A Beginner’s Guide To The BRRRR Method

Real estate has long been one of the most popular investment opportunities. There are many ways to invest in real estate, from owning rental properties to flipping homes. Another real estate investing strategy that’s available is the BRRRR method: Buy, Rehab, Rent, Refinance, Repeat.

What Is The BRRRR Method?

The BRRRR method is an investment strategy where real estate investors buy distressed properties, rent them out after renovations and then use a cash-out refinance to tap the equity, allowing the investing cycle to repeat.

The BRRRR method really combines two other real estate investing strategies. Many people, when it comes to real estate investing, choose to either own rental properties or flip houses. This strategy allows you to do both while also freeing up cash to use for your next investment.

How BRRRR Works In Real Estate

The BRRRR method is a five-step process. It starts with buying a distressed property at a low price. Once you purchase the property, you rehabilitate it to increase its value and make it a more attractive rental property.

After renovating the property, you rent it out to a tenant. You’ve already done most of the hard work, meaning the rental income you receive each month will be largely passive income.

The final steps of the BRRRR method are refinancing and repeating. Because you’ve increased the value of the property, you can use a cash-out refinance to tap the equity you’ve created. You can then use that money to fund your next investment, whether it be the BRRRR method or something else.

Many real estate investors use the BRRRR method again and again to build their real estate portfolios and create more passive rental income.

The BRRRR Strategy: Step By Step

We’ve briefly discussed how the BRRRR method works as an investment strategy. In the sections below, we’ll break down each step a bit further.

Step 1: Buy A Property

The first step of the BRRRR method is buying a rental property. Ideally, the property you buy will be affordable and in need of rehabilitation. After all, the more equity you can build with your renovations, the more profit you’ll make on the investment.

When choosing a rental property to buy, it’s important to consider the purchase price of the property, the amount you’ll need to spend on rehabilitation, and the expected value of the home after the work is done. Determining these three figures can help you decide whether a property is a good investment. To find the after-repair value of the home, look at comparables in the area to see what they’ve recently sold for.

Another thing to consider when choosing a property is how you’ll finance it. Most of us can’t afford to buy a rental property in cash, meaning a mortgage is likely necessary. And not only must you consider how you’ll finance the property itself, but also how you’ll finance the renovations.

Step 2: Rehab The Property

The next step of the BRRRR method is rehabilitating the property. Ideally, you would have considered what updates you’ll make and how much they’ll cost before you even buy the home. That will help the process to go more smoothly after the purchase is finalized.

In all likelihood, the home you purchase to rehab is distressed, meaning it needs a lot of work. For that reason, you must pay close attention to ensure the home is safe to live in and everything is up to code.

When identifying potential improvements, focus on those that will increase the home value the most. Projects might include renovating the kitchen or bathroom, adding a bedroom, or improving the home’s curb appeal.

When it comes to the renovations themselves, you have two options. First, you can do the work yourself if you’re able to. Second, you can hire someone to do it for you. The second option will be more expensive but will also help to ensure the job is done right. Of course, you can also do a combination of those two things and do some of the simpler work yourself while hiring out some of the more complex projects.

At the end of the day, the most important thing is to ensure that you’ve successfully increased the value of the property (ideally by more than you spend on the rehab).

Step 3: Rent Out The Property

Once you’ve completed the rehab, you can find a tenant and rent out the home. Before renting it out, you’ll have to choose an appropriate rental price. You can do this by looking at comparable properties in the neighborhood to ensure you’ve priced yours competitively.

You’ll also want to take steps to ensure you choose the right tenant. The goal is to make passive income from the property, and you can only do that with a tenant who takes care of the property and pays their rent each month. Look for applicants with a strong credit history, steady employment and a good track record of paying their bills on time.

Step 4: Refinance The Property

One of the benefits of renovating a distressed property is that you have the potential to significantly increase its value. And the equity you’ve built up in the home can be used for other investments.

One of the most important steps of the BRRRR method is using a cash-out refinance to convert some of your home equity into cash. Often it takes homeowners years to build up enough equity for a cash-out refinance, but with the increase in the home’s value from the renovations, you can do it more quickly.

The only catch is that some lenders may require you to have your loan for 6 – 12 months before you can use a cash-out refinance.

Step 5: Repeat The Steps

In the final step of the BRRRR method, you can use the money you got from your cash-out refinance to invest in another property. Some investors use the BRRRR method over and over again. In that case, they would take the money from the cash-out refinance and buy another distressed property to rehab.

Of course, you aren’t limited to just repeating the process with the BRRRR method. You can use the money from your cash-out refinance, for any other investment or even for personal use.

BRRRR Method Example

Let’s say you buy a distressed property in your hometown for $100,000. You’re able to renovate and add considerable value to the home. You spend $75,000 on renovations and are able to increase the home’s value to $250,000 (which is $75,000 more than you spent in total).

Once you complete the renovations, you rent out the home for $1,500 per month. You use that money to make the mortgage payments and maintain the home, while the rest is simply passive income. Once the home is rented out, you use a cash-out refinance to pull some of the equity from the home. The home is now worth $75,000 more than you spent on the purchase and rehab, which you’re able to convert to cash.

With the $75,000 from the cash-out refinance, you can make a down payment on another distressed property or invest it elsewhere.

How Much Money Do You Need To Start The BRRRR Strategy?

The BRRRR method can be an attractive way to build home equity for a cash-out refinance. But for this strategy to be successful, you’ll already need some money upfront.

The amount of money you’ll need to start the BRRRR strategy depends on the house you purchase. Generally speaking, lenders require at least 20% down on an investment property. Many experts recommend putting down as little money as possible, but depending on other factors, including your credit score, you may be required to put down more than you originally intended.

And you won’t just need to consider how you’ll buy the property. Rehabbing a home can also be expensive, and you’ll need to consider how you’ll finance those costs.

What Are Your Financing Options For A BRRRR Investment Property?

When it comes to financing your investment property for the BRRRR method, you’ll have plenty of options. Below we’ll talk about some of the loans available to finance the property. They may differ in their interest rates, minimum requirements, and other characteristics.

• Conventional loans: A conventional bank loan is the simplest type of financing you can use for an investment property. You’ll generally need a down payment of at least 20%. Other than that, the features and interest rates on these loans are likely to be similar to those of any other conventional loan.
• Hard money loan: A hard money loan is a short-term non-conforming loan that’s often used for investment properties. These loans may be easier to qualify for, but usually have higher interest rates and short repayment periods.
• Private loans: Another option to consider is a private loan. In this case, rather than borrowing money from a traditional lender, you borrow money from a private party, such as a family member, business partner, or investor.
• Local bank loans: Local banks may allow for more flexibility when you’re borrowing money for an investment property. You may need a large down payment and be subject to a higher interest rate but have more flexibility in other areas.

The Pros And Cons Of The BRRRR Method

Before using the BRRRR method to invest in real estate, it’s important to understand some of the pros and cons you’ll run into.

Pros

• Buying and rehabbing a distressed property allows you to significantly increase its value, especially if you find a good deal.
• The equity you build by renovating a property can be converted to cash with a cash-out refinance, which you can then use for other investments.
• In addition to the additional equity it creates, the BRRRR method also creates passive income from the tenants you rent the property to.
• As you repeat the BRRRR process, you’ll have more capital to fund each subsequent real estate investment and can significantly increase your rental income.

Cons

• Renovations can be expensive, especially if you aren’t equipped to do them yourself and have to hire someone else.
• Borrowing money for this type of investment is riskier than other mortgages because you don’t know for certain that you’ll have consistent rental income.
• Financing this type of property may be more difficult than financing a traditional home purchase.
• The BRRRR method requires a lot of money upfront, and depending on how long the renovations take, it could take a long time to start making money from your investment.

Who Should Use The BRRRR Method?

The BRRRR method can be an excellent way to make money from real estate, but it’s not right for everyone. First, the BRRRR method requires significant upfront capital. If you don’t have any money to start with, you won’t be able to use this investment strategy.

The BRRRR method also requires substantial real estate knowledge and experience. You’ll need to know how to determine whether a home is of good value, how much renovations are expected to cost, and the expected value of the home after the renovations.

Finally, the BRRRR method is best for those who have the capacity to manage rental properties. While it can largely be passive income, there is some work required, as well as ongoing costs.

The Bottom Line

The BRRRR method is a popular real estate investment strategy that involves buying a distressed property, rehabbing it, renting it out to a tenant, converting equity to cash with a cash-out refinance, and repeating the process. It requires a lot of work and a large upfront investment but then has significant profit potential and the ability to help you build your real estate portfolio in the future.

Do you already own a rental property that you’d like to pull cash from? Or maybe you want to convert some of the equity in your primary residence to cash to make your first real estate investment. In that case, apply for a cash-out refinance today to see your options.