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BRRRR Method: What Is It And How Does It Work?

December 01, 2023 - 03:00 am EST

Written by Josh Patoka for Forbes Advisor->

Investing in rental properties requires extensive knowledge of the market, plus a little bit of strategy. The BRRRR method is a common real estate investment strategy used to buy fixer-uppers, perform repairs and utilize the equity to purchase another property.

What Is the BRRRR Method?

BRRRR is short for "buy, rehab, rent, refinance and repeat." It’s a five-step real estate investment process that focuses on buying undervalued or distressed homes and renovating them into income-generating rental properties.

Here are the steps involved in the BRRRR method:

1. Buy an undervalued property
2. Rehabilitate the home, repairing and improving aspects of it as you see fit
3. Rent to a qualified tenant and earn rental income
4. Refinance to cash out on the equity appreciation
5. Repeat and buy another undervalued property

The repairs and improvements you make can increase the property’s value and allow you to charge more in rent. As the property appreciates in value, your equity rises. You can then access your equity through a cash-out refinance, use the funds to purchase another property and repeat the cycle.

How Does the BRRRR Method Work?

A successful BRRRR investment requires buying a house below market value and gaining enough equity to recoup your original investment. Here’s a closer look at each step in the process.

Buy

To buy a property using the BRRRR method, many investors use either a hard money loan or fix and flip loan. These loans are forms of short-term financing and can help get you the funds you need quickly to make renovations and repairs.

BRRRR investors typically evaluate potential deals using these metrics:

After-repair value (ARV). This is the estimated appraisal value after the rehab phase. To find this number, combine the added value from improvements along with the original purchase price. Comparing housing comps for similar properties can help you estimate a fair market value as well.
Maximum allowable offer (MAO). Knowing your maximum purchase price helps you determine how much you can spend up front and still make a profit.
70% rule. This general rule of thumb is popular among BRRRR investors and house flippers. Simply put, you shouldn’t pay more than 70% of the estimated after-repair value. The 30% financial cushion helps offset repair costs while giving you sufficient equity to qualify for a refinance.

For example, an estimated ARV of $425,000 means your maximum allowable offer is $297,500. You should submit a lower offer if extensive repairs are necessary to stay within budget.

In addition to the maximum purchase price and profit potential, you’ll want to assess how long it’ll take to make the house move-in ready. Project delays put you farther away from earning rental income and, in turn, refinancing the property.

Related: Best Hard Money Lenders

Rehab

After closing on the house, it’s time to get to work and increase the curb appeal. It’s also common to make immediate repairs and capital improvements before a tenant occupies the dwelling.

Common methods of funding rehab expenses include cash, a hard money loan or a construction loan. You can also do as much of the work yourself to minimize the need for contractors.

Rent

A successful property investment requires a steady stream of rental income. This cash flow helps pay your mortgage and ownership expenses. Meanwhile, your tenant is there to cover some or all of the utility bills and ensure the systems and appliances function properly to prevent potential damage.

Related: Average Rent By State

Refinance

To access the home equity you’ve amassed through the increased property value, you’ll use a cash-out refinance. This will provide you a lump sum of cash that you can use to put toward the next investment property while also lowering the interest rate on your current loan. Refinancing restarts the loan term, which is something to consider.

Another thing to keep in mind is that it’s not uncommon for lenders to have a six-month seasoning (waiting) period from the time you acquire the house before you can refinance the loan. You may need to wait even longer for the property value to go up.

Lenders usually require at least 25% equity to refinance an investment property. Other requirements for a cash-out refinance typically include:

- Cash reserves (usually between three to six months’ worth)
- Credit score of at least 620
- Maximum debt-to-income (DTI) ratio of 50% but preferably closer to 36%
- Proof of income

Repeat

After cashing out your equity, it’s time to start looking forward to the next real estate deal. How soon you identify the next viable BRRRR investment depends on market conditions and your personal cash reserves. Be patient to avoid chasing bad deals.

The BRRRR strategy is an effective way to buy and hold investment properties with easier access to your capital since you don’t need to sell the property to get money or pay short-term capital gains taxes, which reduces your upfront profit. Selling a BRRRR property later, however, can result in long-term capital gains taxes and depreciation recaptures.

BRRRR Method Example

Here’s a scenario that shows how to use the BRRRR method on an undervalued property:

Buy. Let’s say there is a fixer-upper on the market with an after-repair value of $375,000. By following the 70% rule, the maximum allowable offer is $262,500. You use a hard money loan to finance the purchase for $250,000, leaving room for additional repairs in your budget.
Rehab. A $250,000 purchase price gives you $31,250 for repairs while also leaving you with sufficient equity to refinance. If you don’t use the full amount for repairs, you can apply the difference towards the next investment.
Rent. You can rent the house for $1,500 per month. The immediate cash flow helps you make your monthly loan payments. Any money left over can be put toward future repairs or buying another rental property.
Refinance. After completing the repairs and finding a tenant, you can start working with a lender to satisfy the cash-out refinancing requirements. You’ll pay closing costs and appraisal fees but receive the equity as cash.
Repeat. While you reduce your net cash flow on the existing property following a cash-out refinance, you can apply the funds you receive toward another income-producing asset. Repeat the process, if you wish, as you find suitable properties and loan terms.
BRRRR Method Pros and Cons

There are several advantages and disadvantages to consider before pursuing this investment strategy.

Pros of the BRRRR Method

- Ability to use an existing investment property’s equity to help buy another and grow your real estate portfolio
- Continuous flow of rental income from long-term tenants
- Targeting undervalued or distressed properties means a lower purchase price-and an easier entry point for beginner investors

Cons of the BRRRR Method

- Heavy upfront costs, including the down payment and rehab expenses, may be difficult for new investors to cover
- No guarantee that the property will rise in value over time or at a certain rate
- May struggle to find eligible properties and qualified tenants

More From Advisor

What Does Contingent Mean?

1031 Exchange: Rules And Basics To Know

5 Cities Where You Can Buy A House For Under $300K

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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