If you’re into real estate investing, and you’re thinking about expanding your portfolio to include multiple rental properties, you may have seen the acronym BRRRR and wondered what it means.
BRRRR — which stands for Buy, Rehab, Rent, Refinance, Repeat — is kind of like house flipping, but on steroids. Instead of reselling a newly rehabbed home for a one-time profit, a BRRRR investor keeps the property and rents it with the goal of generating income while also building equity to make another purchase, and another, and so on.
Read on to learn more about this complicated investing strategy, how it works, and some pros and cons.
Understanding the BRRRR Method
Don’t let the “cool” and easy-to-remember acronym fool you: Successfully executing each step of the BRRRR method can require time and effort, and knowledge about how to invest in real estate, especially in your local market. Here are some BRRRR real estate basics:
BRRRR Meaning
BRRRR is a strategy real estate investors use to keep adding rental homes to their property portfolio. Each of the five letters stands for a step in the process:
• B – Buy a property that you expect to gain significant value but that may need a substantial amount of work.
• R – Rehab that property to gain equity and make it appealing to renters.
• R – Rent the property to provide an income source.
• R – Refinance the property with a cash-out refinance to provide money for your next investment property.
• R – Repeat the process with another property that needs help and keep building your portfolio.
Origin and Evolution of the Strategy
Investors have been following these steps for years in an effort to maximize the profits from their rental properties. But podcaster and blogger Brandon Turner of BiggerPockets.com gets credit for the catchy BRRRR acronym, which is now a common term in the real estate lexicon.
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Breaking Down the BRRRR Method
Each step in the BRRRR process presents its own challenges, which may become easier as you develop your own systems and go-to sources. Here’s a look at what to expect.
Buy
Finding the right property to purchase is critical to making the whole strategy work. Many experienced BRRRR investors recommend buying a distressed property that’s in need of renovations, so you can get in cheap and secure the biggest return on your investment. If you have the wherewithal to manage this type of project without getting in over your head, you may be able to quickly add to your equity. And if the property is in a sought-after area, you may find you can charge more for rent.
Rehab
A distressed property may be a good buy, but major repair costs can cut into your profit. And unless you plan to do the work yourself, you’ll need a reliable contractor to help you renovate. Budgeting is a big factor at this stage. It can help to know the market, so you don’t over- or under-improve the property. And since you may be the person who gets the calls when things need to be repaired or replaced, you’ll want to make sure everything is solid and safe.
Rent
Finding the right renter can be difficult — so you may want to hire a trusted property management service to take on this step of the BRRRR strategy. You’ll likely want to check on each applicant’s employment, review their credit score, and perhaps do a criminal background check. Having a reliable renter can cut your overall costs (the place won’t sit empty, you’ll get paid, and you won’t have to worry about damages). And you may need to have a signed lease when you go to do your cash-out refinance. It’s also critical to factor in all your costs and current rent prices for comparable homes in the area when deciding how much to charge.
Refinance
Once you begin collecting rent, you can use it to pay off some of your current costs and prepare for your next purchase. Then, as soon as you have enough equity in the property, you can start the ball rolling on your cash-out refinance. The goal here is to swap your original mortgage for a new loan, preferably with better terms, and to come away with a portion of your equity in cash to put toward your next project. Lenders may have different rules regarding how long you have to own the property, or how much equity you must have to qualify, so it can be helpful to build a relationship with a reliable lender who becomes your go-to source for this step.
Repeat
With the cash from your refinance in hand, it’ll be time to start another property search — or, better yet, to move on a property you’ve already found. If the strategy works, an investor could potentially purchase multiple rental properties and continue making money through rent and equity.
Benefits of the BRRRR Method
As with any investment, there are benefits and risks associated with the BRRRR method. Some of the pros include:
• You can build equity. If you buy multiple properties, renovate them, hold on to them, and maintain them so they keep their value, you can expect to keep building equity.
• You can generate a reliable flow of cash. If you buy multiple properties, renovate them, hold on to them, and maintain them so they keep their value, you can expect to keep building equity.
• You can diversify your investment portfolio Adding real estate investments that provide passive income can further diversify your portfolio, which can help protect you during market fluctuations.
• You can take advantage of certain tax breaks. As a property owner who earns rental income, you may be able to deduct some of your expenses (mortgage interest, property taxes, repair and management costs, etc.) on your tax return each year.
Challenges and Risks
Some of the drawbacks to the BRRRR strategy can include:
• You may experience market fluctuations. Although property values and rent prices always seem to be going up, there’s the chance they could slip and (at least temporarily) affect your profit. And if you can’t make your payments, you could lose the property.
• You may run into renovation overruns. If you’ve ever watched a home renovation show, you know how easy it can be to go over budget. Solid planning, a thorough home inspection, and a contingency fund are must-haves for the rehab stage of this strategy.
• You may lose rental income if there’s vacancy. Finding reliable tenants can be challenging — and unreliable tenants can mean lost income and/or added costs.
• You may have trouble refinancing. Depending on the market, lender criteria, and your own creditworthiness, it may be harder than you expected to get a loan, or to get the terms you hoped for when buying or refinancing.
Financial Considerations
Before jumping on the BRRRR bandwagon, there are several financial considerations to keep in mind, including:
Initial Capital Requirements
Unless you’ve saved up a pile of cash to buy your first property, you’ll need to find financing. That could mean:
• Taking out a mortgage — which can require coming up with a down payment and closing costs.
• Borrowing against the equity in your own home — which can put your home at risk of foreclosure if your BRRRR business isn’t profitable.
• Taking out a hard money loan — which is common for this type of real estate investing, but typically comes with high interest rates and short repayment terms — can be risky. Hard money loans are generally offered by individual investors and investment firms that can provide fast funding and usually care more about the value of the asset than the borrower’s creditworthiness.
Rehab Costs
When looking at investment properties — particularly distressed properties — it’s important to calculate the estimated value of the home after renovations and repairs. This is known as the after-repair value (ARV = current property value + value added from renovations). For the BRRRR method, it can be useful to consider how improvements will affect the value of the home for equity and rental income. A common BRRRR rule of thumb is that you should avoid paying more than 70% of the ARV when purchasing the property. So, for example, if a home’s ARV is $400,000, you wouldn’t pay more than $280,000 for the home.
It can also be helpful to carefully prioritize the renovations you plan to make. Making the home safe is critical, but your costs will also include improvements that add value, such as updating appliances, installing new windows, and adding curb appeal.
Cash-Out Refinancing
Cash-out refinancing is a critical part of the BRRRR strategy, since you’ll use the money to buy another property to rehab and rent. You may want to spend a little time researching and comparing lenders to get the best interest rate and other loan terms for your needs and goals. Be prepared: Qualifying for a cash-out refinance and the mortgage refinancing costs (loan fees and other closing costs) can be similar to a home purchase.
Return on Investment Calculations
Calculating return on investment (ROI) can help you make smarter decisions about the properties you own and those you hope to add to your real estate portfolio. Some things to consider when estimating your ROI include:
• Purchase price and financing terms. If you pay too much for a property or the loan, your returns are likely to disappoint. Negotiating a good deal is a key to making the BRRRR strategy work.
• Profitable and reliable rental income. Finding the sweet spot between charging competitive rental prices and keeping vacancies low is also essential.
• Operating expenses. Keeping your property running smoothly can lower your operating costs in the long term. But things like maintenance costs, property management fees, insurance premiums, and the property taxes included in mortgage payments can all directly impact ROI. Again, finding the right balance between efficiency (getting things done) and economy (keeping things affordable) can help you maximize your profit.
• Property appreciation. Speaking of the long term, a property’s potential to increase in value can also be an important factor when determining ROI.
• Tax advantages. Investors can reduce their taxable income each year by claiming depreciation, mortgage interest deductions, and other tax benefits related to their rental properties.
Recommended: Mortgage Calculator with Taxes
BRRRR vs Traditional Real Estate Investing
Risk vs. reward is a common theme in all types of investing — and it’s definitely something to look at when comparing the BRRRR method to traditional real estate investing.
While investors using the BRRRR method have the potential to expand their portfolio — and grow their wealth — at a faster clip than traditional real estate investors, they’re also taking on more risk. Which is why choosing between the two approaches can boil down to knowing yourself: How much time and effort do you want to put in? How much do you really know about real estate, renovating, rentals, and the market where you would purchase the home? What is your tolerance for risk (emotionally and financially)?
If you’re relatively new to real estate investing, you may want to seek out some advice from someone who’s a BRRRR veteran. It may make sense to hone your skills and get to know your market better before diving in. Or you may decide that taking a more hands-off approach with REIT investing (investing in a real estate investment trust) is a better fit for you.
Recommended: Real Estate vs. Stocks: Pros and Cons
Tips for Successful BRRRR Implementation
Think you may be ready to tackle the BRRRR method? Here are some planning tips:
• Use your contacts. If you’ve been investing in real estate for a while, it’s likely you have a go-to group of pros you work with on a regular basis. Tap those folks — real estate professionals, contractors, workers — for advice and assistance as you search for a property to purchase and rehab.
• Stick to a budget. The key to BRRRR is to keep costs manageable all through the process. That means figuring out your costs before you buy, and sticking to a budget as you renovate, rent, and maintain the property.
• Be picky about tenants. Choosing good tenants can help you avoid problems with vacancies, missed rent payments, maintenance problems, and other issues. Paying a professional service to vet potential renters could end up saving you money later on.
• Don’t forget the importance of refinancing. Finding the right lender and home mortgage loan terms as you prepare for your cash-out refinance can help you confidently move on to the next property.
• Learn from your wins and losses. When you hit the “repeat” stage of the BRRRR method, you can use what you learned along the way to keep improving your process and the team of people you work with.
The Takeaway
The BRRRR method of real estate investing can be profitable: Investors who make it work can enjoy passive income from their rentals and build equity in a portfolio of properties. But BRRRR also can be time-consuming and risky. Newer investors may want to wait until they have more experience with traditional real estate investing before they jump into this strategy.
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FAQ
How long does a typical BRRRR cycle take?
A BRRRR cycle can vary based on several factors (property selection and closing, renovation schedule, cash-out refinance timeline), but it generally takes a few months to a year.
What types of properties work best for the BRRRR method?
BRRRR investors typically look for distressed properties that can be purchased for a low price. This allows them to add value faster, and to turn their equity into cash to use for their next purchase.
How does BRRRR affect taxes and depreciation?
BRRRR investors can reduce their taxable income over the long term by claiming mortgage interest deductions as well as deductions for property taxes, operating expenses, repairs and depreciation on their rental properties.
Can BRRRR be used in any real estate market?
Yes, the BRRRR method can be used in any real estate market. But it requires finding the right property at the right price, as well as having a manageable rehab budget and reasonable financing and refinancing terms to make it a success.
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