What is The BRRRR Method
BRRRR is an acronym that stands for buy, rehab, rent, refinance, and repeat. This acronym was first coined by David Greene of the BiggerPockets Podcast and is an excellent strategy to build your real estate portfolio without having to leave a large downpayment in all of your purchases for a few years.
For example, if you buy five single-family houses (SFH) for $100k each, and you put 20% down on each home, you will leave $100k of your capital sitting in equity in your homes.
This isn’t a bad thing per say, but wouldn’t you rather have the same five SFHs–still with 20% equity–and also have the $100k in your bank account?
I know this scenario sounds too good to be true, but I assure you that it is absolutely possible to accomplish this!
For example, let’s say that you bought five SFH for $50k each, and each of these properties needed $25k in renovations. You could purchase them, renovate them, and then refinance them under a long-term loan for $80k (80% of the appraised value, assuming a $100k appraisal). This would pay you back $80k, which would cover your purchase, rehab, and holding costs, and you would still have $20k in equity, but none of your cash left in the deal.
I love this strategy!
Realistically, there isn’t much difference between the renovation process on a house flip, and that of a BRRRR property. The biggest difference is going to be the finishings and quality of the renovation.
For example, you might use Quartz or Granite for the countertops on a property you are flipping, while on a rental you might use laminate, or something much more affordable.
You may opt for high end appliances on a flip, and affordable appliances on a rental.
With a rental property you want to focus on low cost products with longevity, whereas with a house flip you are going to want more high-end, high-value products to finish out your kitchens, bathrooms, and fixtures.
On a house flip you don’t want to leave any stone unturned, while on a BRRRR there will likely be cosmetic updates you’re okay skipping for the time being.
This is because tenants are notorious for being rough on homes. You don’t want to overdo a renovation that you’ll be moving tenants into because there is a likelihood they could destroy it.
Personally, I hired a property manager to deal with all of my tenant screening, renting, and management. For most people I would recommend the same.
That being said, if you want to self-manage your properties I have some information about this in my first book The No B.S. Guide to Military Life and another great resource is The Book on Managing Rental Properties by Brandon and Heather Turner.
Ultimately, the important piece of this puzzle for the BRRRR strategy is understanding market rents.
You need to know how to discover what a property like yours is likely to rent for once it is fully updated. Without this number it is impossible to truly know whether you are buying a good deal or not.
The whole point of the BRRRR strategy is to renovate a home, pull your capital out of it, and then enjoy the cash flow from a property you have little to no capital left in.
If the property costs you money every month to maintain ownership because it rents for way less money than you anticipated, that kind of defeats the point.
Alright, so how do you determine market rents? There are a lot of ways, but my three favorite are Rentometer, property managers, and local listings.
In time, you’ll be able to predict market rent for a property fairly accurately because of your familiarity with the market. Until that time, here are some great ways to ensure you get an accurate idea!
Rentometer.com is a platform that I use consistently to verify what I believe a property will rent for. I like Rentometer enough that I am subscribed to their pro membership, but you can play around with it for free for a while when you’re first starting out.
Basically, you login to the platform, type in the address you’re going to be renting out, select how many bedrooms and bathrooms it has, and click Analyze. Their database will spit out the average and median rent for that area, as well as the 25th and 75th percentile so that you can get an accurate idea of what your property will rent for, based on the condition of the home.
I probably could leave this bullet point at “This is what they do for a living, ask them.” but you’ll notice that property managers weren’t my first choice.
There are two main reasons for this.
If that property manager doesn’t currently work for you, they might be incentivized to give you a slightly higher number in hopes that you’ll let them manage your properties.
I just don’t like bugging people to answer questions that I can answer myself. I don’t want my property manager running around guestimating market rents for me when she could be managing my properties.
Ultimately, every once and a while I’ll bounce some numbers off them to confirm, but I always do a little homework first so that I’m not shooting in the dark.
This could be Craigslist, Facebook Marketplace, Zillow, or any other location where homeowners and landlords can market their properties for rent.
Find some listings close to your target property that are in a similar condition to what you anticipate the property being in when you’re done with it. Call the person who listed that property for rent, and ask how many applications they have received.
If their phone is ringing off the hook, you could probably charge a little more rent than what they’re asking. If their phone is dead, they are most likely asking too much for rent.
This is a simple, but useful trick to test how hot the rental market is in that area. You definitely want to price your rental at a point that will allow you to pick from multiple applicants for your tenant, so this is a good way to get a pulse check on the market around your property.
The type of refinance we are talking about here is a cash-out refinance. The strategy here is to pay cash for a property, pay cash for the renovation, and then use a cash-out refinance to recoup all of your cash as you place the property on long-term debt.
Here are real-world numbers on one of my recent BRRRR properties to show you how this works.
Purchase price: $55k
Renovation budget: $23,507
Actual renovation costs: $49015.98 (gotta love unexpected plumbing/sewer issues)
Estimated ARV at purchase: $134k
Actual Appraisal: $157k
Loan amount: $133,450 (85% LTV)
All-in costs: $104,015.98
Cash left in the deal: $0 (in fact, I pulled out $29,434.02. Though some of that went to commission for my acquisition manager)
Estimated cash flow: $150/month
There are ways to do this utilizing seller-financing, private lenders, hard money, and all sorts of options for obtaining the capital up front to purchase/renovate. That being said, using your own capital will make it more profitable per deal, but also harder to scale.
This process is pretty straight forward. About 2 weeks before the house is completely renovated, order the appraisal to refinance through your local lender. Once the appraiser comes out and looks at your place, the bank will lend the money based on that appraisal and their loan to value (LTV) requirements. My bank will lend up to 85% LTV, but 70%-80% is more common.
One thing you need to be aware of though is that some banks will have what’s called a seasoning period before you can refinance. That means you would have to own the property for 3-6 months before they’ll refinance. So even if your project is done faster than that, you might be stuck waiting for the seasoning period before you can complete the cash-out refinance.
That being said, my local lender has no seasoning period at all. Literally, I closed on a house on a Monday, and ordered the appraisal to refinance on Tuesday morning, haha.
Talk to various lenders and ask around to find out. There are more products out there that are designed specifically for this strategy now, and some lenders even offer what’s called delayed financing.
Delayed financing isn’t something I’ve done before, but essentially you place the cash for purchase/renovation into an escrow account when you buy the home, and then the bank will refinance up to that escrow amount once the renovation is complete without a seasoning period.
Ultimately, the more you network with lenders in your market the more you’ll find products that work for you.
Even if you don’t manage to pull out 100% of the capital you invested in your deal, you will be better off–most of the time–than buying a turnkey rental property with 20% down!
This is one of the best things about the BRRRR method!
Because you are recouping almost all of your capital (sometimes more) on these deals, you are able to continue investing with a much longer runway.
If you have $100k, you could buy five $100k homes with 20% down, and then you’d be tapped out until you saved another 20% down.
With the BRRRR method you can buy a home, and once the refinance is complete, by the next property, so on and so forth…without depleting your original $100k!
In fact, in a lot of these deals you’ll be able to pull out more capital than you put into the deal!
Putting it All Together
Look, the actual process of completing a BRRRR is fairly simple. What isn’t simple, though, is ensuring that your analysis is accurate, and the project is managed properly to avoid going over budget and taking longer than anticipated!
Also,use Rentometer or a local property manager to validate estimated market rents for this property prior to purchase.
Just to recap, here is an oversimplified breakdown of the BRRRR process.
To ensure you’re buying the right property you will want to take 75% of the after-repair value (ARV), and subtract estimated rehab and holding costs. This will leave you a little wiggle room for overages to ensure you’ll be able to refinance at the end of the process without leaving too much cash in the deal.
Work with contractors you trust, subcontract out what you need to, and manage this project thoroughly. You need to trust, but verify, everything you’re being told until you have completed some projects successfully with your contractor.
Make sure you complete this renovation with rental quality materials and focus on items that will improve the appraisal without breaking the bank, such as the kitchen and bathrooms.
Use Rentometer or a local property manager to validate estimated market rents for this property prior to purchase. You want to ensure this property will cash flow, or at least break even, once you have refinanced and pulled your capital back.
You absolutely need to know what this refinance will look like prior to purchasing the property. Don’t go into this blindly, hoping somebody will cash out and refinance your deal. Talk with local lenders to get a feel for their terms and requirements, and if possible get a pre-approval for that to refinance before buying the property if you haven’t worked with that lender before.
Take your capital and do this repeat this process until you’re sick of managing rehabs and want to move into something more passive!
A Way to Improve Your ROI When House Flipping!
One way to improve your return on investment as a house flipper is to find your own off-market deals. This is definitely more work, and I wouldn’t necessarily recommend learning to do this at the same time you’re learning how to flip houses.
You should focus on learning one, and then maybe integrate the other into your game plan as time goes on. That being said, if you have an interest in learning about how to find your own off-market deals, check out my course which will teach you everything you need to know to get started along that journey!
Start Finding Off-Market Real Estate Deals Today!
Pros of the BRRRR Method
- You can reuse your capital over and over to buy houses
- You will have equity in your rental properties that came from forced appreciation rather than down payments
- If done correctly, you can buy really good deals using this method because you’re buying properties that a lot of people don’t want to put the effort into renovating
Cons of the BRRRR Method
- There are a lot of things that can go wrong when renovating houses
- This is a time-consuming business model
- You need to find solid contractors, and keep them happy enough to continue working with you
Additional Resources for the BRRRR Method
FREE YouTube Channels and Podcasts
- 7-Figure Flipping (both)
- Ryan Dossey (YouTube)
- Ryan Pineda (both)
- Buy, Rehab, Rent, Refinance, Repeat by David Greene
Courses and coaching
- Create Cash Flow (CCF) – hosted by Ryan Dossey
- This is the community that I joined to learn about wholesaling from soup to nuts. It will run you about $10k, and is a great community for the aspiring wholesaler!
- 7-Figure Flipping – hosted by Bill Allen
- Bill Allen is a friend, and I know a ton of people in this community. I even spoke at their event in 2021! It will run you $15k or $25k depending on what level you’re at, and is a great community for wholesalers and flippers who are looking to build a 7-figure business.
Action Items for the BRRRR Method
- Get educated – Start consuming free content, books, and looking into some courses or coaching.
- Decide on a market (local is beneficial, but not necessary when starting out)
- Decide how you’re going to find good deals
- Network with local wholesalers and investors
- Make offers on deals presented to you that fit your buying criteria
- Get bids from various contractors–unless you have one on your team that you trust
- Decide how you’re going to finance this project
- Ensure you get insurance on the house, and have utilities placed in your name before closing
- Close on the house
- Renovate the house and manage your contractors every step of the way
- Order a cash-out refinance for the house with your local bank!
- Find good tenants to occupy the property, at a rental amount that ensures the property will cash flow for you.
- Repeat until rich or moving into more passive options 🙂