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The BRRRR Method (Ultimate Guide) | Real Estate Skills

brrrr Dec 17, 2019

The BRRRR method is a powerful, wealth-building real estate investing strategy that’s exploded with popularity lately. Although it’s been practiced by successful property investors for decades, only recently has BRRRR emerged into mainstream headlines.

The main buzz around the BRRRR strategy in real estate boils down to this -- you can buy rental properties and build a large income-producing portfolio without running out of money.

Sounds too good to be true, doesn't it? It’s not.

It’s a tried and true model that works in any real estate market if you follow the process.

I can tell you from experience, it's not all hype. I went from knowing next to nothing about real estate many years ago, to purchasing my first income producing apartment building following the BRRRR method closely. Since then, I've been able to pull out all of my capital from that building and recycle it into other investments. 

So, sit back and read on as we’ll cover everything you need to know about the BRRRR method in this Ultimate Guide! Use this menu to jump to your section of choice:

 

brrrr method 

What Is The BRRRR Method?

BRRRR is an acronym for Buy, Rehab, Rent, Refinance, and Repeat relating to a real estate investment property. 

The BRRR method is a strategy of adding value to a property with the goal of pulling out your entire initial investment while continuing to hold the property for rental income.

After the property is purchased, rehabbed, and rented to tenants, a refinance may return all of your cash so you can repeat the process on another property.

While this investment model has been around for ages, the term BRRRR was created and made popular by Brandon Turner, real estate investor and podcast host.

 

What Does BRRRR Stand For?

BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. In commercial real estate lingo, this process is sometimes referred to as repositioning and refinancing a property.

 

How Does The BRRRR Method Work?

Here we’ll break down step-by-step how the BRRRR method works. It boils down to a process in the following order:

  1. Buy
  2. Rehab
  3. Rent
  4. Refinance
  5. Repeat

Let's take a deep dive into each stage of the BRRRR process.

Buy

brrrr strategy

Buying a property is arguably the most important step in the BRRRR method. As the old adage goes, you make your money in real estate when you buy. That is certainly the case with the BRRR strategy. The BRRRR method will not work unless you buy good deals.

To ensure the BRRRR strategy works, you need to buy a property for less than market value.

Generally, to warrant a discount you’ll be buying a distressed property that is in disrepair or has been mismanaged by the current owner. You may also consider buying REO properties, wholesale real estate deals, or even a hoarder house!

The real key here is to make sure your total investment in the property, including purchase price, repairs, closing costs, and carrying costs, is less than or equal to 75% of the after repair value (ARV).

BRRRR Formula: Total Investment = ARV x 75%

For example, if you run the comps and determine the ARV of a property will be $100,000, your total investment in the deal should not exceed $75,000.

Example:  $75,000 = $100,000 x 75%

In this example, your all-in cost should not exceed $75,000 if the ARV is $100,000.

You might still be asking: “How much should I pay for a BRRRR property?”

Here’s a formula to help determine the appropriate purchase price in your BRRRR analysis:

Maximum Purchase Price = (ARV x 75%) - Repair Cost

See how that works?

Then, if your deal passes that test you’ll want to analyze it as a rental property.

You want to make sure the property will cash flow after you refinance and pull your initial investment out. Using your projected ARV as the new purchase price, run the numbers on the deal as a rental property. 

Confirm the projected rental income will cover all your anticipated expenses, so that it can sustain itself long term. 

Rehab

brrrr property rehab

Rehabbing a property can be intimidating for most traditional home buyers. That is why real estate investors are able to negotiate deals for less than market value. We’re willing to take on problems that other buyers and property owners are not.

You’ll need to fix up the property in order to lease it out for top dollar rents. Depending on the work required, you may choose to do the work yourself, or hire a general contractor to perform the necessary improvements.

Research competing properties in your market to determine the appropriate level of rehab needed to obtain the rents you desire. Since you’re not selling the property, select finishes that are durable, economical, yet in line with market trends for nicer rentals in your area. 

I usually prioritize my rehab improvements in the following order:

  1. Safety
  2. Functionality
  3. Aesthetics 

Safety: Is the repair a matter of safety for either the occupants or the property itself? These repairs are non-negotiable and should get repaired before anyone lives in the property. These would typically include mechanical repairs such as electrical hazards, plumbing leaks, and broken furnaces. Other safety issues such as mold, termites, and pests should also be remediated promptly. Adding security features, such as flood lights and deadbolts are always a good investment. 

Functionality: Is the property currently dysfunctional? Will this repair make the property function better? Will it make living here easier and more positive for the resident? These items may include repairing a toilet, unclogging a drain, replacing a busted ceiling fan, or installing new appliances. After completing these types of items, the property should be fully functioning and in a habitable condition.

Aesthetics: This is in relation to the visual appeal and cleanliness of the property. Although livable, you may consider replacing old finishes with newer materials. These may include, new flooring, granite counter tops, new paint, new cabinet hardware. These types of improvements will generally allow you to command a higher rent and lease up a unit faster than without them.

Rent

Renting out your property for top dollar once you've fixed it up is the next step in your BRRRR. You can hire a property manager to handle the marketing and leasing of your freshly rehabbed rental property.

Property management will help you determine the market rates that you should expect for your rental property. 

Take professional photos of the property, inside and out. This is likely the best condition your property will be in for many years to come, so take advantage of a newly repaired, vacant units.

Make sure your rental property is listed on all the major listing sites, such as:

  1. Zillow.com
  2. Hotpads.com
  3. Craigslist.com

Here's an example of an online rental listing map:

Renew the listings as often as you can. Even if you hire a leasing agent or property manager, make sure they have your property on all the major rental listing outlets. 

Screening and selecting qualified tenants are some of the most effective ways to mitigate your risk with rental properties and ensure long term performance of your asset. Since you now have a freshly renovated property, it should be easy to rent in a short amount of time.

Secure leases for each unit on the property until you have reached full occupancy. Keep organized copies of all leases, as these will likely be needed by your lender.

After you’ve rented out the property, it’s time to shop around for your refinance mortgage loan.

Refinance

Refinancing your property is the step where your property gets appraised for its new and improved value. At this step, you’re hoping the appraised value meets or exceeds your projected after repair value (ARV).

You’ll want to shop around for lenders who can do a cash out refinance. Most lenders require a seasoning period for collected rents before allowing a refinance. This just means the rental income must be collected consistently for a seasoning period of three to six months before a lender can use a new appraisal to collateralize the property.  

When you refinance, lenders typically lend up to 70 to 80% of the appraised value.

So, let’s look at our example again:

Let’s say after you fix it up, the property appraises for $110,000. A lender may give you 75% of that value, or $82,500, as a new loan on that property. As long as your total investment in the property was less than $82,500, you’ll receive your entire investment back!

If you stuck to your original total budget of $75,000, you'd actually walk away with an additional $7,500 in your pocket after the cash out refinance. Amazing! 

Repeat

Repeat the process by using the proceeds from your refinance to purchase another BRRRR property! Meanwhile, your first Brrr property will be generating rental income and cash flow, which can help fuel your savings until you have enough to start on yet another project.

Now can you see how powerful the BRRRR strategy can be for building wealth?

 

Is the BRRRR Method Right For Me? 

While it’s certainly an attractive business model, there are a number of things to consider before deciding if the BRRRR strategy is right for you. Ask yourself, 

 

  • Are you willing to put in persistent effort to find great deals?
  • Can you build a team to help you execute deals?
  • Can you manage contractors and complete a rehab project?
  • Does being a landlord factor into your personal investment philosophy?
  • Are you willing to go through the hassles of refinancing a property and take on long term debt?
  • Can you manage cash flows and have enough reserves to cover surprise expenses?
  • Do you want to become a landlord and deal with tenants?

 

If you're still not sure about becoming a landlord, watch this quick 2 minute video that might help you decide:

While that was clearly dramatized, most real estate investors do run into problems with tenants at some point in their journey as a landlord. 

If you answered no to any of the above questions, then perhaps the BRRRR method is not a good fit.

If you’re looking for true “passive income,” then you may consider other real estate investment strategies such as private money lending and investing in turnkey properties. 

However, if you’re like most real estate investors, you want to generate large returns and grow your net worth quickly.

You’ll do whatever it takes to achieve financial freedom and escape the 9 to 5 rat race.

You’re willing to put forth the effort to master the BRRR method of investing because you know how powerful it can be for growing your wealth.

The BRRRR strategy is an “active” form of investing in real estate. That is because it generally takes some day to day management from the property owner in order to operate effectively.

Buying Rehabbing Renting & Refinancing (BRRR) properties takes time effort and energy to execute properly. These are all the primary functions of a successful real estate investor.

Although you can hire contractors and property managers, someone has to manage those parties. That someone is you, the property owner.

Property management does not typically perform all of these actions for the owners. The goals of third-party property management are typically not aligned with the goals of property owners. 

Real estate investors are performing asset management duties, such as maximizing the returns on their rental portfolios, managing contractors and property managers.

Therefore, by mastering the BRRRR method you'll become a more sophisticated and competent investor.

  • Do you want to be a full-time professional real estate investor?
  • Would you rather be a passive investor in other people’s deals?

Those who turn real estate into a profession reap the rewards that come along with long term involvement in the trade.

For example, real estate investors are able to create deals that generate double-digit returns 50, to 70, to 100, and even 200% ROI. This is not an exaggeration, as we know investors that have achieved these returns and beyond -- even in today’s market conditions. 

In reality, BRRRR investing is essentially a combination of nearly every real estate strategy packed into one process.

You’re essentially flipping a rental property to yourself.

If you want to receive all the benefits of real estate property ownership, then BRRR away and watch your net worth grow. 

 

BRRRR Financing Options: How To Fund Your BRRRR Deal

brrrr financing

You might be wondering how to fund a BRRRR project. Here we’ll cover some of the best ways you can access the capital needed to Buy, Rehab, Rent, Refinance and Repeat.

Those include:

  1. Cash
  2. Private Money
  3. Hard Money
  4. HELOC
  5. Cash Out Refinance
  6. Seller Financing
  7. Subject To Financing

 

Cash

How much cash do you have saved up in the bank for an investment property?  Depending on the amount of cash on hand and your local market conditions, it’s possible that you may have enough to purchase and rehab a property.

If that’s the case, cash is the best way to fund your BRRRR property. When you have skin in the game, you also become emotionally invested in the deal. You won’t have to pay interest or any fees on the cash you personally contribute to the deal.

Private Money

Private money lenders and investors may have a lot of flexibility when structuring the terms of funding. Fund your BRRRR project with money from individuals who have investment capital and are willing to participate in your investment opportunity. 

Therefore, you can possibly get some of the absolute best terms available with private money, potentially financing 100% of your entire deal. Expect to pay interest and points on the amount borrowed from lenders, as well as profit participation for private equity partners.

Likewise, professional private equity real estate investment companies also exist to provide investment capital for value add projects, like BRRRR.

Hard Money

Hard money refers to borrowing money from a company that specializes in short term distressed property loans. It’s called “hard” because the loan is backed by a hard asset, which is the property being lent upon.

It’s also hard to stomach the high interest rate and fees that a hard money lender charges. For example, a hard money loan may charge an annualized interest rate of 10-14% plus 1-4 points paid upfront.

Hard money lenders typically lend up to 70-75% of the ARV, so try to find one that will finance 100% of the deal. Otherwise, you can use hard money to fund the majority of the project and another funding source to cover the rest.

Factor the cost of a hard money loan into your total investment formula to make sure the deal still works. 

Here’s a list of hard money lenders:

Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) can be a great source of funding for your BRRRR project. If you’re fortunate enough to have equity in your home, talk to a bank or lender about securing a line of credit against your property.

HELOCs can be lent at very low interest rates and can be used like cash. Often, the bank will provide you with a checkbook that you use just like it’s cash. You’ll only pay interest on the amount you used, until you pay it back. Once you pay back the amount you borrowed, it’s instantly available for you to borrow again!

Cash Out Refinance

Consider a cash out refinance to liquidate accumulated equity in another property, which may have appreciated over time. This way, you can borrow money at a cheap interest rate and put it to work in your BRRRR property to earn a higher return on your investment than before. Make sure the property you refinance will still be cash flow positive, since the mortgage payment will increase as you take on more debt.

Here's a clip from CBS News discussing what exactly a cash out refinance is in real estate:

 

Seller Financing

Seller financing can be an excellent way to fund your BRRRR property. Seller financing simply means that the seller of the property is paid over time with interest instead of receiving funds all at once upon closing. So, instead of borrowing money from a bank or hard money lender, the seller carries the note and will allow you to pay them over time. This works great when you don’t have cash to fund the deal or cannot qualify for a loan otherwise. When you refinance the property later on, you can pay off balance due to the seller at that time.

Subject To Financing

Subject to financing simply means that you are assuming the existing loan that the seller has on the property. The sale of the property is "subject to" financing through the seller's mortgage. You can simply take over the monthly payments for that mortgage after the sale is completed. Some lenders have a due-on-sale clause in their mortgage terms, however most will not call the loan unless it becomes delinquent.

 

How Do I BRRRR With No Money?

How do you BRRRR a property if you don't have any money? The answer boils down to this -- use other people's money (OPM). 

It's never a good idea to borrow money for real estate if you have no idea what you're doing. However, with the proper training and experience, you can leverage a combination of the above funding sources to BRRRR without using any of your own money. 

For instance, you can utilize a hard money lender to borrow 75% of the total amount needed for your BRRRR deal. Then, you network with a private money lender who agrees to lend you the remaining 30% of the capital needed. In return, you offer the private lender a fair interest rate of 10%, which will be paid as a lump sum from the refinance proceeds.

Alternatively, you can find a hard money lender or private investor who will lend you 100% of the total investment. That said, it's always prudent to have access to capital reserves in case of surprise expenses. 

  

Can I BRRRR A Commercial Property?

Yes, you can BRRRR a commercial property the same way as residential property. The primary difference is in the way commercial real estate is valued. In residential real estate, the ARV is found by the sales comparison approach. In other words, the after repair value should be similar to comparable sales of similar properties in the area.  


Commercial real estate is valued based on the net operating income (NOI) that it produces, compared to similar commercial properties in the area. By increasing the property’s NOI, you’re increasing the value. You would then refinance and pull out the increased equity, similar to a residential BRRRR.

 

BRRRR Method Refinance Appraisal: Moment Of Truth

brrrr refinance appraisal

During the BRRRR method, the “moment of truth” is when you refinance the property and get it appraised. You’re hoping that the appraised value will be more than your projected ARV.

If the process went smoothly and you executed your plan, this will ideally go without a hitch.

However, you can’t control what the real estate market does during the time you purchased the property and the time you perform a BRRRR refinance. If the appraisal comes in low, you can always request another appraisal. Try the refinance again with another lender. Pull your own comps and send them to the appraiser in case they missed important market data points. 

Appraising a property is both an art and a science. You will likely receive different opinions on the value of your property with different appraisals, so try a few and seek out the highest appraisal.

Worst case, the BRRRR refinance appraisal will come in less than your ARV and you might have to leave some of your investment capital in the deal. That said, if you bought right, you should still have equity in the property and a cash flowing asset.

 

Final Thoughts On BRRRR

BRRRR investing is one of the most powerful real estate investing strategies for building a rental portfolio and growing your net worth. By mastering the BRRRR process, you will learn the essential skills needed for a successful real estate business investing career.

With knowledge and repetition, there’s no limit on how many properties you can add to your portfolio using the BRRRR method. Now, that you know what to do -- go out there and build your empire!

We hope you enjoyed The BRRRR Method Ultimate Guide!

Loved the article? Did we miss anything important? Drop us a note in the comments below!

 

This article was written by Ryan Zomorodi, V.P. of Education at RealEstateSkills.com and President of RZ Holdings, Inc.  Ryan specializes in the acquisition of distressed single and multifamily residential properties nationwide for wholesale, flipping, and rental.  Connect with Ryan on LinkedIn and Instagram.

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