BRRRR stands for “buy, rehab, rent, refinance, repeat,” and describes a step-by-step process of real estate investment. Hard money lenders like Black Brook Capital are a great option for BRRRR investors. Traditional mortgage lenders often decline loan applications for the distressed properties that are key to the BRRRR method.
How the BRRRR method works
BRRRR works by flipping a distressed property, renting it out, and then refinancing it to fund future investments. In the simplest terms:
- First, an investor buys a property with a hard money loan and rehabs it.
- Then the investor rents it out to tenants for an extended period. The tenants’ rent allows the investor to pay the mortgage, build up equity, and earn profits.
- The investor then does a cash-out refinance of the property, using the cash to repeat the BRRRR process by buying a second property.
While he acronym and steps are simple, they must be carried out with careful thought and planning.
Buy
The BRRRR strategy relies on purchasing a distressed property—one that is on the brink of foreclosure, already owned by the bank, or being sold by an owner who owes more money than the home is worth. In other words, it probably needs substantial updates and repairs.
Hard money lenders
One major hurdle to getting a traditional mortgage is that the lender may require an appraisal on the property.
First-time BRRRR investors can qualify for our hard money loans because we don’t focus on the applicant’s credit or income. In our loan application, our primary considerations are:
- The subject property’s After-Repair Value (ARV)—the estimated value of the property after renovations are complete.
- An applicant’s demonstrated experience in property rehabilitation.
How to calculate ARV
You can calculate the subject property’s ARV by looking at comparable properties—“comps”—in the multiple listing service (MLS) that have recently sold. Ideally, you should find three to six comparable properties that sold within the last 90 days. But sometimes you may have to go as far back as six months.
To identify comps, look for properties similar to the subject property based on the following characteristics:
- Condition (upgrades, finishes, features, etc.).
- Age (ideally no more than a five- to 10-year age difference).
- Size (square footage should ideally be within 250 square feet of the subject property).
- Construction and style (Craftsman, wood frame, brick, etc.).
- Location (ideally in the same neighborhood or subdivision, but no further away than a mile).
Rough estimate
A rough estimate of ARV would be the average sale price of comparable properties. For example, let’s say you find four properties in the immediate neighborhood that were renovated and sold in the past 90 days, and they came out to an average price of $175,000. This is your ARV and can be used to determine the likely sale price of the property after repair.
More precise estimate
To get a more precise ARV, you can determine the average per-square-foot price (total sales price divided by the total square feet of the property), then multiply that price by the number of square feet in the subject property.
| Average per-square-foot price of comparable properties |
X | subject property square feet |
= | ARV |
For example, you found four comparable properties with an average price per square foot of $145. The subject property is 1,200 square feet, so your ARV would be $174,000.
70-percent rule
Many investors rely on the 70-percent rule of real estate: Pay only 70% of the property’s ARV minus the cost of repairs. For example, if a home’s ARV is $300,000 and you estimate repairs will cost $30,000, the most you should pay is 70% of $270,000, or $189,000.
Rehab
Be careful not to make excessive upgrades that will exceed the rental income. You want to ensure that the property returns to market value, but you don’t need to make it a dream home.
Up to code
When you rehab a home, you first need to make any updates required to bring it up to code and ensure it’s safe to live in. Below is information about the State of Wisconsin Uniform Dwelling Code:
- Brochure: Information on Wisconsin’s Uniform Dwelling Code. (Department of Safety and Professional Services)
- Code: Wisconsin State Legislature website.
Note: Your county or municipality may have further requirements.
Adding value
Next, identify the types of improvements that will truly increase value. These renovations typically include updating the kitchen and bathroom, improving curb appeal, and installing energy-efficient windows, appliances, and other features.
In its 2022 Remodeling Impact Report, the National Association of Realtors (NAR) lists the following “Cost Recovery On Interior Projects”:
| Indoor Project | Cost Recovery |
|---|---|
| Hardwood flooring refinish | 147% |
| New wood flooring | 118% |
| Insulation upgrade | 100% |
| Basement conversion to living area | 86% |
| Closet renovation | 83% |
| Attic conversion to living area | 75% |
| Complete kitchen renovation | 75% |
| Bathroom renovation | 71% |
| Kitchen upgrade | 67% |
| Add new bathroom | 63% |
| Add new primary bedroom suite | 56% |
| Source: 2022 Remodeling Impact Report, National Association of REALTORS® | |
In its 2023 Remodeling Impact Report: Outdoor Features, NAR lists the following “Cost Recovery On Outdoor Remodeling Projects”:
| Outdoor Project | Cost Recovery |
| Standard lawn care service | 217% |
| Landscape maintenance | 104% |
| Overall landscape upgrade | 100% |
| Outdoor kitchen | 100% |
| New patio | 95% |
| New wood deck | 89% |
| Tree care | 87% |
| Irrigation system installation | 83% |
| Landscape lighting | 59% |
| Fire feature | 56% |
| In-ground pool addition | 56% |
| Source: 2023 Remodeling Impact Report: Outdoor Features, National Association of REALTORS® | |
Before you begin, make sure that the repairs are a defined part of your investment goal. This will help you get a return on your investment.
Lastly, consider if you will be doing the work yourself or hiring a contractor. This will add costs but will improve quality. Also, building a good relationship with a contractor can enhance future investments.
Rent
The idea is to set a monthly price that will cover your mortgage payment and provide added income.
Decide if you will manage the rental property or use a management company. You can save money by handling all the repairs and upkeep yourself. But it is a substantial commitment that often comes with unexpected complications.
Find the perfect tenant(s)
When searching for tenants, there are certain qualities that will make your life easier. Make sure to find tenants with:
- Reliable employment. Ideally, this person has had the same job, or at least has worked in the same field, for many years.
- A record of on-time payments.
- A good credit report.
- A clear criminal record.
- No history of evictions.
- Strong references.
Refinance
Once you have a solid renter in place, it becomes a waiting game while you build up your equity in the property. That’s because BRRRR focuses specifically on cash-out refinancing, which allows you to tap your home’s equity to withdraw cash for any purpose.
A cash-out refinance offers additional advantages, such as favorable interest rates compared to other sources of capital, tax benefits, and control over your financial timeline.
Lender requirements vary, but the following conditions for borrowers are common:
- A “seasoning period” for your original loan of six months to a year prior to approval of a cash-out refinance.
- A minimum credit score (typically around 620 for a cash-out refinance).
- A maximum debt-to-income ratio (usually around 50% or less).
- An appraisal.
- Possibly additional fees, including closing costs, that you’ll need to pay to complete the loan.
Also, because it is not your primary residence, you will likely only be able to finance a portion of the property’s total value.
Repeat
This last step is the one that makes BRRRR so appealing — and potentially lucrative. With the cash from your refinance, you invest in a new property and start the whole process over again. Hypothetically, investors can repeat the process over and over, making money on each new property continuously.
BRRRR method example
Now that you know how BRRRR is supposed to work in theory, let’s walk through a more solid example.
You’re interested in buying a house with a calculated ARV of $300,000.
A walkthrough with a contractor reveals some fairly new systems in place, but the property itself is in poor condition. You estimate that you can invest $30,000 in materials and labor for repairs and upgrades.
Subtracting the $30,000 from the ARV leaves $270,000. Following the 70-percent rule, that gives you a budget of $189,000. This is the amount of your hard money loan and the amount you offer the sellers.
Your offer is accepted. The owners couldn’t make all the necessary repairs, so it worked out well for them, too.
Your loan ends up with a payment of around $1,030 per month. After rehabilitations are complete, you rent the property for $2,000 per month.
This provides a healthy cash flow that will be sustainable with the higher refinance amount. (Most banks will want you to continue to cash flow after the refinance stage, as well as before it.)
After about a year, you refinance your mortgage for 80% of the value of the rehabbed property. As you expected, the property’s value is now $300,000.
So you’ve successfully mortgaged the property for $240,000, repaying the $189,000 you put into it.
And now you have an extra $51,000 in cash to invest in the next property (along with whatever cash from your pocket you put into the first one).
As long as the tenants’ rent covers your mortgage and expenses, you’ve gained a consistent source of income.
Pros and cons of BRRRR investing
Pros
- Your hard money lender considers the property’s ARV and your experience—not your credit and income—when approving a loan.
- You earn passive income: BRRRR investors can create a system that allows them to make passive income, either as an additional revenue stream or to live on.
- You increase your rental portfolio.
- You build equity: Buying and holding on to multiple properties means your equity will keep going up.
- It’s repeatable: Unlike flipping a house, the BRRRR method isn’t one-and-done—you can keep repeating the strategy and build wealth exponentially as you go.
Cons
- Rehab can be expensive and time-consuming: Quality renovations usually do not come cheap, or quick. And depending on the extent of repairs needed, you may need to take out a rehab loan.
- It takes time to make a profit: BRRRR is a slow and steady kind of strategy. You have to put in work and time before you start making money.
- Being a landlord is a lot of work: Finding and managing renters can be difficult. And the more you repeat the process, the more tenants you will have.
- Financial risk: There are a lot of educated guesses in BRRRR. Whether you estimate a home’s post-rehab value incorrectly, overestimate the amount of rent you can charge, or underestimate the renovation budget, there is always a chance you could lose money.
BRRRR method: conclusion
The BRRRR method can be a clever way to build capital for a rental portfolio in a relatively short time frame, but it’s definitely not a get-rich-quick situation. You’ll need to commit a lot of thought and energy to the property you choose and what it will become.
But if you’re good at planning ahead, and you’ve got ample experience in home improvement—or even construction—your very first BRRRR can open up a world of possibilities. Just remember that you absolutely must stick to the budget and choose good renters to keep the cycle alive. No banker will refinance a rental property that can’t pay for itself.
Before you decide to jump into BRRRR real estate investing, research thoroughly and talk to other people who have done it. While BRRRR can be very lucrative, novice investors can easily get in over their heads.
As an investor, you are sure to have some difficulties and missteps during your first BRRRR cycle. But you can apply those lessons learned and newly acquired wisdom to refining your process during your next cycles.
When you’re ready to explore your first BRRRR investment, contact Black Brook Capital. As experienced hard money lenders, we will walk you through every step of the process.
Note on LLCs
Most reputable hard money lenders do business with companies, not individuals. Fortunately, the State of Wisconsin One Stop Business Portal guides you through the process of forming a limited liability company (LLC). The online LLC filing fee is $131 (non-refundable), which includes a $1 portal fee.
For more information
Watch The “Buy, Rehab, Rent, Refinance, Repeat” (BRRRR) Method Made Simple Apr 25, 2019 video from BiggerPockets.
