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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.

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.

Photo credit: iStock/Rockaa

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As artificial intelligence (AI) has become more and more prevalent, people are finding increasingly innovative ways to use the power of AI in their daily lives. That includes personal finance: AI is now being used in tools that can help with budgeting by tracking earnings, spending, and saving; noticing patterns; and finding ways to help users manage their money better.

AI budgeting tools may help some people create and stick to a budget. Learn more about how this kind of financial help might benefit you, but remember that AI is only one of many tools available. Ultimately, you are in charge of your budget and your financial future.

What Are AI Budgeting Tools?

An AI budgeting tool can mean several different things. Many existing budgeting apps have started using artificial intelligence (AI) to enhance their offerings. This can include helping users to automatically categorize transactions or manage cash flow. AI can also use predictive analysis to help you see the path you are on for hitting certain financial goals, such as saving for a down payment on a house perhaps or eliminating credit card debt.

How AI Enhances Traditional Budgeting Methods

There are many different components of a budget, and AI tools can help with many of them. AI can look at your past spending history, analyze it, and provide insights on your upcoming monthly cash flow. AI can also give you personalized recommendations on how your spending compares to other people in similar situations. That can help you identify areas where you can improve your monthly savings.

Recommended: How to Make Money From Home

Key Benefits of AI Budgeting Tools

There are also many different ways to make a budget, and an AI budget maker can help with the process. Here are four of the top benefits of AI budgeting tools:

•  Real-time tracking — You can connect your bank accounts, credit card, and other financial accounts, allowing AI to analyze your spending. This can give you real-time insights into how your money is coming and going.

•  Automated categorization — Along with tracking your spending in real time, AI can categorize your spending, which can be helpful if you, say, think in terms of a 50/30/20 budget rule. In this case, that means keeping your needs to 50% of your take-home pay and wants to 30%, while saving accounts for the remaining 20%.

•  Personalized insights — In addition to categorizing your spending and tracking your ongoing cash flow, AI can help with personalized insights about your spending. As the AI assistant learns about your spending, it can provide you with actionable information to help you improve your budget. This can be a valuable way to see if certain behaviors (such as getting take-out meals) are shifting and blowing your budget.

•  Predictive analysis — One of the biggest benefits of using an AI budget creator is that it can help predict events before they happen. This might include when you’re at risk of going over budget in a particular category or when you might need to deposit or transfer additional money to not overdraft your account.

In these ways, AI can add both tracking and insights to your financial oversight, allowing you to make the most of your money and help it grow.

Popular AI Budgeting Tools in the Market

Many budgeting and personal finance websites and apps are starting to include AI budgeting tools as part of their platform. Your bank may offer such tools as well. Just as there are various types of budgets, there are an array of apps to choose among. Here are a few apps that include some level of AI in their offerings:

•  Buddy: With the goal of financial peace of mind, this app aims to help you budget, lower bills, increase savings, and otherwise maximize your money. It offers both a free and a premium paid version.

•  Cleo: Using chatbots, emojis, and gifs to bond with users, Cleo offers a range of tools to take control of your money, including budgets, saving strategies, and credit-building options. Cleo is free, with an array of paid subscription options to access more features.

•  Copilot Money: This app uses AI as it tracks your spending, budgeting, investments, and net worth. This is a paid subscription app but often offers the first month for free.

•  Rocket Money: This app focuses on saving you money by identifying and dropping unwanted subscriptions; it can also help your wallet thanks to its tracking tools. The basic version is free; paid premium versions are available.

•  YNAB: Short for “you need a budget,” YNAB is based on the envelope system, a budgeting method in which every dollar has a job and is assigned to a specific spending or saving category. YNAB is a paid subscription service, but it often offers a free trial up front.

It may be a good idea to experiment with a few different apps to find one that has the features that you’re looking for at a price that you’re comfortable with. When it comes to living on a budget, some of these tools may suit your lifestyle and financial needs better than others.

Privacy and Security Considerations

It’s important to be thoughtful about sharing your personal data as you consider these apps. One common mistake when budgeting can be sharing your sensitive financial information with the wrong (or too many) people. While AI and other tools can help you with your budget, understand that once you share your financial information with any company or service, you have given up some control over your data.

The vast majority of popular companies have industry-standard security and privacy policies, but that doesn’t mean that they are immune to security breaches that can lead to bank fraud. Opting into multi-factor authentication (MFA) is often a smart move.

Make sure you read the privacy policies and terms and conditions of any service that you use, so you understand how your data is being used and stored. Make sure that you are comfortable with these privacy and security considerations before sharing your financial data with any company.

Recommended: 39 Passive Income Ideas

The Takeaway

Artificial Intelligence (AI) is increasingly being used in personal finance, including budgeting apps. These tools can help you with money management by providing personalized insights, real-time tracking, automated categorization, and predictive analysis. Some of these apps are free, often with paid premium features, and others charge a subscription fee. While AI may not be able to completely replace or automate your budget, using it as a tool may help you strengthen your overall financial picture.

In addition to third-party budgeting apps, consider what SoFi offers to help you manage your money better.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

How accurate are AI budgeting predictions?

AI budgeting predictions are only as good as the programming of the AI as well as the data that is fed into it. If you only have a few weeks of financial transaction data, an AI tool may not be able to give you particularly useful information. On the other hand, if you have months or years of financial information to input into an AI, it may be able to provide you with useful tips for living on a budget

Can AI budgeting tools replace financial advisors?

There are an array of budgeting methods, and AI can help with many of them. However, AI budgeting tools operate very differently vs. financial advisors. At this point, they are a form of technology that are unlikely to offer the insights of a finance professional. A financial advisor is someone you can forge an ongoing personal relationship with. You can plan your longer-term strategic goals and discuss any changes and obstacles you encounter along the road. AI budgeting tools may be better suited for helping you with your day-to-day budget.

Are AI budgeting tools suitable for all income levels?

AI budgeting tools can be used for people of all income levels. It’s important to understand that these tools, like budgeting itself, are only a technique that can help give you perspective on and guidelines for your money. You are still in charge of your budget and overall financial picture, and it can be a good idea to use AI as well as other tools to help you improve your finances.

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