December 5, 2021

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The BRRRR method: Buy, Rehab, Rent, Refinance, Repeat

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BRRRR stands for “Buy, Rehab, Rent, Refinance, Repeat.”

This real estate investment strategy involves rehabbing run-down homes, renting them out, and then using home equity from the rental to buy your next property.

Many investors have found that following the BRRRR method allows them to build a small empire of rental homes, a continuing passive income, and a net worth that grows over the years.

But of course, real estate investing — not to mention rehabilitating older homes — isn’t for everyone. So you should understand all the ins and outs before getting started.

Verify your investment property mortgage eligibility. Start here (Oct 26th, 2021)


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About the BRRRR method

Before we get into the pros and cons of the BRRRR method, let’s establish what the abbreviation stands for:

  1. Buy — Find and buy a distressed or underpriced home to purchase
  2. Rehab — Bring the home up to code so it’s safe. Then renovate to make it attractive to renters
  3. Rent — Find and screen a creditworthy, reliable renter to bring in
  4. Refinance — With the renter in residence, do a cash-out refinance on the property
  5. Repeat — Use the proceeds from your cash-out refinance to find and buy another distressed home at a low price. And keep repeating as often as you can

Of course, the BRRRR method sounds much simpler than it is. There will be a lot of time, money, and work involved to get off the ground and keep your investment portfolio growing.

Those who succeed are likely to be hardworking risk-takers with business savvy, construction skills, and real estate knowledge. They should also be comfortable with periods of financial stress (for instance, when you’re spending cash to buy and rehab property, but don’t yet have any rental income flowing in).

If that sounds like you, though, the BRRRR method could be your ticket to real estate wealth.

Step-by-step guide to the BRRRR method

First, let’s dig into what the BRRRR method really entails at each step of the process.

1. Buy

To start, you need to find a home to which you can add significant value when you rehab it.

Ideally, the property should be one where most of the work is either minor or cosmetic: for example, remodeling the kitchen, laying new floors, improving energy efficiency, and so on. But certain structural issues are fine, providing you can tell the full extent of the existing damage and what it will cost to fix it.

When you’re thinking about the cost of repairs, add 10% or 20% to your rehab budget as a contingency because overruns are common.

At this point, you need to know:

  1. How much you’ll pay for both the home and the rehab project, making it safe and attractive to potential renters
  2. How much rent you’ll be able to charge after rehab when the first tenant moves in
  3. How much the home will be worth when you do your cash-out refinance

Get quotes from at least three contractors for rehab costs. And, if you’re worried about potentially expensive structural defects, bring in professional advice: a home inspector, structural engineer, or other experts.

When assessing the likely rental and sale values of the home, don’t trust your gut or home listings. Pick the brains of local real estate agents. They won’t mind sharing their expertise if they think you might turn into an important client.

This is the time to start thinking about your project in business terms.

Build a spreadsheet with all the numbers, showing cash flowing out during the purchase and rehab phases, and potential money flowing in during the rental and refinancing stages.

Also, be sure to build cost overruns and timetable delays into your estimates. Because you’ll be very lucky if you escape those.

2. Rehab

The more work you can do yourself, the less you’ll pay professionals. And the bigger your profit will be.

But don’t take on tasks unless you’re 100% confident that you have the skills and expertise you need — otherwise you’ll end up wasting both time and money.

Also, think about what mortgage program you’ll be using to purchase the home. Many rehab loan programs only allow you to complete the renovations yourself if you’re a licensed, professional contractor.

Don’t forget that you’re not flipping here. So don’t skimp. You need to bring the home up to code and make it safe. If not, you (as landlord) could later face bills for further repairs. And you might even carry liability that could end in your being sued.

You also have to decide how lavish or basic the cosmetic aspects of your rehab should be. Talk to a local rental real estate agent about that.

Based on the neighborhood and the home’s characteristics, should you be choosing finishes that will attract young professionals, established families, or other types of renters? That could make a big difference in the types of features and upgrades you add.

3. Rent 

The rehab’s complete. And you’re ready to show the home to prospective tenants.

This might sound like the easy bit. But that’s not always the case. So read our complete guide to becoming a landlord for more information.

You can also check out ‘Tips for landlords: How to set your rent.’

These contain a wealth of information for new landlords. And remember, landlords have a range of legal responsibilities that can be based on federal, state, city, or county laws. So read up on the rules that apply where you’re operating.

4. Refinance 

Once you have a tenant in place, you’ll have an income stream. And you can apply to lenders for a cash-out refinance.

Be sure to get quotes (“Loan Estimates“) from at least three lenders. Because that’s the best way to get the lowest rate and best overall deal.

Note that not all mortgage lenders will do cash-out refinances on investment properties. So you may have to shop around for a willing lender and a low rate.

Even then, some require you to own the home for a certain period before you can refinance (often 6 months or more). And expect higher mortgage rates and tougher eligibility criteria than if you were getting a loan for your own home.

5. Repeat 

And you’re off! Things should get easier as you move forward because you’ll be gaining experience, confidence, and skills as you go along. And you’ll build contacts with real estate agents who will remember you when they have especially tempting listings.

As importantly, banks and mortgage companies will be more confident lending to you as you become able to demonstrate an ever-more-impressive record of success.

Why use the BRRRR method?

Why use the BRRRR method? Because it works, though not for everyone who tries it.

The big advantage that BRRRR has over house flipping — which is the main alternative — is that you retain much of the wealth you create when you improve a home.

When you fix-and-flip, you immediately sell the property, pocketing some of the profit and reinvesting the rest in your next project.

But, with the BRRRR method, you keep the home and rent it out. And you fund your next project by doing a cash-out refinance.

The big benefit of BRRRR over fix-and-flip is that you retain much of the wealth you create in your homes.

Over time, this can snowball, producing an ever-growing real estate portfolio generating serious cash from rental incomes.

Indeed, Business Insider recently interviewed Samuel Pimm, who’s used BRRRR successfully. He started out with his first project at age 26 and is now 33 years old. With his business partner, he currently co-owns 167 rental units, comprising 85 houses and 82 apartments. Wow! He built that impressive portfolio in just seven years.

But perhaps even he would acknowledge that luck played a part. Because there are plenty of roadblocks that could be hard for new investors to overcome.

Is the BRRRR method worth it? 

The method clearly works for a particular type of person. You’ll need to be adventurous enough to seize opportunities. But cautious enough to avoid pitfalls.

And you’ll need to recognize that these ventures are all about the numbers. Get those wrong once too often and your empire might crumble.

Pros of the BRRRR method

Here are some upsides of the BRRRR method of real estate investing:

  1. You’re purchasing investment properties at a lower price because they’re run down
  2. Rental income can help you pay your mortgages and provide a passive cash flow
  3. Rehabbing homes will increase their value, and therefore, your home equity
  4. You can use that home equity to buy new properties and build your portfolio
  5. Your net worth should rise slowly to start, but then faster as your mortgage balances fall and the values of your homes rise
  6. You’re using other people’s money to, with luck, ultimately become rich

That all sounds pretty good. But, of course, there are drawbacks too.

Cons of the BRRRR method

The method brings plenty of pitfalls, especially while you’re still inexperienced.

  1. Today’s tough real estate market could make finding affordable, fixer-upper homes difficult
  2. If you pay too much for a home or underestimate the rehab costs, rental value, or resale value, you could see big losses
  3. Rehab timetables are notorious for their overruns. And you’ll be paying for your borrowing as the project drags on
  4. Finances can be tight when you’re between tenants — or if a tenant defaults on their rent
  5. Being a landlord comes with costs, too, including repairs, maintenance, and finding and screening tenants
  6. Rental and resale markets change all the time. In a worst-case scenario, if you pick a city or neighborhood that is or will be in economic trouble, your rental income could shrink or dry up, while your sale price (the emergency exit) plummets

Any of those could bring your real estate empire tumbling down, especially if it occurs during your first or an early project. So do everything you can to guard against them. You can see why luck can play a part in BRRRR success.

How do I start the BRRRR method? 

If you’re serious about trying out the BRRRR method, here are five tips for getting started:

  1. Get your personal finances in great shape. You’ll be borrowing a lot of money. So boost your credit score as high as you can. Save up a big down payment for your first property. And pay down other debts (especially credit card balances) before you apply. This will get you the lowest mortgage rate and best mortgage program
  2. Consider finding a business partner. You may find it easier to borrow if there are two of you. It also means you can share the workload and stress. If you can get someone on board who’s a contractor, landlord, real estate professional, or structural engineer, their skills could be invaluable
  3. Build up your business and management skills. Brush up on your spreadsheet abilities, read all you can about rehabs and construction, study the local property market, and talk through your plans with real estate professionals. Then write a detailed business plan (working with a financial advisor couldn’t hurt)
  4. Line up your financing. Make sure you get pre-approved and have a mortgage loan ready to go when you find your first property. You don’t want to get edged out in a bidding war because you weren’t prepared
  5. Be ready to walk away. Don’t think you can “make” a project work. Only act when you’re absolutely certain that you know all the figures and that they add up to a decent profit

For the right person, the BRRRR method could be a one-way track to financial independence. But there’s a lot of planning, strategy, and patience required. So learn all you can and proceed with care.

Ready to get started? Talk to a lender about your options today.

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