Buy, rehab, rent, refinance, repeat. That’s the BRRRR method in a nutshell, and it’s a real estate investing strategy I currently use.
If you’re new to real estate investing, you may have heard of the BRRRR method in passing. If it piqued your interest, you’re going to want to stick around for this article. I’m currently using this strategy now as part of learning how to invest in real estate, and I’m going to walk you through exactly what you need to know to get started.
What is the BRRR method?
BRRRR method is a real estate investing strategy that stands for buy, rehab, rent, refinance, and repeat. Here’s a simple breakdown of what each stage of the process entails:
- Buy: Find a great deal on a rental property and buy it
- Rehab: Fix up the property
- Rent: Find tenants and rent the property
- Refinance: Get a loan that covers the purchase price plus the repairs
- Repeat: Use that money to buy another property and do it again
The idea behind the BRRRR strategy is to buy an investment property and not leverage a ton of your own money, creating streams of passive income in the process. The BRRRR method is a viable real estate investing strategy for people who are relatively new to real estate investing because you can usually get started without a whole lot of money. In short, you buy with a little bit of money and make your money work harder for you.
My personal BRRR method story
I’m a big fan of the BRRRR method. I first learned about it four years ago when I decided to get serious about being a real estate investor — and it’s been working great for me. As an example of what I mean, here’s what’s going on with my most recent BRRRR venture.
I’m currently in the process of buying an 8-plex: a multi-family property that has eight rental units. Five of the eight units are already rented out for $450 a month. I plan to spend between $10,000 and $15,000 per unit rehabbing the property. I’ll renovate the three vacant units first and give the current tenants the option to move into those at $625 a month. Then, I’ll rehab the remaining units with the end goal of raising the rent on every unit to $625 a month.
At $625 a unit for eight units, that’s $5,000 I plan to bring in each month. Using the 1% rule (which I’ll explain in a bit), that gives this property a $500,000 value. I offered to pay $205,000 in cash for this property. There was another offer on the table for $30,000 more, but offering to pay in cash was the deal-maker in my favor.
After paying $205,000 for the property and putting $80,000-$120,000 worth of renovations into it, I’ll earn a profit of between $175,000 and $215,000. That will be money I’ll have in my pocket to go do this again.
How to buy
I can’t stress this enough: you need to buy right. You make your money when you buy your property. Therefore, you need to get a good deal. You have to know your numbers. This is a very important step in the BRRRR process.
Screen a property using the 1% rule
The simplest way to judge a property’s worth is by using the 1% rule as I mentioned above. Essentially, the 1% rule is a bird’s-eye view of a deal and it tells you the minimum you should rent a property for in order for it to be a good deal.
For example, let’s say you want to buy a specific house that’s listed at a selling price of $100,000. You plan to use the BRRRR method and turn the house into a rental. If you can’t rent it for at least 1% of the purchase price per month, which is $1,000, you typically don’t even want to look at the deal. If you can’t get at least 1% of your money back on a monthly basis, you want to look elsewhere.
How do you know what price you should rent the house for? By looking at the numbers on comparable properties, often referred to as “pulling comps.” You do this by finding a house in the same neighborhood that is similar in size, age, and condition and has similar features as the property you are evaluating. When you have a list of similar properties, compare how much they rent for. If these comparable properties are in the ballpark of the 1% rule, the property you’re considering might be worth your attention.
That being said, some areas have really high appreciation (such as California, for example), where you could maybe get away with renting a property at half a percent of the purchase price per month and still come out profitable. On the flip side, one of the reasons I moved to Tulsa was because I was seeing that I could rent out properties at 1.5 to 2% of the purchase price. That means my money is working harder for me and I’ll earn on my investment at a quicker pace.
Use the cash-on-cash metric to judge a potential real estate investment
Another way to value a property is to use the cash-on-cash metric as a screening tool. This is the return you’re going to get back on your money before taxes divided by the amount of money you put into a property. Here’s an example.
An 8-unit rental property is for sale for $200,000 and you plan to pay the full amount in cash. In addition to the purchase price, there are $10,000 in closing costs and you expect to invest $80,000 in rehab costs so you can charge $625 per month in rent. In total, you’re looking at an equity investment of $290,000.
At $625 a month, the property is expected to produce $60,000 in before-tax income in a year. You also expect the operating costs of the property to run you a third of the rental income, leaving you with a net operating income of $40,000 (2/3 x $60,000 = $40,000).
To calculate the expected cash-on-cash return, you divide the NOI by the equity invested.
$40,000 ÷ $290,000 = 13.79% cash-on-cash
So, the cash-on-cash return you could generate from this 8-unit rental property in one year is 13.79%. This tells you how hard your money is working for you when compared to other investment opportunities. The stock market, for instance, has historically provided around 10% annual returns before accounting for inflation.
Don’t buy these two kinds of properties as a beginner
Let me first start with which types of properties don’t work well for first-timers: condominiums or properties that have a homeowner association (HOA) and properties designated as historic properties.
HOA properties come with a set of rules you have to follow, whether it’s paying fees for a common area and amenities, landscaping restrictions, and even the paint color you can choose. If you buy an HOA property that has a clause that you can’t rent it out and you don’t know this going in, you’ll be stuck with a property you can’t rent. For this reason, purchasing HOA properties for the BRRRR method is generally not worth the troubles you might face.
With homes that are designated as historic properties, you may face similar limitations on what types of updates you can make. This is usually only the case if the historic property receives Federal assistance as a part of a preservation project. In general, however, there are just too many little things you can run into that can cost you a lot of money with properties of this age.
The best properties for beginners are single-family homes. And unless you’re a talented contractor, stay away from properties that have major issues, such as foundation, roof, or structural problems. Your best bet is to stick to properties that need cosmetic or minor repairs, and then learn as you go.
Buy a property that allows you to add value yourself
For the BRRRR method to work best, you need to find a value-add property. A value-add property is one that requires improvements to bring out its value, instead of a property that has already been fully renovated, which is also referred to turnkey.
A turnkey property is a house or other residential property that is ready to be rented immediately after it’s purchased without requiring any sort of renovations. If you buy a turnkey property, it means someone else has already made money on their sweat equity. Sweat equity measures the time and effort you put into your real estate project to drive up its value.
In general, you want a property where you can at least paint, slap some shutters on, or refinish the hardwood floors. This is important for two reasons: you’re building your own sweat equity; and when you go to a bank, they’re going to refinance the property based on how much it rents for and what the after-repair value is. The ARV is the actual value it would sell for. The added value that you created from your renovations is what lenders will look at when you’re ready to refinance.
So if you buy a place that’s already fixed up, you won’t be able to get a loan for more money because you didn’t make any repairs. You need to make sure your investment property is a value-add place, and you can do this by converting a garage, adding more square footage by extending the bathroom — things that give it real value you can show the bank when you’re ready to refinance.
How to rehab
You’ve got your property, now it’s time to add to its value. The rehab process itself is really important. Understanding where to put your money and what does and doesn’t make sense to spend on is key. In my experience, remodeling a kitchen or bathroom can add a lot of value to a property. Cosmetic repairs are valuable as well.
Credit cards can help you save money on repairs
When you go to make your repairs, consider using a good credit card for your real estate expenses. If you take advantage of sign-up bonuses, you can get a lot of money back on your purchases in the form of rewards.
Some people I know are spending $400,000 a year on rehabbing their BRRRR properties and they’re not using credit cards. But with a straightforward, cashback card like the Citi Double Cash Card, they could earn up to 2% cash back on all the purchases they make toward their BRRRR properties. On that $400,000 spend, that’s $8,000 in cash back. That’s a good chunk of money.
Whether it’s a personal credit card or a business credit card, the point is that credit cards can help you cut repair costs by earning you rewards on your spending. Ultimately, this improves your bottom line.
Should you make repairs yourself or hire a pro?
For the actual repairs, you might be wondering whether you should go the DIY route or hire a contractor. This really boils down to how much time you have and your skill level.
If it takes you a month to make the repairs that a skilled craftsman could complete in no time, it may make more sense to hire a contractor. Plus as you start to scale and purchase more properties to BRRRR, you might not be able to spend a month on each property. Simply put, what’s your time worth? Would it be better spent researching properties and securing financing or painting cupboards?
That said, not all contractors are created equal. Finding good contractors is important. My advice is to join Facebook groups and get recommendations from real people. Word of mouth usually works out well.
How to rent
For the BRRRR method to work, you have to get your property rented out. You must get a rental contract in place because that contract is what you take to the bank for the next step, which is to refinance. The rental contract shows the bank you are actually making money on this property.
But the rental process can present you with a lot of potential pitfalls and even legal complications. So here are some things to keep in mind as a new landlord:
- You need to screen properly. You want to have responsible tenants, which means you need to screen your applicants. Properly screening your applicants can help you avoid tenants with histories of late or missed payments and evictions.
- Decide whether you’re going to use property management. If you are planning to hire a property manager, make sure to take the property management fee into account in your bottom line numbers. This fee is usually 8 to 10% of the rental value per month. You could also use a property management service such as Cozy. Cozy provides tools for landlords, from screening to marketing to rental payment services. If you go the Cozy route, you’ll still need to figure out who will take care of repairs and maintenance.
- Cover your bases in your lease agreement. Address everything you want as a landlord in your lease agreement. This includes security deposits, utility responsibilities, whether you will allow pets, whether other people can live in the unit, if tenants can sublet their unit, etc.
- Be even-handed. You’re running a business so you need to treat every tenant the same. If you give certain tenants privileges you don’t give others, you can open yourself up to a lawsuit. Consistency is key.
- Invest in a conversation with a CPA and an attorney. It’s not a bad idea to spend $1,000 to sit down with a CPA and $1,000 to sit down with an attorney to ask all the questions you have and get their expert advice — whether it’s with general questions or help with drafting a lease agreement.
How to refinance
You purchased a property, you completed all your renovations, and you’ve rented it out. Now it’s time to refinance.
First, decide on the bank or lender you want to work with. Finding a good lender is important. Generally, the big banks aren’t necessarily your best bet. In my experience, local credit unions are a good option for the BRRRR strategy. They tend to offer easier underwriting and more flexible terms, and they can have lower rates because they don’t have shareholders and lots of overhead.
Other options are hard money lenders or private loans from people you know. Hard money lenders specialize in lending for real estate ventures such as BRRRR properties or house flipping. Costs and interest rates tend to be higher with hard money loans, though, so make sure to take that into account when you’re running your numbers.
When you meet with your potential lender, tell them you bought a property, that it’s rented out (bring your lease agreement), and that it has been rehabbed. In most cases, the lender will require an appraisal of your rehabbed property to determine its new value. The lender will likely choose the appraiser, and you will pay for it. You can expect to pay a few hundred dollars for the appraisal.
After the appraisal, the lender will look at the ARV (after-repair value, which is the value added to the property from making repairs and renovations) and at the rent you’re collecting on the property. They will lend you an amount of money based off of those numbers. Exactly how much they lend you will vary based on certain fees and rates, but lenders will typically lend somewhere between 70% to 90% of the value of the home.
When you refinance, you’ll usually get a percentage, if not all, of your initial investment back. In some cases, you might even receive a refinance loan that’s more than your total equity investment. You can then take that money and go do the exact same process again.
Tips for refinancing
Here are some things to consider when you’re ready to refinance your BRRRR property:
- Shop around to find the best rate
- Avoid large and hidden fees
- Consider using a mortgage broker
- Check with small companies; don’t assume big lenders are better
- Consider online lenders
The process of refinancing a BRRRR property is a little different than getting a regular home mortgage. You want to be sure the lender offers cash-out refinancing so you can get a lump sum of money. Cash-out refinancing is when the lender gives you a new mortgage that’s in excess of your previous mortgage. The loan proceeds first go toward paying off your previous mortgage, and the remaining money is yours to use as you please.
You also want to find out whether the lender requires a seasoning period. A seasoning period refers to the age of your previous mortgage. In short, it’s the amount of time you must hold a mortgage before a lender will approve refinancing that loan. According to Fannie Mae, the seasoning period required for a cash-out refinance is typically six months. Some lenders may require you hold your previous mortgage for a year before refinancing. Others don’t require a seasoning period at all.
How to repeat
With cash in hand, it’s time to repeat the process on a new property. Follow the same steps as before, incorporating anything you learned along the way and making your second BRRRR property even better than the first.
Did you spend too much time and money on renovations when you could have hired a pro to do it in less time and for less money? Are you unhappy with the lender you chose? Ask yourself critical questions. But remember this was your first time so don’t beat yourself up if you made mistakes. Just try to learn from them for your next BRRRR project. You’ll gain the most knowledge the more you do it.
When it comes to actually executing on your second project, the best way to find that next property is to always be looking. If you take a passive approach to locating properties, there’s a good chance someone more aggressive will snatch up the best deals before you get to them.
You can stay on top of local real estate deals a number of ways:
- Find a local real estate agent who will send you deals
- Find wholesalers and get on their buying list
- Set up alerts on Zillow and other MLS aggregators
- Network with other real estate investors, as they may come across a deal they can’t do but they can pass it along to you
BRRRR method vs. flipping
Flipping houses is another form of real estate investing in which an investor buys houses and then sells them for a profit, usually after making repairs or improvements. Most often, the house is flipped within a few months of being purchased, though this time period can also stretch up to a year.
The BRRRR method, on the other hand, is typically used as a buy-and-hold method to create monthly cash flow. It tends to be more popular in the FIRE (Financial Independence, Retire Early) community because you can sit back and collect money each month. It’s a way to create passive income.
Additionally, there are tax advantages to opting for BRRR over flipping. When you’re flipping, you have to deal with short-term capital gains taxes. Short-term capital gains are typically taxed as ordinary income, so your rate could be high depending on your income bracket. For example, if you buy a flip for $50,000, spend $20,000 on rehabbing it, and sell it for $150,000, you’ve got $80,000 profits. If you held the property for less than one year, that $80,000 would be taxed as ordinary income. If you fall within the 24% bracket, that’s $19,200 in taxes.
On the flip side, if you buy and hold a property for more than a year (which you would do with a BRRRR property) and then sell it, your profits would be taxed as long-term capital gains. Depending on your taxable income and marital status, long-term capital gains are taxed at 0%, 15%, or 20%.
Pro tips on how to succeed with your first property
- Run the numbers. The biggest piece of advice I can give to you is to fall in love with the numbers, not the property. It doesn’t matter how cute the property is; focus on the numbers. Numbers don’t lie.
- Investigate a potential property. If you see a property listed for a price that falls outside the norm of other houses in the neighborhood, it might be a good opportunity. But ask yourself why this property is selling for less. Go view the property and see for yourself. Does it need a new roof or is the foundation crumbling? Does it have unruly neighbors who will make things difficult when it comes time to rent? Or it could just be a bad layout that needs some remodeling to bring out the true value (there’s your sweat equity).
- Be active in your approach for finding a good BRRRR property. Other people are looking for their next property as well. If you don’t move quickly on a good deal, someone else will snatch it up.
- Learn who the wholesalers are in your area. Wholesalers make money by finding people with distressed properties. A distressed property is usually one that is under foreclosure. Wholesalers buy the property so the person doesn’t have to foreclose. They then sell it to people like you who are looking to flip or BRRRR. As a result, you get a little bit better of a deal, the wholesaler makes money, and the original owner is saved from having to foreclose. Oh yeah, and lots of wholesalers know who the good contractors in the area are too.
Make smart moves; make money. Don’t get into the BRRRR method — or any real estate investing for that matter — on a whim. Doing your research is always important, and you’ll want to keep up on the real estate market so you know when it’s a good time to buy real estate. And the real experience comes from doing it a few times and practicing how to invest money.
If you’re interested in getting started in real estate investing, the BRRRR method is worth considering. It doesn’t take a whole lot of money to get started, which makes it ideal for beginners. Good luck on your first BRRRR property!