How the BRRRR Method Works for Real Estate Investors
By Michelle Clardie on 05/02/2024.
Reviewed by Dan Gatsby.
If you’re looking to build a real estate portfolio quickly, the BRRRR method may be a good fit for you. This popular real estate investment strategy relies on renovating a property and refinancing the initial loan to pull your original investment capital back out of the deal. With your original investment back in hand, you can purchase another property and repeat the process.
In this article, we’ll explain how the BRRRR method works for real estate investors, including:
The steps of the BRRRR method,
The pros and cons of the BRRRR method,
BRRRR method alternatives, and
BRRRR method FAQs.
By the end of this article, you’ll understand why the BRRRR method is one of the best real estate investment strategies, and you’ll know if this investment style makes sense for you.
What is the BRRRR Method of Investing in Real Estate
The BRRRR method is a real estate investment strategy designed to help investors expand their portfolios to include multiple properties without tying up too much of their own capital in the portfolio.
The process follows these five steps:
Buy
Rehab (or Renovate)
Rent
Refinance
Repeat
The goal of the BRRRR method is to add enough value to your first property that you can secure a cash-out refinance to get your initial investment back. Then you can reinvest your initial investment in a new property to grow your portfolio.
The next section will take a closer look at these five steps and how they work together to achieve this goal.
Let's walk through the process step-by-step to see how the pieces fit together.
Step 1: Buy
As with any investment strategy, buying right sets a project up for success.
BRRRR investors specifically target distressed properties that can be purchased for less than market value. Distressed properties are in physical disrepair, financial trouble, or (often) both. You might, for example, come across a property in pre-foreclosure, in which the owner wants a quick sale to avoid foreclosure. Pre-foreclosure properties may need substantial work. After all, the owner didn’t have the funding for the mortgage, so they are unlikely to have the funding for maintenance and repairs. And that’s a good thing for BRRRR investors who want to add value to the property through renovation.
Ideally, you want to buy a property that will allow you to limit your total investment to 75% or less of the property’s after-repair value (ARV).
ARV is one of the most important real estate investing metrics. It is the projected value of your property once renovations are completed. You want to keep the purchase price plus renovation costs under 75% of this projected value for any given deal. This is critical for maintaining enough equity to pull your initial cash investment out of the deal during the refinance in Step 4.
Off-market deals (properties that are not currently listed for sale) are a great source of properties you can buy for less than market value. You can find off-market deals through a variety of sources, including:
Industry insiders, like real estate agents, builders, and developers,
For-sale-by-owner (FSBO) properties, and
Real estate auctions.
Once the purchase is complete, you can begin rehabbing the property.
Step 2: Rehab
Rehabbing the property is about functionality and return on investment (ROI).
Your first priority is the safety of future residents. You may need to bring systems, like electrical and heating, up to code, for example.
Your next priority is to find ways to improve the property so the final product will be worth far more than the sum of its parts. Here are a few examples of renovation projects that often produce a positive ROI:
Kitchen remodels.
Bathroom renovations.
Fresh paint.
Clean landscaping.
New roofs.
Depending on your local market conditions, you might also want to consider adding an ADU (accessory dwelling unit)to the property. ADUs are simply additional living quarters (like a guest house, in-law suite, or casitas). In California, for example, where there is a severe housing shortage, regulations have been changed to make it easier for property owners to build ADUs. An ADU would give you an extra unit, and therefore, an extra stream of rental income. And it could dramatically boost your ARV as properties with ADUs are in high demand, particularly in the age of house hacking and multi-generational households.
Step 3: Rent
With renovations complete, it’s time to find qualified renters to fill the unit(s).
Invest time in screening applicants as allowable by state law. Depending on your state, you may be able to:
Review credit reports,
Run a criminal background check,
Confirm employment and income,
Contact previous landlords for reference.
Your newly renovated property needs to be filled with responsible renters who will take care of their unit, pay rent on time, and otherwise adhere to the terms of their lease.
The rental rates your tenants pay can impact the appraised value of the property, so set your rates toward the higher end of the market price range for comparable properties.
Step 4: Refinance
This is the step that takes a traditional renovate-and-rent investment and turns it into a BRRRR investment.
When your property is stabilized, meaning that the units have been filled with rent-paying tenants for several months, you can begin the refinance process.
Refinancing simply means replacing an existing loan with a new loan, under new terms. The new loan essentially pays off the balance of the original loan. But here’s the magic of the BRRRR method: if your renovations have caused the property to grow substantially in value, you can take out a larger loan than you would need to pay off the original loan’s balance…and you pocket the difference.
As an example, let’s say your current loan balance is $425,000. But the renovated property appraises at $600,000, and the lender is willing to loan 75% of the property’s appraised value. In this case, your new loan amount would be $450,000 (75% of the $600,000 appraised value), and you would pocket $25,000 (the $450,000 new loan amount minus the $425,000 current loan balance).
Now, you can take that $25,000 and invest it in another deal. This allows you to retain ownership of your first property while gaining the funds to acquire a second property.
One word of warning: some lenders require a “seasoning period” of ownership before they will issue a new loan based on the appraised value. For example, a lender may require you to hold the property for one year before they will approve a cash-out refinance based on the appraised value. If you’re in a hurry to move on to your next project, it’s best to find a lender who will loan based on the appraised value as soon as the property is stabilized.
Step 5: Repeat
The last step of the BRRRR method is to start over, carrying the funds from your cash-out refi over into a new investment property.
You also get to carry the knowledge and skills you gained from your first investment experience into the next project. And with each successive project, you’ll have more experience to pull from, allowing you to work more efficiently and effectively in the next project.
Financial Example of a BRRRR in Action
Here is a financial example to show how the BRRRR strategy works (for mathematical simplicity, we will ignore closing costs, refinancing fees, incoming rent amounts, and ongoing principal and interest payments on the initial loan).
Let’s say you found a property for $400,000 that needs a lot of work. You estimate $200,000 in rehab costs. But you project the after-repair value to be around $850,000, so your total investment of 600,000 would still be below 75% of the ARV.
You invest $80,000 to cover the down payment and get a $520,000 loan for the remaining purchase price and rehab costs.
The project is completed on budget, and you lease up the units with well-qualified renters.
Now the property is appraised for the expected $850,000, and your lender is willing to offer a cash-out refi at 75% of the appraised value. With the new $637,500 loan, you pay off the $520,000 balance on the initial loan and pocket the remaining $117,500.
Your initial investment capital has been recovered, so now you have the funds to purchase your next deal and repeat the process.
Oh, and don’t forget; you now have a stabilized property bringing in passive rental income every month!
BRRRR Method Pros and Cons
Benefits of the BRRRR Method
This method takes full advantage of debt leverage.
You earn steady income potential from rented units.
As long as you can get a cash-out refi as planned, you’ll always be able to finance your next acquisition.
You’ll be able to build a portfolio comparatively quickly.
Potential Risks of the BRRRR Method
You need specialized knowledge in the areas of real estate analysis, property renovation/construction, and leasing.
You need a trusted network of real estate agents, lenders, contractors, appraisers, and property managers on your side.
This sophisticated strategy requires accurate projections. If you underestimate the cost of the renovation or the ARV, you might not have enough equity to secure a cash-out refinance.
Carrying a high loan balance means more of your rental income must be used to cover the mortgage payments. So it can take time for the cash flow side of your portfolio to pay off.
Quick Tips for a Successful BRRRR
Here are a few things to keep in mind as you implement your BRRRR investment strategy:
Work through your numbers up front. Never buy a property without knowing how much it will cost to rehab, how much the renovated units can rent for, and how much the completed property will be worth.
Don’t over-improve. Sure, hardwood floors and hot tubs are nice, but if your renters aren’t willing to pay high enough rent to cover the expense of installing premium features, you’re losing money.
Have a plan in place for managing ongoing rentals. Some investors choose to manage the day-to-day operations of their rental properties themselves. Others choose to hire a property management company for a share of the rental income.
Build your network of real estate agents, lenders, appraisers, inspectors, and developers. These professionals can help make your deals smoother and more profitable.
BRRRR FAQs
Which investors should use the BRRRR Method?
The BRRRR method works best for real estate investors who have a foundation of knowledge in market valuations, construction, and property management (or those with trusted partners who can impart this knowledge). BRRRR also requires active management, so only investors with the time and desire to be involved in the projects should attempt it.
How do I finance my first BRRRR?
There are multiple ways to finance a real estate investment, including conventional mortgages, home equity loans, private money lenders, and retirement accounts.
How long does it take to BRRRR a property?
One cycle of BRRRR might take six months to two years. The exact amount of time needed to BRRRR a property depends on the scope of the rehab, the time it takes to stabilize the property, and any seasoning period by the lender.
What happens if you can’t refinance your BRRRR?
The success of the BRRRR method hinges on being able to secure a cash-out refinance once the property is stabilized. This is why it’s so critical to have accurate financial projections from the beginning of the project. If the property does not appraise high enough to allow for a cash-out refi, you may need to wait for market values to appreciate over time as you pay down the debt balance on the original loan. Eventually, you will have enough equity in the property to refinance.
BRRRR Alternatives
If you’re not quite comfortable tacking the BRRRR method, one of these alternatives may be a better fit for you.
Traditional buy-and-hold. If you don’t want to stress so much over the financial details, buying a long-term rental property for passive income and long-term appreciation may suit you better.
Fix-and-flip. You can make good money by flipping houses. And since you sell upon completion of the project, you get your capital back quickly, and you don’t have any ongoing property management concerns.
Real estate syndication. Similar to crowdfunding, real estate syndication pools funds from multiple investors to finance a specific project. This structure allows you to buy into a professionally managed deal for as little as $10,000. Interestingly, some syndication companies, like Gatsby Investment, actively implement the BRRRR method on behalf of their investors. This means you can take advantage of the benefits of the BRRRR strategy without any industry experience or connections.
Join the Real Estate Investing Experts at Gatsby Investment
Whether you’re looking for a short-term fix-and-flip, or a professionally-managed BRRRR portfolio, consider investing alongside the experts at Gatsby Investment.
Our team of experienced real estate analysts scout hundreds of properties to bring you only the very best potential deals. And we manage the process from start to finish, allowing you to focus your time and energy on other ventures as you build a passive real estate portfolio.
If you’re interested in the BRRRR method specifically, consider our multi-family built-to-rent investment offering. This unique opportunity starts with the ground-up construction of a new multi-family building, then we stabilize the property with well-qualified renters for you. Depending on interest rates and appraised values, we may opt for a cash-out refi once the property is stabilized to return some, or all, of your initial investment back to you so you can invest in another property.
