What Is The BRRRR Method in Real Estate?
The BRRRR method has received a lot of attention in the past few years. It’s been popularized by sites like BiggerPockets, and it is frequently mentioned in discourse surrounding smart investing strategies for building a strong real estate portfolio in any real estate market.
But what actually is the BRRRR method?
The BRRRR strategy is an approach to real estate investing that takes advantage of forced appreciation and cash out refinancing to allow investors to roll over funds and invest continuously in rental properties. BRRRR is a modified version of house flipping, except that instead of selling your property, you rent it out to generate cash flow.
In this article, you’ll learn more about the BRRRR method, how it works, and why it works.
What is BRRRR? BRRRR Meaning
You may have seen this term spelled as “BRRR” or “Burr method”. But what is BRRRR? The five letters of the acronym actually stand for five key steps in the real estate investing cycle:
BRRRR meaning: Buy, Rehab, Rent, Refinance, Repeat
In short, the strategy is to buy a distressed property with less upfront capital and make improvements like you would for a house flip. However, instead of selling it afterwards, with BRRRR, you would lease the home as a rental property and later refinance the original mortgage. In many cases, a real estate investor can get much of their original capital back out of the refinancing, which can then be reinvested into another BRRRR deal or real estate investment.
The main benefit of BRRRR is that it allows real estate investors to invest over and over again and build a substantial portfolio with very limited capital (similar to how home equity loans allow you to “reuse” the value/equity of your home). With ideal cash out refinance rates, many investors can save big simply by making the right home improvements, refinancing, and limiting monthly mortgage payments while they reinvest. If you have limited funds to start out with a knack for big picture strategies, BRRRR might be for you.
How Does BRRRR Work?
Let’s break down each step in the BRRRR method in more detail.
Buy
The first step in the BRRRR cycle is purchasing an investment property. There are several different options: you can get a hard money loan, use seller financing, find a private lender, etc. If you’re not paying with cash, it’s recommended to aim to finance between 70% and 75% of the property’s cost, which means you’re looking at a down payment of around 25% to 30%. Keep in mind that refinancing down the road costs money as well (appraisal, title work, loan fees, etc.).
The key to BRRRR is in the buy stage. There are two critical points here:
- You must buy a property under market value. There must be room for property value improvement so you can get a higher appraisal after your rehabs. Many investors looked for older or distressed property with a low purchase price and monthly payments for this reason.
- Never invest more than 75% of the property’s after-repair value, or ARV. If you never invest more than 75% of ARV, you know you won’t run out of capital and can keep buying properties to propel the BRRRR cycle.
Rehab
Now that you have your property, it’s time to fix it up. When rehabbing your rental, first focus on repairs that make the home livable and functional. For instance, if the home doesn’t have working plumbing or electricity, these systems should be your priority. Then, when it comes to renovations, you’ll want to choose projects that add more value to the property than they cost to implement. Luxury renovations like saunas, wine cellars, home theaters, or granite countertops are likely to cost way more than their presence will earn you back in revenue. Instead, focus on high value-add projects like new roofing, refinished hardwood, bathroom/kitchen remodels, and additional bedrooms.
Rent
The next step is to rent out your BRRRR property and start generating rental income. This means creating engaging listings for your unit(s), posting them on popular online listing sites, and conducting thorough tenant screening reports for all rental applicants (or having your property manager conduct them). Securing good tenants at this point is important because banks will want the property to be occupied before refinancing your loan.
When it comes to the rental rate, experts recommend following the 1% rule: If you can rent out your property for at least 1% of its original price, you’re likely to have healthy, positive cash flow from the investment. For example, if you originally bought your property for $130,000, following the 1% rule means you need to rent out the unit for at least $1,300. However, it’s important to keep in mind that the 1% rule has its limitations. It becomes less accurate with higher property values and shouldn’t be relied on as the sole deciding point.
Refinance
Next: refinance. Start by requesting an appraisal, which should ideally be much higher as a result of your hard work, repairs, and renovations. You can then take this appraisal to a bank to request a better, more advantageous loan, with a lower mortgage payment or interest rate. The key to this step in BRRRR is to find a bank that allows you to cash out refinance and one that requires a relatively short “seasoning period,” or the time you’ve owned the property. The ability to cash out refinance is important. How does a cash out refinance work? This type of loan works by tapping into the value of your home, similar to a home equity loan or home equity line of credit. You want a loan amount based on as high of an appraised value as you can find, as how much cash you can get out of it depends on the property’s new appraised value. If your rehabs were strong, you will have more success achieving that high appraisal value and securing a refinanced loan.
Note that your mortgage lender may have certain cash out refinance requirements or criteria that you’ll have to qualify for in order to be approved for the loan. For example, your lender might require a certain credit score, debt to income ratio, or interest rate in order to qualify for the cash out refinance loan.
Repeat
The last step in the BRRRR real estate strategy is to do it all over again with the capital you got out of the refinanced loan. The BRRRR strategy works best in multiple cycles not only because you can reuse that capital to grow your portfolio, but also because you can use what you learned in previous deals to make future cycles even faster and easier. The true power of BRRRR as a real estate investment strategy unfolds when the passive income and cash flow from each new deal and new mortgage refinance compounds to cover your mortgage payments and renovation costs.
BRRRR Example
Now that you know all about the BRRRR method, let’s demonstrate each step using an example.
- Step 1: Buy. Let’s say you find a promising deal for a single-family home at below-market value. The property is in a great location but needs substantial repairs, leading you to believe you could greatly increase its value. You buy the house for $90,000, including closing costs.
- Step 2: Rehab. After an initial evaluation, you decide on the most advantageous repairs and renovations to make to the home. You spend around $35,000 on the rehab in total.
- Step 3: Rent. Next, you photograph the home, write and post a few listings, and start screening applicants. Within a month, you find a family interested in renting it who meet all your screening criteria. You sign a lease with them.
- Step 4: Refinance. As a result of your rehabs, you get the property appraised at $200,000, about $110,000 more than you originally paid for it. Then, you find a bank willing to refinance your existing mortgage at 75% ($150,000). This leaves you with $25,000 in profit (new loan value minus initial investment/current mortgage and rehab costs).
- Step 5: Repeat. You can now use that $25,000 of profit to reinvest in another property for your rental portfolio and repeat the BRRRR cycle from the beginning.
BRRRR Method Real Estate Tips
There are a few critical mistakes investors commonly make during a BRRRR deal. Here are a few blunders to watch out for as well as some additional BRRRR method real estate tips:
- Not buying at below-market value. You need a fixer-upper for this strategy to work. For a first-time BRRRR investor, single family rental properties are a good place to start.
- Not choosing the right rehab projects. Focus on projects that will increase the property’s value, not empty your wallet. If you spend too much rehabbing on projects that don’t add substantial value, you won’t get enough cash out of the refinanced loan to keep the cycle going.
- Not knowing how much various rehab projects cost. You should already have an idea of what you want the property to appraise for and from that number, approximately how much you can afford to spend on rehabbing. Know how much a kitchen remodel or new roof will cost before you agree to sink money into it during the rehab process.
- Not finding the right lenders. As a new BRRRR investor, you may not have the resources or connections to know which lenders are likely to give you the cash out refinances you need to tap into your home equity. If your cash out refinance rate is too high on the second mortgage, the BRRRR deal may fall through as well. Look for local landlord groups in your area or use online forums like BiggerPockets to get suggestions for banks and loans that are accustomed to BRRRR deals and would be more likely to work with you.
Conclusion
The BRRRR method is just one real estate investing strategy, of which there are many. However, the increasing popularity and success of this method make it a tried-and-true approach for investors from coast to coast, and by following the tips in this article, you can join in their success.
