This post is going to be a little bit long—but I want to give you a real life case study of a deal I recently did—and show exactly how I made $40,000 on this investment. Here on BiggerPockets (especially on the weekly webinars and on the BiggerPockets Podcast), I talk a lot about the BRRRR strategy and how powerful it can be for investors—especially those without a lot of money to put into deals. For those unaware, BRRRR is an acronym for: Buy Rehab Rent Refinance Repeat Therefore, the rest of this blog post is going to divide itself up into those categories, so you can see each part below. I’d also encourage you to ask as many questions as you’d like in the comment section below, and I’ll do my best to explain anything in further detail! Finally, while case studies can be helpful, you are not going to be able to perfectly copy what I did. Every property is unique, every location is unique, and your skills are unique. Therefore, throughout this case study, I step aside and offer you some tips based on my story—things that you can start doing immediately in your own business. Buy “I found a great deal.” This is, ideally, how every BRRRR case study should begin—with a great deal. If you don’t buy a “great deal” at the beginning, nearly every other part of the BRRRR strategy will be difficult or impossible—thus unprofitable. The foundation of a BRRRR investment is a great deal; never settle for less. So, here’s how I found this great deal. It was in early spring of 2015, and in typical fashion, I was checking the latest email to come from my real estate agent with new listings in my area. This property immediately stood out to me because it was located in the town on Montesano, WA and was listed below $100,000, which is unusual. Most properties in this town sell between $130,000 and $200,000—so my interest was immediately piqued. Investor Tip: Talk to your real estate agent and have them set you up with automatic email alerts for properties that meet your criteria. If your agent can't do this, find an agent who can (and remind your former agent that we live in the 21st century!). For example, I have an automatic email sent anytime a property under $100,000 goes on the market in my town of Montesano. In a competitive market, it is often the fastest investor who proves to be the most successful. Of course, just because a property is cheap does not mean it’s a good deal; usually, it means there is something really wrong with the house. However, every once in a while, you stumble across a true diamond in the rough, which this property proved to be. After looking at the photos and description in the email, I ran some preliminary numbers. At the time, I thought this house was worth around $135,000 if fully fixed up. The home didn’t appear to need a ton of work (see photos below), but it wasn’t without it’s own set of challenges. Related: How I Bought a Fixer-Upper Fourplex for $1 Down: A BRRRR Case Study Among the repairs needed were: New paint inside and outside New windows throughout New flooring throughout New or Painted cabinets New bathroom shower (it was cracked) New appliances (there were none) A new garage door New exterior doors and patio door Some drywall repairs General landscaping My original budget was $30,000 to complete all these items, and I planned on doing none of the work myself—I would hire it all out. But first, I needed to finance this property. As I mentioned earlier, when doing a BRRRR property, there are actually two different financing methods involved. The initial purchase The refinance Right now, we’re going to focus on #1—the initial purchase. Now, I don't generally keep a lot of cash around, but if I did, I might have just used my own cash to buy this property. Instead, I needed to obtain a loan. But I couldn't just go to a local bank and ask for a mortgage, due to the condition of the home. Most banks do not like to lend on properties in "unlivable condition." And even if I wanted to just go to bank, and even if the home could have passed the bank’s “livable test,” I would have been faced with putting down 20% AND coming up with all the repair money out-of-pocket. Therefore, my initial cash outlay COULD have looked like this: Purchase Price: $70,000 Loan Down Payment: $14,000 Closing Costs: $2,000 Repairs: $30,000 Total Potential Cash Outlay: $46,000 Once again, maybe you have this money lying around, but when I purchased this home, I didn’t. So I decided to use “private money.” Private money is what we call funding from individuals with whom you have a personal relationship. It differs from hard money in that private money lenders are typically just normal people who are looking for a good return—not companies who lend money for a business. In this case, I called up “Jerry” and discussed the deal with him. (Name has been changed to protect him from 500 BiggerPockets members slamming him for funding!) Months earlier, Jerry reached out to me on BiggerPockets. He was a regular user of the BiggerPockets Forums, where he had read numerous posts I had made. We initially built a relationship via the BiggerPockets Private Message System, discussing our investing goals and strategies. Later, we spoke on the phone several times, and Jerry mentioned that he would be interested in private lending on a deal some day. So, when this BRRRR deal came up on the market, I called up Jerry and told him about the deal and what I was looking for. Because I had run the numbers on the BiggerPockets Rental Property Calculator, I emailed him a link to the PDF report I had generated that showed all the details. (At the time, the BiggerPockets BRRRR Calculator did not exist, so I used the Rental Property Calculator. Today I use the BRRRR Calculator instead for any potential BRRRR property. Also, the reports generated from these calculators were designed to show a lender/partner/spouse all the details about the deal. If you haven’t tried out the calculators, check it out today.) Back to the story. Jerry agreed to fund the deal at 12% interest with no points (a point is a fee equal to 1% of the loan amount). I would make interest-only payments to him. Jerry agreed to fund $83,000. In other words, Jerry's loan would cover the entire purchase price ($70,000), plus the closing costs ($2,000), plus another $11,000 toward the rehab costs. That’s right: After closing on the deal, I left with a check for $11,000. Sure, that means I would need to come up with the rest of the rehab money out-of-pocket (about $19,000 in total), but I had this money. Had I not had $19,000, I could have done a number of different strategies to fund this, such as: Using credit cards (not a fan, but I’ve done it) Getting a second mortgage from another private lender Bringing in a partner to fund the $19,000 and splitting the deal with them at the end Using a personal loan from the bank Obtaining a Home Equity Loan or Line of Credit from the bank Getting a business line of credit from the bank Negotiating stronger and getting Jerry to fund the entire thing—maybe for a higher interest rate The point is, don’t let money stop you. When you have a good deal, you have options. If you don’t have options, you probably don’t have a very good deal. Investor Tip: Let’s take a minute here to talk about funding. A lot of newbies struggle with getting the funding for a deal, whether it’s a rental, flip, BRRRR, or something else. I know some of you reading this just saw that I put $19,000 into the deal and scoffed, saying, “Sure, must be nice to have $19,000. But I’m broke. So I’m going to go back to watching ‘Two Broke Girls’ and painting my nails.” But here’s the thing: Are you going to always find a private lender to fund 100 percent of your deal plus a sizable chunk of the repairs? Maybe, maybe not. Every deal is different. But if you find good deals, there are always ways to finance deals. That’s what my entire book, The Book on Investing in Real Estate with No (and Low) Money Down is all about. The more strategies you understand for creative finance, the more deals you can do. It’s that simple. So read up, son! OK, after this, the story is pretty boring until closing. The title company handled all the paperwork, I had to get insurance, and we closed on schedule. So, let’s move onto the next segment in the “BRRRR” strategy—the rehab. Rehab “He stole $5,000 from us.” Those were the words I was too scared to say to myself, to my wife, and even say in my own head—but I knew it was true. The very first contractor I hired to do some of the rehab was not returning phone calls, was not coming back to the house, and was, in fact, heading to Vegas (we anonymously stalked his Facebook and watched him spend our money). But I’m a little ahead of myself, so let me back up and tell you how this came about. All my normal contractors were booked up or otherwise unavailable, so I needed to find someone new. Rather than following the advice I generally give people (ask the Pro desk at Home Depot, get referrals from other investors, etc.), I decided to go the “easy route” and place an ad on Craigslist. I received several responses to my ad, but two stood out—Ryan and Richard. I called Ryan first and was instantly impressed. He spoke clearly, said all the right things, and had an opening for the next month, so the timing was perfect. I met Ryan at the house, and we walked through together. I asked him to give me a bid on doing all the windows, the painting, and some other minor work. He gave me a number of around $10,000 and asked for one half down for the cost of the windows. I said “sure” and wrote him a check for $5,000. After a few days of him not starting, I started getting nervous. I just paid a guy—whom I didn’t know—$5,000. “Nah,” I thought, “I’m just being paranoid.” So I texted him to find out how things were going. “Things are great! I’m just wrapping up another job, but I’ll be there soon,” he texted back. “Windows have been ordered, they will be here next week.” But next week the windows didn’t come—and neither did Ryan. After another week of excuses (“The windows were delayed, but they’ve been shipped now”) and still no Ryan and no windows. So, just to put my paranoid mind at ease, I drove to the lumber store where Ryan purchased the windows. But rather than being reassured that all was OK, my worst suspicions were confirmed. No window order had ever been made. And that’s when Ryan stopped communicating. At that point, I decided to do some research on Ryan. First, I discovered that Ryan was NOT licensed and bonded, despite what his hat, business card, and truck said. His license had been revoked a year earlier. A five-minute Google search could have told me that before he started, but I was in too big of a hurry so I just trusted. Another thing a Google search would have told me was that I was not the first person Ryan stole from. Several contractor review websites online listed eerily similar stories to mine from the same company. Ryan was a professional con man. I’m just thankful I only lost $5,000. Others had it much worse. I was out $5,000 and almost a month behind schedule, so it was time to get serious. So I called up Richard, the second contractor who had responded to my Craigslist ad. This time, I vowed not to pay anything up front. I would cover all the material purchases myself, and I would create a DETAILED scope of work on exactly what needed to be done and when someone would get paid. This time, the story turned out much differently. After verifying that Richard was, indeed, licensed and bonded, I hired him to finish the project. And he started right away, working diligently on the project five to six days a week. Of course, nothing is ever perfect. In this case, Richard preferred to work alone. He had no employees, no subcontractors, no grunt help. He did everything. While his work was fantastic, the time it took was longer than I would have liked, and Richard spent the next 80 days or so finishing the project. At the end of the day, the house looked amazing. Related: How We Got a Million-Dollar Property Portfolio for (Almost) Free I actually ended up spending almost exactly $30,000 fixing up this house with Richard, including holding costs, so with the $5,000 that was stolen from me, I spent about $35,000 on the rehab phase. Investor Tip: In the past several years, because of this experience, I changed a lot about how I hire contractors. In fact, I continue to learn and adapt this vital area of my business. But to summarize a few things I now do differently that would have made a big difference: Create a DETAILED scope-of-work before looking for a contractor. Know exactly what you want, and get the contractors to bid that. Only hire contractors who you get from referrals—or at least get numerous referrals before hiring anyone. And check their license/bond/insurance. Don’t let contractors work “by the hour.” Get everything in a bid, so you can keep better track of your expenses. Don't pay anything up front to a new contractor. If they insist it's for materials, pay for the materials. Once you build up trust, you can hand over money. For more of my contractor tips, see "The Ultimate Guide to Finding an Incredible Contractor” and “8 Simple Tips for Managing Contractors Without Losing Your Mind.” Before After Rent In my experience, weird houses attract weird people; the opposite is also true: Awesome houses attract awesome tenants. Therefore, one of my favorite things about the BRRRR strategy is the quality of tenant the home attracts. Because the house has been rehabbed, it can demand higher rent and better tenants. In this case, we found a family before the property was even finished. Through word of mouth, this family heard we had a vacant house being remodeled and jumped on it. When they called me, I wasn’t even sure how much it should rent for, so I just took a guess and said, “Rent will be $995.00 per month.” After all, it had been four months since I had last “run the numbers” on the rental, and I assumed that rents had not climbed significantly. The new tenants were ecstatic at the news of $995 and agreed immediately. So although it took nearly four months, from beginning to end, to rehab the property, the new family (a local church pastor and his family) moved in the day after the rehab was finished. Of course, after telling the tenants $995 for rent, I decided to just double check my numbers and I was SHOCKED to see that I was way off. Apparently, the rental market had heated up so much and vacant properties were so hard to find, I could have likely rented that property for closer to $1,400 per month. Of course, I wasn’t going to go back on my word—especially to a church pastor—so we signed a one-year least for $995 per month with a $995 security deposit. At this point, keep in mind, I’m still losing money. Let’s do the math real quick: Rental Income: $995.00 Loan Payment: $830.00 ($83,000, 12% interest-only payments) Taxes: $150/month Insurance: $50/month Total Fixed Expenses: $1,030.00 per month. Base Cash Flow: $-35.00 per month. Of course, that wasn’t all. As any landlord knows, there are more expenses than just the “fixed” monthly expenses I outlined above. Although the tenant paid for his own utilities, I still have to pay for things like repairs, capital expenditures, management, etc. Which brings me to another thing I love about the BRRRR strategy: Because the house was totally rehabbed, other than a few small things that were forgotten during the rehab and discovered immediately (a couple light switch covers, some trim that wasn’t nailed good enough, etc.), we had no major repairs while the tenant lived in the home. Now, I know what you are thinking: Why would someone buy a rental property to LOSE money each month? Well, remember, the reason I’m losing money is because I’m paying 12% interest on the money. I know that I had equity in the property, and I know I will begin to cash flow once I get the property refinanced. This brings us to the next part of the BRRRR strategy, the refinance. Investor Tip: For this property, I decided to manage myself. While you don’t have to manage yourself (there are professional management companies out there), you can make a decent amount of extra cash flow by doing so. The key, however, is learning how to manage properties. If you don’t know what you are doing, tenants will walk all over you and/or you’ll end up with a trashed house and possible eviction. That’s not good for building wealth. So, if you plan to manage yourself, only do so if you learn how. Read blog posts on managing properties (like “How to Be a Landlord: Top 12 Tips for Success“) or pick up a book on managing rental (like The Book on Managing Rental Properties, which I wrote alongside my wife.) Related: How I Bought, Rehabbed, Rented and Refinanced 14 Properties at Once Refinance Now, some of you might be wondering: If you are losing money every month by holding the property with the private money loan, why not just refinance right away? Good question, and here’s the easy answer: seasoning. No, not like “steak seasoning.” A properly-cooked steak doesn’t need seasoning. The seasoning I'm referring to is the time period that the bank requires before they will refinance a loan. Typically, banks want the property to "season" between six and twelve months after a title change. In other words, they don't want to let you refinance right away. Why? I have no idea. I suppose it’s to limit the possibility of 2008 rearing its ugly head again. (Caveat: It is probably possible to refinance before six months, but the bank will only be able to use the “purchase price” of the property, rather than the new value. We’ll talk about why it’s important to have the latter, not the former, in a moment.) Regardless, seasoning is a real thing, and it sucks, but we deal with it. When I first bought the property, I was told by several lenders that the seasoning requirement was six months, but after six months of seasoning, I was told “Nope, the rules changed, and now it’s 12.” I don’t know if I buy “the rules changed”—I’m guessing they didn’t understand the rules to begin with (when they told me “six”) or they were incorrect on the 12—but either way, I waited 12 months and then obtained the refinance. As with all refinances, the bank wants to see a lot of information about me and my personal finances, such as: Credit report Loan application Personal tax returns for two years Business tax returns for two years Profit/loss statements for all my properties My favorite kind of breakfast cereal (Cinnamon Toast Crunch) My underwear color (grey?) My IQ The names of my still unborn (and “un-conceived”) children And whatever else they can demand. It truly is a frustrating experience, and someday I’ll be rich enough to simply tell them to “talk to my people,” but for now, my wife and I have to get all this information together in a nice little packet for the bank. So we did. Now comes the most important part of this BRRRR strategy, something that if we messed up could cause a lot of drama—the after repair value (ARV.) The ARV is simply the fair market value of the property after it’s been fixed up. The reason I say this is the most important part is because if the property does not appraise high enough, I'm going to struggle getting a high enough loan to pay back my private lender (and pay myself back for the money I put into the deal). As is typical with rental property refinances, the bank was only going to let me get a new loan that is 75% of the new, appraised value. So, if the property only appraised for $100,000, they would only give me a new loan of $75,000. Yikes. And this is the biggest danger of the BRRRR strategy, so let’s take a moment to discuss this more in-depth. Investor Tip: Like house flipping, the BRRRR strategy relies heavily on the after repair value (ARV). You need to have some serious equity in the property after you fix it up, or you'll struggle getting the house refinanced. So how do you ensure you get the ARV right? One word: comps. (OK, that's not even a full word. It's short for "comparable," and it basically means "your house is going to be worth what other similar houses have sold for.") The easiest way to get "comps" is to talk to an experienced real estate agent, who can either flat-out tell you the ARV (if you trust them) or they can provide sales data for the area and you can do the math yourself. For more on estimating the ARV, read Chad Carson's awesome post, "The Ultimate Guide to Quickly Estimating a Property’s ARV” here on BiggerPockets. So, back to the story. At this point, I bought the property for $70,000, and I put $35,000 of repairs (including holding costs while the property sat empty) into the property. I also had a few thousand dollars in closing costs, so my total “in” for the property was $107,000. The appraisal came back at $145,000, thus the bank agreed to fund $108,000âenough to pay back my lender, pay back myself for the money I put in, and cover almost all the closing costs for the new loan. Bingo. However, I actually didn't refinance for $108,000. I decided, instead, to keep most of my money into the deal and just refinance for $90,000. I decided that, by doing so, I would keep my mortgage payment lower and that made sense to me at the time. My new loan was just $650 a month, including taxes and insurance. Investor Tip: What if you can't get the refinance? This is a valid question and serious concern, so let me offer a few thoughts. First, I never go into a BRRRR deal unless I'm relatively sure my credit/income/debt is at an acceptable level to get a refinance. Second, because of the nature of a BRRRR deal, if I did my numbers right, I should be able to sell the property instead if I had to. Essentially, turn the property into a flip. Yes, I might have a tenant that I would have to ask to move after their first year, but it's an option. Another option would be to extend the loan with the private lender. I'm sure Jerry in this deal would have been more-than-pleased to continue receiving his 12%. Finally, if I couldn't qualify for a loan, I could bring in a partner, someone who could help me qualify for the loan. (After all, who would reject the idea of being added to a property that has huge equity already, after the risk of the rehab, where they don't need to bring any money, just good credit and income? It's a no-brainer for any partner.) The point is, there are options IF you buy smart and get some good equity. So, the refinance went through without any major problems, and one year after I bought the home, my private lender Jerry was paid off, allowing me to use his money again. Which brings me to the final “R” of the BRRRR strategy… Repeat After one year of ownership, I refinanced this BRRRR house and paid off my lender, Jerry. Now, because of this, I was able to use his money again for another deal. This is where the final “R” comes in—”repeat.” While this “R” is optional (some people don’t want to do it again), the benefit of the BRRRR strategy is the ability to get your money (and your “short-term lender’s” money) back so you can do it again and again and again, as much as you want. Well, within reason. One of the things that could stop you from doing this over and over for years is the simple fact that most banks have a limit on how many loans you can get. If you are obtaining conventional loans, which are “sold” to Freddie Mac and Fannie Mae (pseudo-government agencies that buy loans so banks can get their money back to re-lend out—kind of like banks are playing the BRRRR game too), you can only have 10 loans in your name. Of course, there are many ways to work around this. For example: You could put 10 in your name and 10 in your spouse’s name. You could use a partner and put the properties in their name. You could use a portfolio lender (a bank that doesn’t sell their loans to Fannie Mae/Freddie Mac). You could use the commercial loan department at the bank (they have different rulesâno limit of 10). Or you could figure something else out creatively. But I’m guessing at this point you don’t have a huge problem with that limit of 10, so let’s move on. Investor Tip: Although at the time of this writing the limit for both Fannie Mae and Freddie Mac loans are 10, it used to be four total loans. Many banks are unaware that this number has risen from four to 10, and many are just stuck with the old rules. So, if a lender tells you the limit is four, find another lender—someone who knows what they are talking about. Want more articles like this? Create an account today to get BiggerPocket's best blog articles delivered to your inbox Sign up for free So, back to the final “R”—repeat. As soon as we finished this project and I paid back Jerry, he was excited to see the project completed successfully, but he also really enjoyed that 12% interest I was paying him. So he said, “If you have another deal, let me know!” Related: How I Made $575k From One Deal In Five Months — And How You Can, Too And within a few weeks, I did. I went under contract on a single family house in a great area that I decided to fix and flip. I used Jerry to fund a flip, and my partner and I cleared $52,000—but that’s a story for another day. What Happened to the BRRRR House? OK, so I titled this post “How I Made $40,000…” but up to this point, I haven’t told you how I made $40,000. So far, you’ve seen me: Buy the property for $70,000 plus $2,000 in closing costs Rehab the property for $35,000 (including holding costs and the $5,000 stolen from me) Rent the property out for $995 a month Refinance the property for $90,000 (but I have $110k into it, total) Repeat the process and use my lender’s money on the next one Now, the final piece of the BRRRR puzzle—and perhaps my favorite aspect of BRRRR investing—is the ability to control when I sell. You see, when you flip a house, you have to sell it right away. You are in a rush, and if you don’t sell fast, you could lose big. When you buy a rental, you typically make money on the looooong haul, and it could take years to see anything. But when you BRRRR, you are put in control. After the refinance, you can sell it whenever you want or whenever it is most advantageous to you. You could wait two years or 20 years. In the meantime, you are paying off the loan slowly, you are getting cash flow, and you own a great property in a great area with great tenants. Not a bad deal to me. Now, after the tenant (the pastor) had lived in the home for 12 months, he let me know he would not be staying. He and his family would be moving out of the area, and suddenly I had a choice: Should I rent the property out at the higher rent that the property could get? Or should I sell? After looking around at the market and talking with my real estate agent, we decided to sell. We spent a few thousand dollars finishing a few things at the property (such as new countertops, something I was reluctant to do when we placed the tenant in the home) and listed the home for $165,000âand received an offer within 24 hours. Two months later, we sold the house, spending about $15,000 on closing costs (mostly real estate agent fees). So the final numbers looked like this: Purchase Price: $70,000 Closing Costs: $2,000 Rehab/Holding Costs: $35,000 Refinance Fees: $3,000 Total In: $110,000.00 Sales Price: $165,000 Minus Closing Costs/Final Repairs: -$15,000 Minus Total In: -$110,000 Total Profit: $40,000.00 In addition, remember I had left nearly $20,000 in the deal, as my refinanced loan was for only $90,000. So I actually walked out of closing with a check for almost $60,000, which I am using TODAY to purchase a flip for all cashâbut that's also a story for another day. Summary So there you have it. Normally, I like to take time to draft up a nice long “summary” at the end of an epic blog post. But I’m tired of writing, and at 5,028 words, you are probably tired of reading. If you made it this far, do me a quick favor: Leave me a comment below. I’m happy to share more info if I can or clarify anything. Besides, comments make me feel good! 😉 Thanks for reading. Now go out and get your next BRRRR deal. Or spend some time with your family, because you’ve been reading this post for WAY too long. Oh, and be sure to sign up for this week’s BiggerPockets Webinar workshop that I’ll be teaching LIVE. It’s going to be awesome. [Editor’s Note: We are republishing this article to help out our newer readers.] Any questions about this strategy? Have you done something similar? Let me know your questions, comments, and stories below!