How the BRRRR Method Works in Real Estate Investing

The BRRRR method is a five-step real estate investment strategy. BRRRR is an acronym that stands for buy, rehab, rent, refinance, and repeat. The method involves using cash or short-term financing to purchase a fixer-upper property and rehabbing it by making any necessary improvements to bring it up to code and increase its value. Once it’s ready for tenants, the investors will rent it out and eventually refinance it to recoup their investment before repeating the process with another property.

The BRRRR strategy aims to enable new or seasoned real estate investors to build a property portfolio that can provide long-term passive income without needing a significant amount of upfront capital.

With the BRRRR method, investors use cash or a short-term loan to buy and improve a property, refinance it, and recycle that money for the next property purchase. Here is a breakdown of the process:

• The investor acquires the ideal property. The first step in the BRRRR method is finding a good real estate deal under fair market value. The goal is to buy a distressed property under fair market value—the valuation of a property or asset based on current housing market conditions—which investors can rehab with a reasonable investment to increase its value.
  
• The investor rehabs the property. Once the property is acquired, investors fund the necessary improvements to make the BRRRR property rentable. The more time spent rehabbing the property, the less money the investor will make in rental income, so it is important to keep rehab costs limited to improvements that will have a significant return on investment (ROI). The goal is to hold onto the rental property for as long as possible to build equity rather than flip the house and sell it as quickly as possible.
• The investor rents the property to tenants. Most banks won’t refinance an unoccupied investment property, so investors will need to find reliable tenants as soon as possible to start building a cash flow. Rental income can pay the mortgage and build equity as the property goes through a year-long seasoning period—the amount of time that has gone by since the initial financing—that most banks require before refinancing. Banks consider mortgages under a year old unseasoned because not enough time has passed to determine whether the borrower is reliable, making refinancing a bigger risk for lenders.
• The investor refinances the property. After renting the rehabbed property and allowing the loan to become seasoned, investors can apply for refinancing with a mortgage lender at its after repair value (ARV)—the property’s estimated market value after undergoing specific repairs and renovations—to make their money back. The bank will usually offer one of two types of refinancing: first, a cash-out refinance, or second, to pay back the outstanding debt. Cash-out refinancing refers to when a borrower takes out a new loan worth more than they owe on the current mortgage so that they can use the overage for home improvements, one-off purchases, or investments. If given a choice, the cash-out method is more desirable for this investment strategy as it will give investors the capital to invest in a new property.
• The investor uses the cash-out to buy more property. The final step in the BRRRR method is for investors to repeat the cycle by purchasing another property with the cash they recouped from refinancing. This investment strategy enables investors to grow their real estate portfolio by recycling their capital rather than repeatedly saving up large amounts of money to make new investments.

The BRRRR method has some advantages over other real estate investment strategies, such as flipping.

• It may require less upfront capital. When done correctly, BRRRR investing makes it possible to get in the real estate game without significant amounts of upfront capital. For the BRRRR strategy, investors will mainly need enough money for a down payment and potentially closing costs if the approved loan is too low.
• It is a steady form of passive income. The desired outcome is a portfolio of long-term investment properties that can provide a passive income stream through rent. Passive income refers to any earnings stream derived from investments, royalties, rental properties, or stakes that do not require daily active involvement from the earner.
• It can help investors build equity. As homeowners make payments toward their mortgage, they begin to build equity, a valuable asset that can serve as leverage when applying for loans or lower mortgage costs. Using the BRRRR strategy, investors have the potential to build equity during the rehabilitation process.
• Investors may recoup initial investment after refinancing. Refinancing at the after-repair value rather than the original mortgage amount presents investors with the opportunity to recoup their initial investments.

There are some important drawbacks to take into account before diving into the BRRRR method:

• The property can require extensive renovations. Renovation projects can be expensive, labor-intensive, and time-consuming. Whether investors choose to renovate the BRRRR property themselves or hire contractors, they should prepare for the unexpected, like bad plumbing, hidden mold, or structural issues.
• The bank’s appraisal price determines the refinancing amount. Banks will refinance the property based on the appraisal value which its licensed home appraiser determines. Thus, investors run the risk that the appraised value will be lower than their estimation.
• There may be a long wait for refinancing. The refinancing bank will likely require investors to wait up to 12 months before refinancing due to the bank’s required seasoning period. Thus, investors will have to wait a year or longer to access equity to finance their next property.
• It can be hard to find reliable tenants. One of the most important aspects of the BRRRR strategy is renting the property to use the tenant’s rent to pay the mortgage and build equity. Finding good tenants that meet specific income and credit requirements can take a while, which means investors will have to pay the mortgage with their own money.
  

All investments, including real estate investments, come with inherent risks which may involve the depreciation of assets, financial losses, or legal ramifications. The information presented in this article is for educational, informational, and referential purposes only. Consult a licensed real estate or financial professional before making any legal or financial commitments.

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