What is the BRRRR Method in Real Estate?

The BRRRR method is a strategy for rental real estate properties that many investors swear by. When followed properly, it can result in maximized returns on rental investments. It’s a great way to potentially build equity, generate cash flow and drive long-term appreciation and wealth.

How can the BRRRR method — buy, rehabilitate, rent, refinance, repeat — boost your rental income investment? 

How Does the BRRRR Method Work?

The BRRRR method is for investors who want to grow their rental portfolios in a sustainable, scalable way. The following takes a closer look at each of its components.

Buy

The first step is to find and acquire rental properties that fit your financial goals. Unlike a traditional buy-and-hold investment, investors focus on available properties that will benefit from renovations and upgrades.

When experienced investors assess properties, they differentiate between necessary and nice-to-have upgrades for renting situations, taking the investor’s budget into account. Certain potential upgrades — especially in the kitchen and bathroom — may generate a higher return on investment (ROI) than others.

Investors use bank loans and financial resources to buy properties. After renovations, the property should bring in rental income with minimal work from the owner.

Rehab

The next step is renovating the rental property to meet higher standards and appeal to prospective renters. When rehabbing the property, investors must have a clear idea of what upgrades are crucial for generating a higher ROI and which ones are optional.

Along with kitchen and bathroom improvements, floor replacement, outdated fixture replacements and energy-efficient upgrades are usually the most important items to address. Nice-to-have improvements on real estate investments might include swimming pools and high-end appliances.

Rent

In this phase, the investor does the following: 

• Sets a monthly rental rate that sufficiently covers their expenses 
• List the property in several forums
• Identifies and conducts screenings on potential renters 
• Develops a fair lease agreement

The goal of the rent phase is to give investors a way to collect rent and manage property issues with as little effort as possible.

Refinance

Refinancing the mortgage on a rental property is key to the success of the BRRRR investing method. Planning the refinance is important for ensuring the property’s feasibility as a rental unit. Doing so also lessens the prospective risks and streamlines the investment process.

There are two primary options for refinancing. In rate and term refinancing, the investor replaces the existing mortgage with a new one that has more favorable terms, like a lower interest rate or longer repayment period.

In cash-out refinancing, investors access equity by refinancing the property for more than the current balance on the mortgage. The funds unlocked in cash-out refinancing can be used to pay for additional investments, conduct renovations or serve the investor’s personal financial needs.

Repeat

The goal of the BRRRR method is to generate and increase rental income over a sustained period. Investors seek a constant pattern of growth. They focus on reinvesting capital to purchase property with the highest potential to generate rental income.

In the repeat phase, the cash-out refinance structure is especially beneficial. The investor has greater access to liquidity, leverage and tax advantages that build wealth reliably.

Example of BRRRR 

Here’s a step-by-step breakdown of the BRRRR method in action for overall success.

Buying

An investor finds a distressed home in an appealing neighborhood. Its market value is lower than other local homes because of its poor condition. The investor negotiates a purchase price of $150,000.

Rehabbing

In this BRRRR example, the investor identifies which portions need renovations the most. They include replacing the floors, upgrading bathroom fixtures and updating the kitchen. The investor budgets $40,000 to cover the rehab project.

Renting

After completing the rehab phase, the investor seeks responsible tenants to rent the property. They set a monthly rental rate of $1,600 to cover their expenses. Following screening and interviews, they approve a young family to rent the home.

Refinancing

The investor pursues cash-out refinancing of the property. A new appraisal gives the property a value of $200,000. The new loan amount is 75% of the revised value, a total of $150,000. The investor pays off the old mortgage and keeps $15,000 after closing costs.

Repeating

With $15,000 in hand, the investor looks for more distressed homes to renovate and rent, restarting the method. 

What Is the 1% Rule in the BRRRR Method?

Many investors adhere to the 1% Rule when adopting the BRRRR method. This maxim simply states that the monthly rent of any rehabbed property should be at least 1% of the property’s original acquisition cost. In the previous example, the $1,600 rental rate is more than 1% of the original purchase price of $150,000.

The significance of the 1% Rule is its effectiveness in generating positive cash flow. It also helps investors screen new investment properties that are likely to result in a solid return, control potential risks and build long-term wealth.

Pros of the BRRRR Method

The method offers investors several advantages.

Unlocking Equity

The strategy sets up a cycle for property renovation and continuous revenue. In doing so, the investor can refinance the mortgage to gain access to property equity.

Dependable Rental Income

The method establishes a pattern for sustainable growth through rental income. The more property the investor acquires, the greater their prospects for higher rental returns.

Finding Undervalued Properties

When executed well, the method allows the investor more funds for purchasing rental properties. These discounted homes can be renovated using the money the investor saves.

Earning Passive Income

Once the property has been updated and rented out, the investor can earn more rental revenue with minimal to no effort.

Generating Lower Interest Rates

In refinancing their properties, the investor takes advantage of the home’s post-renovation value to access lower interest rates and increase liquidity.

Cons of the BRRRR Method

Investors should be aware of the limitations of the BRRRR method.

Heavy Upfront Costs

New investors may be taken aback by the expense required to get into the rental market. 

Uncertain Property Value Appreciation

Success is not guaranteed in real estate. There’s no certainty that the property’s value will increase over time.

Difficulty in Finding Eligible Properties and Qualified Tenants

There may not be a lot of rehab candidates in the investor’s area or price range. Similarly, screening prospective renters can be a long process.

Who Should Use the BRRRR Method?

The BRRRR method works best for investors with the required skills, resources and risk tolerance levels to thrive in rental properties.

Having sufficient real estate knowledge is equally important. Investors should have experience navigating the rental market. They must commit themselves to the time and budget required for renovation projects.

Who Should Avoid the BRRRR Method?

New investors with little or no experience in rehabilitating properties might not be suitable for the BRRRR method. They run a higher risk of expensive issues during rehab. A lack of time and resources hampers an investor’s ability to execute the technique.

Investors may also run into risks in their local rental market. Soaring home prices, increased competition or economic fluctuations may impact housing affordability.

How to Finance the BRRRR Method

Rental property investors have a few options for financing purchases and renovations.

Loans

A traditional mortgage loan is the most common vehicle for acquiring capital for rental homes. These loans are specifically meant for acquiring rental properties based on their potential income and value. An investor could also take out a home equity loan against the property’s market and mortgage values.

With a rental loan, the investor must make an upfront down payment on the property — generally from 15% to 25% of the property’s value. A home equity loan has no bearing on the required down payment.

In either loan scenario, the investor should consider the carrying costs of owning and keeping the property. These include mortgage payments, taxes, insurance, utilities and other expenses. Investors who manage carrying costs successfully can access lower interest rates and positive cash flow.

Hard Money

Investors can take out short-term loans from private investors that are tied to their property’s market value. Hard money lending involves putting up the property as collateral.

These loans are popular among some investors because of their quick approval process. The loan can instantly fund a larger financing percentage of purchasing, constructing and renovating the property.

However, hard money loans can come with higher interest rates than traditional mortgages. They also require a reappraisal of the property’s value.

Home Equity Line of Credit (HELOC)

A home equity line of credit (HELOC) is a good way to acquire startup capital. It allows the investor to take out a loan based on the difference between a property’s retail value and mortgage balance.

Taking out a HELOC is a quick option. You only need to wait around 10 days to close, with no appraisal requirement. However, it’s also risky and subject to market volatility.

Alternatives to the BRRRR Method

Investors can look into other financing options, including the following.

Real Estate Investment Trust (REIT)

In a real estate investment trust (REIT), investors pool money into a diversified portfolio of real estate assets similar to a mutual fund. It’s appealing to those who want to generate income without owning a property outright.

Turnkey Real Estate

Turnkey properties are completely renovated and ready for tenants to occupy. Investors buy and hold these profits as vehicles for passive income. Managed by third parties, turnkey properties can deliver high ROI figures, albeit with less control. The property’s condition and layout are of crucial importance. 

Although turnkey properties are low maintenance, they usually offer a lower return than properties acquired using the BRRRR method.

House Flipping

House flipping allows an investor to buy, renovate and sell a home for a dramatically higher price than the investor paid for the property. The practice is subject to market fluctuations, remodeling costs and challenges in finding capital and budgeting time. The potential rewards include higher and quicker returns and sweat equity.

Takeaways From the BRRRR Method

When effectively deployed, the BRRRR method can generate substantial rental income that grows over the long term. Committed and organized investors stand to gain the most from the process.

Frequently Asked Questions