By Ben Gobel — Mar 4, 2024

The BRRRR Strategy for Real Estate Investors (Made Easy)

The BRRRR Method is a real estate investing strategy that has the potential to supercharge your net worth!

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

The strategy involves buying an investment property, rehabbing it, renting out the property, refinancing it with cheaper debt, and repeating the process over and over again.

You can think of the BRRRR method as a form of house flipping, but instead of selling, you’re ‘flipping’ the property to yourself. This is not your traditional buy-and-hold investing where you simply purchase great investment properties, in great areas, in order to hold onto them for decades while they appreciate in value.

Instead, the goal of BRRRR investing is to buy low-priced rental properties (usually with a short-term loan), make a few key improvements, and then refinance the property with long-term debt at a lower interest rate.

The BRRRR strategy can also be thought of as a strategic way to utilize cash-out refinancing. When the average person talks about a cash-out refinance, they are usually talking about pulling equity out of their house to put in a pool, go on a vacation, or maybe consolidate credit card debt. As a BRRRR investor, you’re going to use cash-out refinancing to repeatedly buy investment real estate to create cash flow. There is no better investment strategy for buying rental property and creating passive income!

The BRRRR method works for all types of real estate investments, but for this article, we’ll be focusing on buying small multiunit investment properties with one to four (1-4) units. Using this strategy will help you buy more properties, with less money, in a shorter time period.

This article will walk through the entire process of how BRRRR investing works so that you can start creating passive income and building wealth today!

STEPS OF THE BRRRR METHOD

Step 1 of the BRRRR Method - "Buy" a Property

The first step in the BRRRR method is to “Buy” a rental property. This step is actually made up of three (3) smaller parts, finding a property, analyzing it, and securing financing for it.

Finding an Investment Property to BRRRR

The BRRRR strategy lives and dies on finding the right property to buy – you have to find the right deal.

You are targeting a “distressed property.” A distressed property is one that is not selling for what it is worth, for one reason or another. This can be because the property needs repairs, or maybe the current owner has relocated, gotten divorced, or died. There could also be issues with the title or overdue taxes that need to be paid. Whatever the reason may be, you are looking for a property that you can buy at a discount.

So, how do you find these types of distressed properties?

Real Estate Agents

The first one is easy, you can start by talking to a real estate agent. An agent may know about a property that is on the market that doesn’t appeal to a “retail” real estate buyer, someone who is looking for a move-in-ready home. An agent that works with real estate investors may also know about a problem property that another investor is looking to offload.

Driving for Dollars

Driving for dollars is another strategy you can use. Driving for dollars is simply the process of driving around neighborhoods that you are interested in and looking for potential properties to target. Keep an eye out for “For Sale By Owner” or “For Rent” signs, call the number on the sign, and simply start up a conversation about the property – you may be surprised about what people disclose when you get them talking.

Also, if a property has unmowed grass, broken or boarded up windows, or is otherwise in need of repairs, it is probably worth reaching out to the owner to check if they are interested in selling. You can either knock on the door, or look up their name in the county property records, find their phone number online, and give them a call.

You can also look online. There are many websites that list distressed properties, some local, some national – start by just googling it. Do the same thing for “real estate wholesalers [name of your city or county].” From there, check out local real estate investor Facebook groups in your area. Both wholesalers and other investors will often list properties for sale in these types of groups. Setup alerts on these websites and in these groups so that you get notified immediately when a new property gets listed.

Foreclosures, Tax Sales, and Probate Sales

Don’t forget about looking into local foreclosures, tax sales, and probate sales. You can reach out to a clerk at your local county courthouse to try to gather some more information about when these sales take place and what you need to do to participate. It may seem intimidating at first, but just take it one step at a time. There are not as many of these types of sales as there used to be, but they still happen all of the time.

Direct Mail Marketing

Finally, there are also some more advanced tactics that are focused on marketing directly to potential sellers. These include direct mail marketing, where you mail a letter to a list of property owners that you want to target (absentee owners, for example), as well as targeted online marketing strategies, such as SEO and PPC ads on Google. These strategies take more work up front, but once they are established, they can generate leads for you on autopilot.

You can check out my website to capture seller leads at PittsburghHouseBuyer.com. Even though I pay for the website every month, it still costs significantly less money than a direct mail marketing campaign.

Analyzing the Property

Once you’ve found a potential property to buy, the next step in the process is to analyze the property – you’ve got to run the numbers!

To get an idea of what constitutes a good deal in your local market, I recommend analyzing at least fifty (50) properties before you pull the trigger and buy one. The best way to learn about the market value of a property in your target area is to look at every property that is currently for sale, every property that has sold in the last year, and how long each one of those properties that sold was on the market.

Here is the BRRRR Method Magic Formula:

Purchase Price + Rehab Costs = 70% of Market Value

As we’ll talk about in more detail in Step 4, when you refinance out of the loan used to purchase the property, your goal is to recover your down payment and all of your repair costs. Most conventional lenders will offer you a mortgage with a “loan to value” of seventy-five to eighty percent (75%-80%). To put it simply, if a property is worth $100,000, you can most likely get a mortgage of $75,000 – $80,000.

When you’re analyzing a property, if you aim to be all in for seventy percent (70%) of the property’s value, that still leaves five to ten percent (5%-10%) for overages during the rehab. If you hit these numbers, you will be able to recover 100% of your initial investment when you refinance. You will also obviously be left with more equity in the property than if you had paid market value at the time of purchase.

Let's look at a quick example:

123 Main Street has an after repair value (“ARV”) of $300,000.
Based upon the ARV, once 123 Main Street is fixed up, a bank will give you a mortgage of approximately $225,000 – $240,000, which is seventy-five to eighty percent (75%-80%) of $300,000.
Now, the property also needs $100,000 of repairs, in order for it to actually be worth $300,000.

So, when you find out that the owner of 123 Main Street is a motivated seller, what can you offer to pay if you want to use the BRRRR method on this property?

The answer is approximately $110,000, that’s the purchase price you can pay. How did we calculate that number for the property purchase? I’m happy you asked!

Remember, you need to be all in for seventy percent (70%) of the ARV, that’s $300,000 x 0.7 = $210,000. But, the property needs $100,000 worth of repairs, which needs to be subtracted from the $210,000. That leaves $110,000 you can pay as a purchase price.

$110,000 (Purchase Price) + $100,000 (Rehab Costs) = $210,000 (70% of Market Value).

Finally, remember to factor in taxes and closing costs when you’re running your numbers.

Financing the Property

When it comes to financing the initial purchase of the property, you have lots of options.

Most experienced real estate investors who use the BRRRR method finance the initial purchase of the property with a short-term loan, often from a “Private Money Lender,” or a “Hard Money Lender.”

Private Lenders

Generally, private lenders are just people, often family or friends, who loan money to real estate investors. These types of private money loans have the ultimate flexibility. As long as both the borrower and the private lender agree on the terms, you’re good to go.

Hard Money Lenders

A hard money lender is a company, or sometimes just an individual, that lends money to borrowers who are looking to purchase a piece of real estate that a bank would not be willing to lend on (like a property in need of lots of repairs), or to borrowers who are unable to obtain financing from traditional banks.

Typically, a hard money loan will be more expensive than a loan from a private lender, and definitely more expensive than anything offered by conventional banks. Hard money loans typically have a higher interest rate than those charged by banks, and they also often require high-interest payments, or “points,” when the loan is originated.

So, if hard money lenders are so much more expensive than banks, why would anyone use one? The reason investors love them is because of the flexibility they offer. Depending on your level of experience, some hard money lenders will finance up to 100% of the purchase of the property and all of the repairs. This means you’re able to buy the property and complete the repairs with no down payment and no money out of pocket.

Traditional Financing & Home Equity

Depending on the property and your plans, you may also be able to finance the initial purchase through a bank. This can be a great option for your first investment, for example, if you’re planning to live in the property while you fix it up. If you go this route, you’ll be positioned nicely to do a cash-out refinance of your current mortgage, after you complete Steps 2 and 3.

Finally, if you already own a primary residence, you may be able to take out a home equity loan, a home equity line of credit, do a cash-out refinance, in order to come up with the cash necessary to buy the investment property.

Regardless of which financing route you choose, if you’re able to purchase the property (and maybe even fund the rehab) with other people’s money, there really is no limit to how fast you can grow and scale!

Step 2 of the BRRRR Method - "Rehab" the Property

The next step of the BRRRR strategy is to rehab the property.

Do I Need to Do the Work Myself?

The rehab process can be intimidating for a lot of newer investors – don’t let it stop you. Ideally, you want to serve as the general contractor, where you oversee and guide the project while allowing other skilled subcontractors to perform the work itself. This will allow the project to progress much more quickly and, as long as you hire the right people for each job, will hopefully result in a better-finished product.

If you’re extremely handy and enjoy fixing things, feel free to plan to do some of the work yourself. Unless you happen to be a licensed electrician, plumber, or master carpenter, it’s often best to hire out this type of work. On the other hand, with the help of just a few YouTube videos, you can do a great job painting, installing laminate flooring, or changing out basic lighting and plumbing fixtures.

With that being said, doing the rehab work yourself is not necessary. In fact, I don’t really even recommend it in most situations. You need to treat this BRRRR strategy of real estate investing as a business – not a job.

What Should You Rehab to Maximize Rental Income and "After Repair Value"?

When using the BRRRR method, you should always focus on rehab projects that will increase the appraised value of the property as much as possible. Remember, you are trying to increase the value enough to be able to refinance the property and pull all of your money back out.

What’s the easiest way to know what should or shouldn’t be renovated?

Always focus on things you can see! Banks require appraisals on properties before they will be willing to give you a loan.

Here’s a list of some of the best renovation projects that will instantly increase the value of a property in the eyes of an appraiser:

Painting the Interior or Exterior
Minor Kitchen Remodels
Minor Bathroom Remodels
Installation of Hardwood or Laminate Flooring
Replacement of Carpet
Adding a Kitchen Backsplash
Updating or Adding Kitchen Lighting
Entryway Door Replacement
Adding or Improving Outdoor Space or Deck
Manufactured Stone Veneer on the Exterior
Siding Replacement
Window Replacement
Garage Door Replacement

Appraisers are people too. Yes, they will use comparable properties to arrive at a value for your property. But at the end of the day, if a property looks nice, new, and clean, an appraiser will be far more inclined to assign a higher appraised value.

When you’re just starting out, focus on properties that need minor cosmetic renovations so that you can get some momentum going quickly.

Calculations and Estimates

Start by calculating rehab costs and preparing a rough rehab budget. A great place to start is the Bigger Pockets Rehab Estimator Calculator: Rehab Estimator Calculator from BiggerPockets

When you’re putting these things together, also make sure to add at least ten to fifteen percent (10-15%) for unexpected expenses and overages. Even experienced real estate miss things, you will too.

Once you have a rough draft prepared, start reaching out to subcontractors to get estimates. As you get updated information and figures, update your estimates for costs and cash flow.

Step 3 of the BRRRR Method - "Rent" the Property

The third step in the BRRRR method is to find tenants and rent out the property.

How to Find Great Tenants

Generally, a good property attracts good tenants. With that being said, it’s extremely important that you properly screen applicants.

What constitutes a great tenant varies from property to property, but generally, you are looking for someone who has the following qualities:

The tenant should have the ability to afford rent today
The tenant should have the ability to pay rent tomorrow
The tenant should have a desire to pay on time
The tenant should value cleanliness
The tenant should value and follow the law
The tenant should have a manageable level of “neediness,” which will directly correlate to how much stress they’ll cause.

How to Determine What Rent to Charge

Given that you just completed the rehab project and are dealing with a brand new property, you should be able to charge a higher rent, which will result in more cash flow.

As you’re determining where to set your rental price, make sure to check other rental properties that are listed for rent in your local market. You can also check out Zillow’s Rent Estimator, as well as places like Rentometer.

Your goal is to maximize rental income to increase positive cash flow as much as possible.

When to Hire a Property Manager

Generally, I recommend self-managing at least your first and second rental property. There’s no better way to learn the business than to do it.

If you are going to manage your growing real estate portfolio yourself, you have to treat it like a business from day one. Make sure to open a separate bank account and credit card to keep all of your real estate investment income and expenses separate from your personal funds. Set up a system to collect rent payments electronically – services like Apartments.com make this easy. Also, as quickly as possible, signup for a service like Quickbooks or Stessa to track and categorize your income and expenses. Having these few services in place makes bookkeeping and taxes so much easier.

With all of that being said, property management can simplify your real estate investing tremendously. A full-service property manager will typically charge a management fee of at least ten percent (10%) of gross rental income, so yes, it’s expensive.

I still self-manage all of our rental properties, however, I don’t recommend this for everyone. If hiring a property manager will result in your actually going out and buying your next property sooner, a property manager is probably worth the expense. If you’re not going to leverage this additional free time into growing your business, you will most likely end up with more money in your pocket if you stick to managing the property yourself.

Step 4 of the BRRRR Method - "Refinance" the Property

Now that you have rehabbed the property, found a great tenant, and rented it out, the next step of the BRRRR method is to refinance – this is the “cash-out refinance” part of the process.

What Type of Loan Are you Looking For?

Your ultimate goal is to find a new lender, most likely a bank, that will provide you with a long-term mortgage at the lowest interest rate possible.

You are looking for a new loan that will allow you to pay back (1) the initial loan you used to finance the purchase of the property, (2) any money you borrowed to rehab the property, and (3) any cash you spent throughout the process, such as the initial down payment, closing costs, as well as any other incidental expenses you incurred.

If you can find a loan that makes all three (3) of those things possible, paying back all of your outstanding debt, that’s what is called a “Perfect BRRRR.” That’s a deal where you are able to recover the entirety of your initial investment, such that you now own a new rental property having spent $0 out of pocket. This is where the magic formula we were discussing earlier comes into play. To refresh your recollection, this is the formula: Purchase Price + Rehab Costs = 70% of Market Value

If you were able to hit those numbers and not go over budget on the rehab, you just pulled off a Perfect BRRRR – congratulations!

Real Estate Investing Works with the BRRRR Method, Even When It's Not Perfect

With that being said, the BRRRR method doesn’t require every deal to be perfect. Even if you’re only able to recover a portion of your initial investment, e.g., fifty percent (50%), this still cuts the amount of money you need to save in half, before you can buy your next investment property.

Can I Cash Out Refinance Right Away?

It depends!

If you used traditional bank financing for the initial purchase of the property, you will most likely have to wait. Most banks require a year-long seasoning period for a mortgage loan. A “seasoning period” is the length of time that must pass after the loan has been closed and funds have been disbursed before the mortgage can be refinanced.

If you purchased the property with a hard money loan, private money, or with cash, you will most likely able to refinance the property into a long-term mortgage as soon as the rehab is complete and the property is rented.

How Will a New Loan Impact My Monthly Mortgage Payment?

Again, it depends! (But it will probably go up, and that’s okay)

When you refinance a BRRRR property, you are borrowing a larger sum of money and increasing your outstanding debt, which will make your monthly mortgage payment go up. However, the new mortgage loan should have a much lower interest rate than the initial financing, which will decrease your interest expense and make your payment go down. How these factors shake out needs to be analyzed on a case-by-case basis.

With that being said, when accounting for all of these changes, your monthly payment on your new mortgage will most likely be higher than the payment on the initial loan used to purchase the property, which is fine.

As you’re running the numbers, just make sure that the property still produces positive cash flow after being refinanced.

Step 5 of the BRRRR Method - "Repeat' the Process

The fifth and final step of the BRRRR method is to repeat the process, over and over again!

Building Your Real Estate Portfolio by BRRRR-ing Properties

If you were building a real estate portfolio the old-fashioned way, you would have to wait and save money, either from your day job or from rental income, for your next down payment. With the BRRRR method, when you refinance the property in Step 4, you simply reuse those funds as a down payment to purchase your next property.

As you keep putting those proceeds towards more rental properties, your passive income will continue to grow until you are generating enough money to support your lifestyle, and more.

Conclusion

So there you have it, that’s the Buy, Rehab, Rent, Refinance, Repeat, real estate investment strategy!

If you consistently use the BRRRR Method, you’ll quickly grow your passive income and accumulate more real estate equity.