What if you could grow your real estate portfolio by taking the cash (often, someone else’s cash) you used to purchase one home and recycling it into another property, end over end as long as you like?
That’s the premise of the BRRRR real estate investing method.
It allows investors to purchase more than one property with the same funds (whereas traditional investing requires fresh cash at every closing, and thus takes longer to acquire properties).
So how does the BRRRR method work? What are its pros and cons? How do you do it? And what things should you consider before BRRRR-ing a property?
That’s what we’ll cover in this guide.
What is the BRRRR method?
BRRRR stands for buy, rehab, rent, refinance, and repeat. The BRRRR method is gaining popularity because it allows investors to use the same funds to purchase multiple properties and thus grow their portfolio more quickly than traditional real estate investment methods.
To start, the real estate investor finds a good deal and pays a max of 75% of its ARV in cash for the property. Most lenders will only loan 75% of the ARV of the property, so this is important for the refinancing stage.
(You can either use cash, hard money, or private money to purchase the property)
Then the investor rehabs the property and rents it out to tenants to create consistent cash-flow.
Finally, the investor does what’s called a cash-out refinance on the property. This is when a financial institution provides a loan on a property that the investor already owns and returns the cash that they used to purchase the property in the first place.
Since the property is cash-flowing, the investor is able to pay for this new mortgage, take the cash from the cash-out refinance, and reinvest it into new units.
Theoretically, the BRRRR process can continue for as long as the investor continues to buy smart and keep properties occupied.
Here’s a video from Ryan Dossey explaining the BRRRR process for beginners.
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An Example of the BRRRR Method
To understand how the BRRRR process works, it might be helpful to walk through a quick example.
Imagine that you find a property with an ARV of $200,000.
You anticipate that repair costs will be about $30,000 and holding costs (taxes, insurance, marketing while the property is vacant) will be about $5,000.
Following the 75% rule, you do the following math…
($200,000 x .75) - $35,000 = $115,000
You offer the sellers $115,000 (the max offer) and they accept. You then find a hard money lender to loan you $150,000 ($35,000 + $115,000) and give them a down payment (your own money) of $30,000.
Next, you do a cash-out refinance and the new lender agrees to loan you $150,000 (75% of the property’s value). You pay off the hard money lender and get your down payment of $30,000 back, which allows you to repeat the process on a new property.
Note: This is just one example. It’s possible, for instance, that you could acquire the property for less than 75% of ARV and end up taking home extra money from the cash-out refinance. It’s also possible that you could pay for all purchasing and rehab costs out of your own pocket and then recoup that money at the cash-out refinance (rather than using private money or hard money).
The BRRRR Method, Explained Step By Step
Now we’re going to walk you through the BRRRR method one step at a time. We’ll explain how you can find good deals, secure funds, calculate rehab costs, attract quality tenants, do a cash-out refinance, and repeat the whole process.
The first step is to find good deals and purchase them either with cash, private money, or hard money.
Here are a few guides we’ve created to help you with finding high-quality deals…
- How to Find Real Estate Deals Using Your Existing Data
- The Ultimate Real Estate Investor Marketing Plan: Better Data, More Deals
We also recommend going through our 14 Day Auto Lead Gen Challenge — it only costs $99 and you’ll learn how to create a system that generates leads using REISift.
Ultimately, you don’t want to buy for more than 75% of the property’s ARV. And ideally, you want to purchase for less than that (this will result in extra money after the cash-out refinance).
If you want to find private money to purchase the property, then try…
- Reaching out to friends and family members
- Making the lender an equity partner to sweeten the deal
- Networking with other business owners and investors on social media
If you want to find hard money to purchase the property, then try…
- Searching for hard money lenders in Google
- Asking a real estate agent who works with investors
- Asking for referrals to hard money lenders from local title companies
Finally, here’s a quick breakdown of how REISift can help you find and secure more deals from your existing data…
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The next step is to rehab the property.
Your goal is to get the property to its ARV by spending as little money as possible. You definitely don’t want to overspend on repairing the home, paying for additional appliances and updates that the home doesn’t require in order to be marketable.
That doesn’t mean you should cut corners, though. Make sure you hire trustworthy contractors and fix everything that needs to be fixed.
In the video below, Tyler (our founder) will show you how he estimates repair costs…
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When buying the property, it’s best to estimate your repair costs a little bit higher than you expect — there are almost always unexpected repairs that come up during the rehab phase.
Once the property is fully rehabbed, it’s time to find tenants and get it cash-flowing.
Obviously, you want to do this as quickly as possible so you can refinance the home and move onto purchasing other properties… but don’t rush it.
Remember: the priority is to find good tenants.
We recommend using the 5 following criteria when considering tenants for your properties…
- Stable Employment
- No Past Evictions
- Good References
- Sufficient Income
- Good Financial History
It’s better to reject a tenant because they don’t fit the above criteria and lose a few months of cash-flow than it is to let a bad tenant in the home who’s going to cause you problems down the road.
Here’s a video from Dude Real Estate that offers some great advice for finding high-quality tenants.
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Now it’s time to do a cash-out refinance on the property. This will allow you to pay off your hard money lender (if you used one) and recoup your own costs so that you can reinvest it into an additional property.
This is where the rubber meets the road — if you found a good deal, rehabbed it adequately, and filled it with high-quality tenants, then the cash-out refinance should go smoothly.
Here are the 10 best cash-out refinance lenders of 2021 according to Nerdwallet.
You might also find a local bank that’s willing to do a cash-out refinance. But keep in mind that they’ll likely be a seasoning period of at least 12 months before the lender is willing to give you the loan — ideally, by the time you’re done with repairs and have found tenants, this seasoning period will be finished.
Now you repeat the process!
If you used a private money lender, they might be willing to do another deal with you. Or you could use another hard money lender. Or you could reinvest your cash into a new property.
For as long as everything goes smoothly with the BRRRR method, you’ll be able to keep purchasing properties without really using your own money.
The Pros and Cons of the BRRRR Method
Here are some pros and cons of the BRRRR real estate investing method.
High Returns — BRRRR requires very little (or no) out-of-pocket cash, so your returns should be sky-high compared to traditional real estate investments.
Scalable — Because BRRRR allows you to reinvest the same funds into new units after each cash-out refinance, the model is scalable and you can grow your portfolio very quickly.
Growing Equity — With every property you purchase, your net worth and equity grow. This continues to grow with appreciation and profit from cash-flowing properties.
High-Interest Loans — If you’re using a hard-money lender to BRRRR properties, then you’ll likely be paying a high interest rate. The goal is to rehab, rent, and refinance as quickly as possible, but you’ll usually be paying the hard money lenders for at least a year or so.
Seasoning Period — Most banks require a “seasoning period” before they do a cash-out refinance on a home, which indicates that the property’s cash-flow is stable. This is usually at least 12 months and sometimes closer to two years.
Rehabbing — Rehabbing a property has its risks. You’ll have to deal with contractors, mold, asbestos, structural inadequacies, and other unexpected problems. Rehabbing isn’t for the light of heart.
Appraisal Risk — Before you buy the property, you’ll want to make sure that your ARV calculations are air-tight. There’s always a risk of the appraisal not coming through like you had hoped when refinancing… that’s why getting a good deal is so darn important.
When to BRRRR and When Not to BRRRR
When you’re wondering whether you should BRRRR a specific property or not, there are two questions that we’d recommend asking yourself…
- Did you get an excellent deal?
- Are you comfortable with rehabbing the property?
The first question is important because a successful BRRRR deal hinges on having found a great deal… otherwise you could get in trouble when you try to refinance.
And the second question is important because rehabbing a property is no small task. If you’re not up to rehab the home, then you might consider wholesaling instead — here’s our guide to wholesaling.
Want to Learn More About The BRRRR Method?
Want to learn more about the BRRRR method?
Here are some of our favorite books on the topics…
- Buy, Rehab, Rent, Refinance, Repeat: The BRRRR Rental Property Investment Strategy Made Simple by David M. Greene
- The Book on Estimating Rehab Costs: The Investor's Guide to Defining Your Renovation Plan, Building Your Budget, and Knowing Exactly How Much It All Costs by J Scott
- How to Invest in Real Estate: The Ultimate Beginner's Guide to Getting Started by Brandon Turner
Final Thoughts on the BRRRR Method
The BRRRR method is a great way to invest in real estate. It allows you to do so without using your own money and, more importantly, it allows you to recoup your capital so that you can reinvest it into new units.
Naturally, this allows you to grow your real estate portfolio more quickly than you might be able to otherwise.
But… is the BRRRR method right for you?
Only you can answer that question — hopefully, this guide has given you a starting point.