Your Complete Guide to Using the BRRRR Method in Real Estate Investing Roger Odoardi Reviewed by: Jason Caruso If you have goals of investing in real estate, the cost of entry can often seem like a barrier — especially if your savings aren’t where you’d like them to be. The good news is that you have options, even if you aren’t in a position to purchase a turnkey property. One way to invest within your means is to use the BRRRR method, a strategy that focuses on buying homes that need some extra work for the lowest possible price before fixing them up, renting them out and capitalizing on the equity you build to ultimately purchase more investment properties. Could the BRRRR method be your ticket to reaching your real estate goals? Read on to find out everything you need to know before getting started, including an in-depth look at how it works, who should consider using it, tips for success and much more. What Is the BRRRR Method? As previously mentioned, the BRRRR method is a great way for aspiring real estate investors to get started, as it enables people to grow their portfolios while putting relatively low strain on their personal finances. The term itself is an acronym that stands for: Buy, Rehab, Rent, Refinance, Repeat — and, as it suggests, the ultimate goal is to gain rental properties that both generate passive income and enable owners to leverage equity to obtain more real estate. Understanding the BRRRR Strategy: The 5 Steps Explained To fully understand how BRRRR investing works, let’s take a closer look at each step in the process: Step 1: Buy To set the cycle in motion, the first thing you need to do as an investor is to purchase property. But not just any property — for BRRRR to work to your advantage, limit your search to fixer-uppers or homes that need a little extra work. Since the price you pay for your property will have a direct impact on your return on investment (ROI), the key to this step is to purchase it for as little as possible. Not only do you have the purchase price to consider, but also the renovation budget, which is why it’s important to keep the scope of renovations in mind when settling on a home. Step 2: Rehab Next, it’s time to break out the power tools, paint and rollers — or call in a contractor if you aren’t confident in your home improvement abilities. When it comes to renovations and repairs, you should focus on two main objectives: First, making the property suitable (and safe) for future tenants through any necessary structural repairs. And second, identifying improvements that will add value to the property, such as kitchen and bathroom remodels or upgrading appliances. To have the best chance at a high appraisal, it’s crucial to prioritize repairs and updates that represent the greatest opportunity to increase your ROI. Step 3: Rent “Unoccupied units” are two of a landlord’s least favorite words. To avoid the loss of rental income that comes with vacancies, it’s crucial to find tenants who can move into your property shortly after renovations are complete. Consider listing your rental while the finishing touches are being made to the unit(s), that way you’ll have a better chance of getting tenants lined up in advance. As you work out the details of your listing, remember to set monthly rent prices at a level that’s fair, but high enough to generate positive cash flow. Another reason to find renters as quickly as possible? You may not be approved for refinancing without them. Step 4: Refinance For this step in the BRRRR method, investors typically pursue cash-out refinancing. This type of home loan is the preferred choice as it enables borrowers to convert the equity in their properties to cash. This doesn’t mean you’re limited to only this option; taking out a new rate and term mortgage, second mortgage or hard money loan are all viable alternatives. With all home loans, there are certain requirements you’ll need to fulfill in order to qualify. Depending on which you choose, these can include (but aren’t limited to) seasoning periods, minimum credit score, maximum debt-to-income ratio, minimum amount of equity in your property or appraisals. Step 5: Repeat To repeat the process, take the cash (if you’ve chosen a cash-out refinance) or other financing you secured in the previous step and start the whole process over again by purchasing a new rehab project. As with any new experience, it’s good practice to use what you learned the first time around to inform your future decisions. The BRRRR Method in Action When you put all five steps together, the overall process looks something like this: You buy a run-down, two-family home for $100,000 and finance the purchase with a $20,000 down payment and traditional mortgage. You also set a renovation budget of $50,000. Then, over the course of a few months to a year (depending on the extent of the required work), you rehab the property by making the renovations needed to make each unit liveable and appealing to future tenants. After running the numbers (while keeping the value of your property and market rates in mind), you determine that you can rent each unit for $1,650 a month. Then, you find tenants to move in and begin earning passive rental income. Once enough time has passed and you’ve built up the required amount of equity in your property (usually at least 20%), you can begin to explore refinancing options. After weighing your options, you choose to get a cash-out refinance. The seasoning period for cash-out loans can vary between lenders and mortgages and can be anywhere from six months to two years. For our example, we’ll say one year has passed from your tenants’ move-in date. In this time, you’ve been able to pay off $39,600 of your original mortgage, meaning that you now have $59,600 of equity in your property. Since most cash-out loans are capped at 80% loan-to-value (LTV) ratio, this means that you can potentially access up to $47,680 through refinancing. Finally, you use the cash you receive to put toward the purchase of a new property to ultimately increase the amount of rental income you’ll earn in the future. Who Should Use the BRRRR Method? Now that you know what the BRRRR method is and have a good idea about how it works, the question remains: Is it the right path for you? If the goals of the strategy align with your real estate investment aspirations, it might be. Additionally, those who are best suited to BRRRR are: Looking to earn passive income while building their real estate portfolios at the same time Comfortable with taking on some extra risk to get the benefits of a higher reward Prepared to do research — BRRRR requires determining whether certain properties are worth the investment, shopping for lenders, knowing rental market trends and more On the other hand, BRRRR may not be the best choice if you aren’t ready or willing to take on potentially lengthy and involved renovations or if you aren’t interested in becoming a landlord. Pros and Cons of the BRRRR Method Still not sure if this is the right path forward? Let’s take a look at some of the BRRRR method’s benefits. Pros include: The potential for high ROI An opportunity to build equity The ability to grow your real estate portfolio The possibility of achieving economies of scale However, in addition to these benefits, there are also potential drawbacks to BRRRR. Cons include: Loans can be expensive and a potential deterrent for those who want to limit their debts Renovations can be difficult and oftentimes exceed their original scope Long waits during the rehab phase and seasoning period Lower than expected appraisals on rehabbed properties Whether or not the benefits outweigh the drawbacks comes down to a number of factors that can vary between individual investors. When making your decision, it’s important to keep your finances, goals and comfort levels in mind. 11 Tips for Success To ensure you get off to the best possible start with BRRRR investing, we’ve compiled our top tips for each step in the process. For the Buy Phase 1. Before you purchase a property, be sure to calculate the after-repair value (ARV). This term refers to the new value of the property after renovations. Calculating ARV is simple — just add the purchase price to the value added through rehab. Remember, added value isn’t the same as the amount of money you spend on improvements. Instead, it refers to the perceived worth added to the property as a result of the repairs you make. 2. Always follow the 70% rule when determining how much to offer for the property. In order to maximize your ROI, you should never pay more for a home than 70% of the ARV, minus the cost of repairs. 3. Calculate the cash-on-cash return you expect to receive from the property. Also known as “cash yield,” this figure is a comparison of the annual (pre-tax) cash flow your property generates to the initial amount of cash invested. Ideally, you want this number to be at least 10%. For the Rehab Phase 4. Be honest with yourself when determining whether to do repairs yourself or hire a contractor. As a landlord, it’s your responsibility to provide your tenants with a safe place to live, which is why it’s crucial for the renovations you make to comply with all building codes. If you have extensive experience with home improvement projects, then it may make sense to take on the work yourself. If not, hiring a professional contractor is the safest way to move forward. For the Rent Phase 5. Make sure you take on reliable, stable tenants. Lenders want proof that your property has tenants, so rental history will factor into your refinancing prospects. That’s why it’s crucial to find good tenants who are capable of making the monthly rent payments. 6. Decide whether you’re prepared to take on the management of the property yourself. If performing the duties associated with being a landlord — fulfilling maintenance requests, finding new tenants when current ones move out, overseeing evictions if necessary — aren’t appealing, then you may want to consider outsourcing those responsibilities to a management company. 7. Create a thorough lease agreement. The lease is the legally binding contract that spells out the terms of tenancy, including tenant and landlord responsibilities, rental amount and rules that occupants must abide by. An air-tight lease agreement will help protect you in the event of a dispute. If you need further guidance, it may be wise to have an attorney review your document before passing it along to your tenants. For the Refinance Phase 8. Always shop around to find the best rates. Chances are, the first terms you’re offered won’t be your best option. As you’re looking for a lender, consider all types of financial institutions, from national banking chains to local credit unions. Then, choose the one with the most favorable interest rates and other terms. 9. Spend time figuring out what type of refinancing works best for your situation. While an ideal option for some, a cash-out refinance may not be the best solution for you. Explore different types of refinancing to determine which one best aligns with your financial goals and comfort level. For the Repeat Phase 10. Team up with a local real estate agent who can keep you updated on the most recent listings. By establishing a relationship with an agent, you not only have a partner who knows the specifics of what types of properties you’re looking for, but you may even be able to see certain properties before they officially appear on the multiple listing service (MLS) database. 11. Learn from your experience the first time around. One of the best ways to learn is through practical experience. Take what you learned from the previous four steps and use those lessons moving forward. BRRRR Method Alternatives If, after weighing your options, you determine that the BRRRR method isn’t for you, that’s alright. It doesn’t mean that your investment goals are unattainable. There are several other ways to generate income through real estate, including: Purchasing move-in-ready rental property using a traditional mortgage Flipping properties Investing in a single property in good condition that only needs minimal changes before being rented out BRRRR Strategy FAQs Q: How much can I make with the BRRRR method? A: There’s no limit to the income you can generate through BRRRR. The more properties you acquire, the higher your rental income will be. Q: What is a seasoning period? A: A seasoning period is the amount of time homeowners must wait before applying for refinancing. The period starts after purchase and generally lasts anywhere from six months to a few years, depending on the lender and other factors. In other words, and in most cases, your mortgage must be at least six months old before you qualify for refinancing. Q: How long does the BRRR method take to complete? A: The amount of time it takes to complete the process depends on a number of factors. Most significantly, the time it takes to complete the rehab phase, how quickly you can find tenants, the length of your seasoning period and how long you need to wait for your refinancing application to go through. Q: How much money do I need to buy my first property as part of the BRRRR method? A: This figure varies, and depends on the cost of the property you purchase as well as your budget for renovations. We recommend having at least $50,000 in savings to get started. Ready to Start Your BRRRR Journey? At Blue Water Mortgage, our experienced team has the knowledge and ability to help you meet your real estate investing goals. We utilize a transparent approach to assess your current financial status, understand what you hope to achieve and identify the right refinancing option for your unique situation. As independent mortgage brokers, we have the advantage of working with multiple lenders to shop around and find you the most competitive rates. You will benefit from our expertise and advocacy on your behalf, as well as our thorough understanding of the BRRRR process. Plus, you’ll have peace of mind knowing that we are available 24/7 via phone to address any concerns or questions you might have. To speak with one of our mortgage specialists today, contact us here. We are excited to start a conversation about how we can offer a solution to meet your needs! Or, download a copy of our free eBook, 105 Mortgage FAQs: A Guide for First Time Buyers & Experienced Investors, to get the answers to all your mortgage questions. Roger Odoardi Roger is an owner and licensed Loan Officer at Blue Water Mortgage. He graduated from the University of New Hampshire’s Whittemore School of Business and has been a leader in the mortgage industry for over 20 years. Roger has personally originated over 2500 residential loans and is considered to be in the top 1% of NH Loan Officers by leading national lender United Wholesale Mortgage.