An increasingly popular real estate investing formula, the “BRRRR” method refers to a five-step process for buying homes in dilapidated conditions, renovating and improving them, generating rental income, and refinancing.
But the point of the BRRRR method is not just to do it once. Instead, the goal of the BRRR method is to do it over and over again, with the vision of building an impressive portfolio of rental properties that generate consistent rental revenue.
The best part?
If it works according to plan, the BRRRR can give you as a real estate investor a great return on the capital you invest on your first property — capital you won’t have to spend again on future properties.
Here’s a breakdown of how the BRRRR strategy works and how you can utilize the BRRRR method to achieve your real estate dreams — and even build a real estate empire.
What is BRRRR?
The steps of the BRRRR strategy are as follows:
The first step in the BRRRR method is to buy a property in need of repair.
Known as a “distressed property,” it will often have been foreclosed on by the bank or be close to being foreclosed.
The second phase of the BRRRR strategy is to renovate the home to bring it up to code and livable.
Once that’s complete, you’ll focus on making upgrades that increase the home’s market value, such as:
- curb appeal
- a total kitchen makeover
- other miscellaneous improvements
Next, you'll need to find a carefully screened tenant that you trust to rent the property to.
It's important to have someone living on the property because most lenders won't agree to refinance — a critical step in the BRRRR method — an unoccupied home.
The next step in the BRRRR method is for the property owner to take out a cash-out refinance.
This converts the equity you’ve built up in the home to money.
When to Use the BRRRR Strategy
The BRRRR method is a choice for real estate investors looking to earn long-term passive income.
It’s an effective and proven way to build a portfolio of real estate properties without investing too much of your own cash reserves.
When the BRRRR strategy works, the only capital you spend is on the purchase and rehab of the first property.
From that point forward, you use rental income and cash-out refinance to acquire new properties, generating more income and more equity along the way.
The BRRRR method is effective for patient and resourceful investors who understand the value of consistent, steadily-paced growth.
BRRRR Strategy Advantages
There are several key advantages to the BRRRR strategy.
The BRRRR method is easy to understand, because it’s a 5-step formula that you apply to every single investment.
The details may be different, and complications may arise along the way, but because the high-level program is the same, it’s simple to follow.
In the perfect BRRRR strategy, your only major capital investment is on the first property you buy and fix up. You then use rental income and a cash-out refi to buy subsequent properties and generate additional income.
There’s a continual ROI on your first property — and each additional property.
The BRRRR method is a great vehicle for expanding your real estate holdings.
Since the process repeats and the income keeps coming in, you can build a real estate portfolio in a relatively compact time.
Homes that are the best candidates for the BRRRR method are usually underpriced for their neighborhoods.
By buying and rehabbing the property for less than its ideal market value, you capture considerable equity right off the bat — sometimes 20% to 30% on each home.
BRRRR Strategy Disadvantages
As with any real estate investing strategy, there are drawbacks to the BRRRR approach that you should consider.
An appraisal should be conducted on the property at the refinancing stage of the BRRRR method.
If your estimate of the home’s post-rehab value is higher than the appraiser’s value — if you went far over budget — you may not be able to complete the refinance, halting the 5-step process in its tracks.
Repaying your lender may also be more difficult.
Rehab Delays and Cost Overruns
There can be delays projected timelines, costing cost overruns to your budget.
If they take too long or cost too much, you may face issues in repaying your lender.
Finding Reliable Renters on Time
Your rehabbed home needs to be occupied as quickly as possible after renovations are finished.
They need to be very qualified renters who meet each of your criteria, too.
If you can’t find qualified renters, you’ll be stuck with an empty home, no rental income, and no chance to refinance.
Here’s a very quick and rough outline of the numbers you might see with the BRRRR strategy. Keep in mind this example doesn’t include peripheral expenses like taxes or fees.
Let’s say you buy a foreclosed home for $150,000. You front $50,000 for a down payment, and you borrow the remaining $100,000.
The rehab for the property costs $30,000.
Your total investment at this stage is $80,000 (down payment + rehab costs).
You find a qualified renter, and rent for $1,500 a month.
Next, you refinance the property one year later. The appraiser estimates the new value of the improved home is $250,000.
The bank loans you $187,500 — 75% of the home’s new value. You pay off the original $100,000 loan.
That gives you $87,500 for a down payment on a new home, allowing you to…
Repeat the process on your next home.
4 Tips To Get Started With the BRRRR Strategy
To get started using the BRRRR method, keep a few tips in mind:
1. Look for properties being sold far below their market value, especially in comparison to surrounding neighborhoods.
2. Set a reasonable and reachable budget and timeframe for the rehab.
3. Set your rental fees at costs that are both fair and designed to generate sufficient cash flow.
4. Screen your rental candidates thoroughly — verify:
The Bottom Line: BRRRR
The BRRRR strategy is a simple concept. But even though it’s a relatively passive form of investing, it still requires careful consideration, budgeting, planning, dedication and patience.
It won’t be the best idea for investors who want to cash in quickly.
But for those that are willing to do due diligence, work patiently, increase their education, stay on top of financial agreements, and follow the formula, the BRRRR method can turn your portfolio into a source of continued passive income.