around to find your best loan options.
This strategy gives investors the most bang for their buck. But that doesn’t mean there aren’t a few risks of BRRRR you should look into before diving in. Here are some considerations.
If you have the cash to finance your first deal without getting a lender involved, this isn’t something to worry about. (And let’s not forget the hearty congratulations!) However, if you need financing, it’s important to consider the costs of the loan. What will your carrying costs look like? What kind of rate can you get? Remember, private and hard money lenders often charge higher interest rates, which can reduce your cash flow.
One alternative is using a home equity loan on an existing property. This gives you initial funding without quite the same risk.
Refinancing is an important part of BRRRR—otherwise, it would just be BRRR. However, refinancing involves a home appraisal, making careful math important. You’ll have trouble repeating the deal if you miscalculate your after-repair value and the property doesn’t appraise.
Here’s another refinancing annoyance: Many conventional and portfolio lenders require properties to “season” first. Seasoning means you’ll need to wait between six and 12 months before refinancing. If you’re using a private or hard money lender, it’s imperative to calculate exactly how much this period of time will cost you.
You might love the idea of renovating houses, but the rehab stage is nothing like HGTV. Prepare to juggle absentee contractors, surprise problems like asbestos, and many other headaches. Rehabbing certainly isn’t a dealbreaker, but don’t stride into this stage wearing rose-colored glasses.
If you can fully fund your BRRRR, that’s great! However, most of us don’t have $100,000s of disposable income, especially when new to real estate investing. Luckily, you have plenty of loan options and one that usually isn’t. We’ll start with that one first.
If you already own existing property—either an investment or your primary residence—a HELOC, or home equity line of credit can provide your startup capital.
This option lets you close in about 10 days, depending on your state, and means you won’t need an appraisal. But there’s a downside to that: You need to be spot-on when determining your ARV. Otherwise, you may lose your investment.
This strategy isn’t ideal for BRRRR but is not completely infeasible. Start by talking with your current lender if you already own property. They can walk you through the ins and outs of financing a rehab with a conventional loan.
A few things to keep in mind: Conventional loans severely limit the types of properties you can purchase. And BRRRR works best when the property has big problems, like a bad roof or HVAC system. Additionally, conventional loans close significantly more slowly, which eliminates one of the major advantages of BRRRR.
The right hard money lender will finance up to 90% of the purchase price and 100% of the construction. And when you’re buying, they’re treated like cash, keeping you competitive.
However, some hard money or private lenders will require an appraisal, which decreases your competitiveness. They’ll also pay close attention to potential rents and may have requirements for how much the property should bring in.
And then there’s the biggest downside: rates. These are typically much higher than a standard mortgage, so calculate your holding costs carefully.
Assuming you’ve made it through the rehab and gotten your place rented, it’s time to refinance.
Pro tip: Plan your refinance before you buy. Think about it too late, and you might find yourself scrambling for an acceptable solution. There are two primary refinancing options.
This is the most common option for BRRRR investors. It involves working with a traditional lender to procure a mortgage backed by Fannie Mae or Freddie Mac. (Although you should seek out lenders familiar with investors.) These loans can have up to 75% loan-to-value ratios.
Generally, these loans offer the lowest interest rates and fees and have no prepayment penalties. However, conventional lenders often have strict underwriting guidelines, so make sure you walk through the requirements before buying the property to prevent surprises.
Commercial financing can be a fabulous choice for investors. It involves underwriting the property as income and can garner up to 80% loan-to-value.
However, unlike conventional financing, these loans offer higher interest rates and prepayment penalties, and you may have to guarantee the loan personally.
Consider looking for commercial lenders who do both rehab loans and commercial loans. That saves time and money.
Types of BRRRR Properties
You can apply the BRRRR method to most property types, including:
If you’re new to real estate investing, we recommend starting small. Even if you have experience in construction and/or as a real estate agent, real estate investing has a huge learning curve. When something goes wrong (and something inevitably will), it’s best if you make a newbie mistake on a $50,000 condo, rather than a $1,000,000 fourplex.
After BRRRR becomes second nature, you can start getting more ambitious and rehabbing larger spaces, converting offices into multi-family homes, or even break into commercial real estate!
Here are seven surefire ways to find distressed properties to BRRRR:
The BRRRR strategy isn’t meant for everyone. According to the IRS, rental income is passive, but BRRRR is anything but! Much like house flipping, BRRRR requires you to be active in your investment every step of the way.
If you’re looking to become a more passive investor or want to assume less risk, here are a few alternatives to the BRRRR method:
The traditional method requires a lot less work than BRRRR, because you usually only do one of the R’s: renting your property to tenants. Depending on the condition of your property, you might have to do some rehabbing, but nothing compared to the level of work required when renovating a distressed property.
Because the property is in great condition, you’ll qualify for a traditional bank loan. Once you do, you can rent it out and use the income to cover your mortgage and other expenses. You’ll grow your portfolio at a slower pace than with the BRRRR method, but it also requires a lot less work.
Become homeowners. AFC Mortgage Group will help you navigate the loan process, secure financing, and purchase your dream home.
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