Beginner’s Guide To The BRRRR Method

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Real estate is a popular way to invest your money outside of the stock market.

But real estate investing can be costly, especially for first-time investors.

In recent years, the BRRRR strategy has been gaining popularity for a good reason.

It can be an excellent way for beginners to build a real estate portfolio.

In this post, I walk you through the BRRRR method and how you can use it to build passive income.

I’ll also show you the downsides you need to consider and alternatives that might make better financial sense for you.

Beginner’s Guide To The BRRRR Method Of Real Estate Investing

What Is The BRRRR Method?

The BRRRR method is an acronym for a real estate investment strategy: Buy, Rehab, Rent, Refinance, Repeat.

It gained in popularity after being talked about on the Bigger Pockets podcast.

Now many first-time real estate investors use this plan to get started building their real estate portfolio.

• Read now: Here are the pros and cons of real estate investing

How The BRRRR Strategy Works

The BRRRR method is straightforward, and for it to work, you have to follow it in the order it is designed.

Doing this will increase the likelihood of success.

Here is a breakdown of each of the steps.

Buy

Buying a property sounds simple enough, but you can’t buy just any property.

You are looking for a distressed property that needs a lot of repairs.

Because of the need for repair, you want to buy it for less than its market price.

This leaves you plenty of room to increase the property value when you update it.

I’ll walk you through this more in the example below.

The most important part of this step is to make sure the foundation of the distressed property is in good condition.

While it is costly to knock down walls, insulate, and add new plumbing or electricity, these prices will be a lot less than needing to repair the foundation or the roof.

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Repair (Rehab or Renovate)

Once you purchase a property, you need to update it.

Depending on the house’s condition, this could include minor repairs or a total gut job.

Some investors are interested more in total rehabs for maximum profit, as these houses tend to sell for a lot less than market value, leaving a lot of room for profit.

The most important part of this step is to remember you are renting out the house and not living in it.

As a result, you don’t need everything to be perfect, and you don’t need the finishes to be high-end.

You need to make it look good and be ready for tenants.

According to Antonio DeRosa, a Realtor in Pennsylvania, “most investors I work with use the same color paint, flooring types, cabinets, etc., in all of their rehabs. They often buy in bulk and have the material available before purchasing a home.”

This is a great way to keep the material and labor costs as low as possible.

Antonio also cautions investors against buying distressed properties that need major repair work.

“I also wouldn’t buy a home with major repairs necessary like foundation issues or water problems. These issues are costly and hard to remediate. I would stick with houses that mostly need paint and flooring.”

Rent

When the property is ready to rent, you need to determine the monthly rent you will charge and find quality tenants.

It is essential to get the rent right as this drives your ongoing monthly rental income and the next step, refinance.

The more significant the gap between your expenses and income, the more passive income you stand to earn.

Because of this, you must consider the average rent in your area before you purchase a rental property.

If you crunch the numbers to see what your monthly mortgage payment will be compared to your rental income, you can see if the house will be cash flow positive or not.

As for tenants, you want to make sure you don’t just accept the first person.

Make sure they fill out an application and do a background check.

Also, check references.

It’s a lot of work, but having quality tenants means you get paid on time, and you will probably have fewer issues too.

Of course, you could choose to hire a property management company to handle this part for you, but you will give up a portion of the monthly rent as an expense.

This cost has tax advantages as you write them off against your income.

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Refinance

After you rehab the house, the value will automatically increase in value.

But you also want to pay down the mortgage a bit using the rental income.

This will build additional equity that you can use for your next fixer-upper property.

Also note that many mortgages have a mandatory year long seasoning period, which means you have to wait a certain amount of time before the bank will agree to a new appraisal.

When you do refinance, you will do so at the new higher value of the home.

You will take the amount needed to pay off the original mortgage and the rest of the cash is used to buy your next property.

Repeat

This final step is as simple as it sounds.

The cash you have left from refinancing and paying off the first mortgage is now used for your next property purchase.

Once you secure a new property, you rehab, rent, and refinance all over again.

At this point you can choose to repeat the process again or simply stop.

It is all up to you as to how big you want your real estate business to become.

BRRR Process In Action

Let’s walk through an example showing you how the BRRRR method works in real life.

Note that I am keeping this example basic so you can more easily follow along.

Jane finds a distressed property with a sales price of $175,000.

Looking at the monthly rents in her area she sees comparable homes renting for $1,500 a month.

She buys this house for $175,000 and makes an initial down payment of 15% using a 30 year fixed rate mortgage at 4% interest.

Her monthly payment is $710 a month.

She puts $15,000 into the house to get it ready to rent.

The rehab process takes 3 months and after one year, she decides to refinance.

The new appraised value of the house is $225,000 and she takes out 80% of the equity, or $180,000.

Her original outstanding debt balance is $146,130 as result of making monthly payments for one year, so she pays this off with the $180,000 from the cash out refinance.

She uses the remaining investment capital of $33,870 to buy her next property.

How To Finance BRRR Properties

The hardest part of BRRRR investing for many investors is the financing of the property.

This is because of the various rules.

Many lenders only offer a 70% loan to value ratio, meaning you will need a significant amount of cash.

The good news is there are a few options you have to choose from.

Cash

This is the easiest option as you don’t have to worry about dealing with a bank.

The problem is most first time investors don’t have enough of their own money to pay for a property outright, including closing costs.

Conventional Bank Loans

This is an option for those who don’t have the cash to purchase real estate outright and need to obtain a mortgage.

Many banks will offer you financing on the property, though most will require at least 20% down since it is not your primary residence, or owner occupant loan.

Another hurdle could be the appraisal.

Since the property is in need of repairs, it might not appraise for the purchase price.

In this case either the price needs to be lowered to the appraised value or you need to come up with the difference in cash, according to Joe Gonzalez, Senior Loan Officer at Cross Country Mortgage.

Local Bank Loans

This could be your best option for a few reasons.

First, they may offer you better loan terms by not requiring as much money down, if they have a purchase rehab program.

Also, depending on the bank, you might be able to get a little creative.

For example, some local banks might require less money down, like 10%, and allow you to borrow up to 80% of the repair value of the house.

The benefit here is you can get the cash for the rehab costs in the mortgage.

Hard Money Lenders

These are specialized lending services that work specifically with real estate investors.

They offer a very short term loan, called a hard money loan, say for three to six months, at a very high interest rate.

Because the loans are such short term, they are aimed more for house flippers compared to longer term investors.

Private Money Lenders

There are private investors who want to earn a return on their money without the hassle of finding properties, rehabbing them, and more.

The private lenders simply put up the money for investors and charge an interest rate.

Usually the interest rate is higher than a traditional mortgage, but still competitive.

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How To Refinance A BRRR Property

Refinancing a rental property can be just as hard as obtaining the financing in the first place.

For instance, most refinances have a 70% loan to value cap, meaning you need to build up a good amount of equity in the house.

If the house is valued at $150,000 and you put $20,000 down, you need to build up $25,000 more of equity to qualify.

Because of this, Mr. Gonzalez says it is critical you know your numbers and don’t overpay when you buy the house.

By getting a good purchase price and a favorable appraisal, you have less equity to build before you can refinance.

Pros And Cons Of BRRR Method

Now that you know how to use the BRRRR method, it is important to look at the pros and cons so you can make a better decision as to whether or not it makes sense for you.

After all, this real estate investment strategy looks great on paper, but this doesn’t mean it is perfect.

Pros Of The BRRRR Method

I’ve covered some of the advantages of using this process to invest in real estate.

Here are some more reasons why you might consider it.

#1. Potential For No Money Down

Once you buy a property, if the numbers work out in your favor, you might not have to bring any cash to the table to buy more rental properties.

It will all be funded by the cash out refinancing from the other units.

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#2. High Return On Investment

You put down a small down payment and then profit from the appreciation of the property as well as the monthly income from rent, as long as it has a positive cash flow.

#3. Potential For Higher Rents

A completely renovated unit could have a higher rental price than a similar outdated unit.

Added to this, if the rehab is done right, there is a high probability that you will have fewer maintenance calls since everything is new.

#4. More Options

In the off chance you buy a house and rehab it, but then decide managing the unit isn’t for you, you have the option to flip the property and earn a profit since you updated it.

Of course, you could also keep the property and higher a property manager to handle the day to day operations.

#5. Scalable

Once you use the BRRRR method once, you get a better feel for how it works.

This means you can more easily purchase additional rental properties, fix them up and start turning a profit.

And if you put a system in place, like having a set group of reliable contractors and using similar products to update the house, you can remove a lot of possible headaches.

#6. Get Your Cash Back Fast

When you buy your first rental property, you have to put money down out of pocket as well as pay for the rehab.

But once you rent it out, you can start paying yourself back from the monthly rent.

Then when you do refinance, you can finish paying yourself back.

#7. Generate Passive Rental Income

You can use the income you earn from monthly rent to pay extra on your mortgage, for personal living expenses, or to put towards more properties.

#8. Tax Benefits

Most people are aware of some of the tax advantages of real estate investment, but there are a lot more benefits than people realize.

For example, when you do a cash-out refinance, the money is tax-free.

So if you pay down your mortgage and do a refi, the money is not taxed at all.

You could use this money as income to live off of without having to pay taxes on it.

Cons Of The BRRRR Method

As great as the BRRRR method sounds, it’s not the right investment strategy for all real estate investors.

Let’s look at some of the reasons why it might not be right for you.

#1. Need Cash

With a regular investment property, you need to come up with 20% as your down payment.

With a property you plan to rehab, you need both the down payment and a decent amount of money to make the repairs.

In many cases, these could end up being more money than if you just bought an investment property that was ready to rent from the start.

#2. Competition

More and more people are getting into real estate as an investment, so there is a lot more competition.

As a result, it can be hard to find investment properties, let alone ones that would qualify for BRRR.

Because of this, having a good real estate agent is key to finding the rental properties before they even have a chance to come on the market so other investors can’t buy them first.

In fact, some investors think outside the box to try to find cash flow properties to purchase, like telling everyone they know they are looking to purchase properties.

According to Lori Salmon, a Realtor with BHHS Fox & Roach Realtors, “Ideally if you could find a property before it hits the market, you are in a better position, but it is not an easy task.

If you can find a property that needs some work, a seller that doesn’t want the hassle of listing or you can offer cash, you have a better chance at beating the competition.”

#3. No Income At First

Related to the point above, since it is not move-in ready, you won’t have income from rent.

This means you will be paying the monthly mortgage yourself.

And the longer it takes you to get the property ready for tenants, the more cash you need.

Finally, remember you might not find a tenant right away either, meaning you could go a few more months with zero income.

#4. Time Consuming

Regardless if you are going to make the repairs yourself or hire a contractor, it is going to take time to repair the house.

If you have a family or a full time job, it might take you longer to get the house ready for renters than you think.

For example, managing contractors is not a simple process.

You need to make sure the work is being done well and they are on schedule.

#5. Appraisal Risk

Another issue you might face is when you try to refinance.

If the property doesn’t appraise for as much as you planned, you might be stuck in the refinance phase for a longer period of time.

This means you have to wait longer to have enough cash to use for your next property.

#6. Underestimating Repair Costs

Many investors underestimate the cost of repairs, which can make the property more trouble than it is worth.

Add to this and unforeseen repairs, like finding a water leak after tearing down a wall, can drastically impact both the cost and time for rehab.

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#7. Higher Financing Costs

You usually get the best interest rates and terms on a primary residence.

With an investment property, you face higher interest rates, fees, and a larger down payment requirement.

Alternatives To BRRRR Strategy

What if you want to invest in real estate but don’t have the time or interest to buy rehab rent refinance repeat?

Here are some possible options for you.

Buy Rentals

Instead of finding a place to fix up, you could buy a property that is in move-in condition or is already rented out.

This investing strategy carries less risk since you have an income a lot sooner and no surprises during the repair stage.

Buy Multifamily Properties

Related to the point above, you could buy multifamily units, like duplexes and triplexes.

With these, you live in one unit and generate rental income by renting out the others.

The benefit here is the other unit covers a good portion of your monthly mortgage payment, or in the case of multiple rental units, all of it.

House Flipping

This is very similar to the BRRR method with the main difference instead of keeping the property, you buy it, fix it up, and then sell it.

As you get skilled at this, you can start making a serious income in a short amount of time.

Crowdfund

Crowdfunded real estate investing is gaining popularity.

There are companies out there that have investors buy shares in single-family rental properties or other real estate and then handle the managing of it.

You earn passive income based on your percentage share of the property.

Two popular options in this space are Arrived Homes and Diversyfund.

REITs

Real estate investment trusts are investments you can buy into either as mutual funds or exchange-traded funds traded in the stock market.

They typically have small initial investments and mostly invest in commercial real estate.

The benefit here is this is a true passive income play as there is nothing you do other than buy shares.

Frequently Asked Questions

I get asked a lot of questions about the BRRRR strategy.

Here are the most common ones.

Who should use the BRRR method?

Any real estate investor who wants to get their hands dirty.

While you can outsource the repair process to a contractor, many people like to do the rehab themselves, saving money.

Of course, you also need to be in a place where you can commit the time to perform the repairs as well.

Is BRRR a good strategy?

It is a good investment strategy to get a full understanding of real estate.

You learn about not only the buy-side but also the renovate side as well as the refinancing side.

All of this knowledge benefits you as you dive deeper as a real estate investor.

As long as you are comfortable with the rehab portion, it is a great way to get started.

How long does the BRRR method take?

This is all property-based.

Ideally, you want to complete all the repairs in as short of time as possible so you can get the unit rented and earn an income.

From there, most seasoning clauses require two years before you can refinance.

So you are looking at a minimum of two years before you can complete the BRRR process.

Is the BRRRR method risky?

The BRRRR strategy is risky in the sense you are buying a house that needs a lot of repairs and you don’t know what issues you might uncover as you fix it up.

Additionally, the repairs you plan on making could cost more than you planned, which turns the property into a negative cash flow business.

Also, contractors could fail to perform the work, and it could take longer than you planned to get a tenant.

But all real estate investing carries some form of risk.

You have to decide which risks you are willing to take.

Final Thoughts

There is everything you need to know about the BRRRR method for investing in real estate.

For some, this is the perfect way to get started building your rental property portfolio.

But for others, it isn’t the best solution.

Make sure you take the time to really consider how it works so you can make the right decision for yourself.

Otherwise, you could cost yourself not only a lot of time and money, but also deal with a lot of stress as a result.

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