Understand The BRRRR Method in Real Estate – A Beginner’s Guide

The BRRRR method is a great way for real estate investors to build passive income if they’re willing and able to put in the work. It’s also much better than traditional financing if your goal is to own more than one or two properties. With the BRRRR method, you can recover the largest of your capital out of a project as possible.

You’ve probably heard the “BRRRR” mentioned a lot in the Bigger Pockets community—and for good reason. The BRRRR method represents a real estate investor’s investment cycle, and stands for “buy, rehab, rent, refinance, repeat.” 

Simply put, you buy a discounted, or value-add property, increase its fair market value with renovations and repairs, and refinance the property when it’s at its highest value. Then, you repeat the cycle by recouping your down payment from refinancing to buy another property.

Are you ready to achieve financial freedom?

In this post, we’ll cover everything you need to know about the BRRRR method to help you become a savvy real estate inventor, including:

Feel free to jump down to any section you’d like!

Let’s get started…

Page reviewed by James Dainard, expert panelist on the Bigger Pockets On the Market Podcast, Co-Founder and Managing Principal at Heaton Dainard, and expert real estate investor with over 2,000 doors. James is actively involved in over 3,000 real estate deals and touts over a billion dollars in sales.

The BRRRR Method: How to Get Started Step-by-Step

The BRRRR acronym lays out the step in order:

  • Step 1: Buy
  • Step 2: Rehab
  • Step 3: Rent
  • Step 4: Refinance
  • Step 5: Repeat

Buying a discounted or value-add property is the first step in the process, but it’s not the first action you take. Since this is a beginner’s guide, we’ll make sure you start with the basics. In our guide to flipping houses, we suggest before you buy you should:

  • Know your market: Learn as much as possible about the real estate market in your neighborhood (or the neighborhood you’re investing in). Working with an experienced investor or an investor-friendly real estate agent will help. It is very important to understand the improved value and the loan to value position. Hiring a knowledgeable investor-friendly agent could save you thousands of dollars in the long-run. 
  • Know your skills: If you have general contracting or real estate investment experience, it will come in handy here. If you don’t, that’s okay! No matter your skill level, you need to approach the BRRRR process with a willingness to learn—and prepare to learn a lot
  • Build your power team: Solo investors rarely work alone. Build a power team to outsource work you don’t excel at, like construction or electrical work. You’ll save time and money by having professionals ready to do something right the first time. As you’ll soon see, time and money are finite resources in BRRRR.

Your team should consist of: 

  • Permanent financing mortgage lender to pre qualify you BEFORE you buy
  • Construction financing lender to help with the initial construction plan
  • Investment-minded broker to locate and evaluate the property
  • Dependable contractors to do the repairs and renovations
  • Leasing professionals to help with evaluating rents.  

Once you have your foundation in place, you’re ready to buy.

Step 1: Buy

Your equity position for BRRRR is its after repair value (ARV), minus the property’s current value, initial debt costs, and all other rehab and property ownership-related costs. Here’s how to calculate potential profit on your investment —- including your sweat equity. 

For guidance, apply the 70% rule. The 70% rule states investors shouldn’t pay more than 70% of the ARV minus the cost of repairs. 

For example, let’s say Sung is trying to decide if a distressed property is worth purchasing. Based on the fair market value of comparable houses in the neighborhood, he estimates the ARV is $300,000, and the estimated repair costs (ERC) will be $40,000. Based on the 70% rule:

$300,000 (ARV) X .70 (ARV percentage) = $210,000

$210,000 – $40,000 = $170,000

Based on the 70% rule, Sung shouldn’t buy the property for anything more than $170,000 if its ARV is $300,000.

Since the BRRRR method is most effective when you buy a discounted, neglected, or otherwise undervalued property, a traditional loan may not be your best option. These types of properties usually fail to meet the guidelines that conventional lenders require. We’ll dive deeper into your loan options a little later. 

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Step 2: Rehab

Value-add properties require extensive repairs and renovations or modifications to improve the value. You need to make it structurally sound and aesthetically appealing. 

As investor David Greene, the author of Buy, Rehab, Rent, Refinance, Repeat: The BRRRR Rental Property Investment Strategy Made Simple puts it, there are two questions to consider when rehabbing a rental:

  1. What do you need to do to make your house livable and functional?
  2. What rehab decisions should you make that will add more value than cost?

When deciding what to rehab on the property, evaluate what NEEDS to be replaced for function, safety, and future deferred maintenance. Select the finishes and upgrades based on what the comparable rental units may have. Unless you’re rehabbing for luxury rentals, it’s not worth refinishing a basement or adding skylights and chandeliers. You want to keep your material and labor costs down, especially on projects that add little value. Focus on high-value projects that’ll substantially increase your ARV, including: 

  • Outdated bathrooms
  • Unfinished kitchens
  • Failing roofs
  • Older systems like windows, furnaces, plumbing, electrical.
  • Unkempt landscapes 
  • Adding an extra bedroom or bathroom
  • Finished rentable space.

Step 3: Rent

It’s important to know the market when investing in a rental property. An understanding of what you’ll be able to rent the property for, vacancy rates, and how the neighborhood is trending will help you make informed decisions as you analyze prospective or current deals.

Research comparable homes in your neighborhood to figure out a fair rental price, then begin screening potential tenants. You can find your potential rent by similar comps in the area and the average price per rentable ft. Tools are your friend. Start with a rental estimating calculator to get started. You can always manually verify the insights. 

After you find tenants and get the property rented, you get to enjoy the additional cash flow from the delta from your rental rate minus the mortgage payment and expenses. Rental properties also give you invaluable experience as a real estate investor, so keep that in mind!

Once your tenants settle in, you’re ready to get an appraisal. Give your tenants plenty of notice, and request an interior appraisal. Make sure to send your appraiser a list of all upgrades you completed to increase the value. In addition, it’s beneficial to send the appraiser the comparables you used when underwriting the deal.

What is the 1% rule in BRRRR?

The 1% rule is a simple metric to identify the likelihood of a property’s positive cash flow. Basically, if you can rent a property for 1% of the price you paid for it, it passes the 1% rule. This metric is very important for BRRRR investors looking to keep properties as rental rather than flipping them. 

If you buy a property for $100,000 and you can rent it out for $1,000, it follows the 1% rule. If you buy a property for $200,000 and rent it for $2,000, that follows the rule. 

However, the 1% rule isn’t the be-all end-all rule of BRRRR investments. Think of it as a preliminary screening procedure. There are many other variables to consider when applying the 1% rule, like HOA dues and high property taxes. Also, the more expensive a property is, the less likely it is to conform to the rule. Just because you’re not getting $6,000 in rent for a $600,000 unit doesn’t mean it’s a bad investment. It just means you should dig deeper into the property’s financials to determine if it’s worth investing in. 

Step 4: Refinance

There are two extremely important questions you need to ask every bank.

First, do they offer a cash-out refinance? If they don’t, you should move on. A cash-out refinance lets you convert your home equity into cash, and it’s the money you’ll be using for your next investment. Without a cash-out refinance, your BRRRR turns into a BRRR.

The second question is about their seasoning period. “Seasoning” is how long you must own property before the bank lends on the appraised value, rather than how much you’ve invested. Again, for the BRRRR method to work, you need to borrow on the appraised value. 

Luckily, some banks will do this as soon as your property is rehabbed and rented. However, they usually have a waiting period of six or twelve months. Ask our BiggerPockets community which banks are best to use.

You’ll also need to meet a lender’s minimum requirement when refinancing. These usually include:

  • 620 minimum credit score
  • Maximum debt-to-income (DTI) ratio of 50%
  • Equity in your home
  • Homeownership of the property for a specified amount of time

CTA – Learn about what’s so special about a BRRRR refinance 

Step 5: Repeat

Congratulations! You’ve completed the BRRRR cycle. Now it’s time to take in everything you’ve learned. Think about what worked and what you can improve upon. Then, use the money from your cash-out refinance as a down payment for another distressed home, and expand your real estate portfolio.

BRRRR Method Strategy Pros

The BRRRR method is a real estate investment strategy with many risks and rewards. Here are the most notable benefits:

You don’t need to save a large sum of money to start implementing the BRRRR method. Some investors can land deals with no out-of-pocket costs! How much you need depends largely on rehab costs and your loan’s terms.
Pro tip: Some construction lenders will require you to provide less down with a full pre-qualification from a take-out lender.

Your ROI for real estate investing can be astronomical. For example, let’s say Bailey’s total out-of-pocket costs were $10,000 (her cash-out refinance covered her loan and other expenses), and her yearly net rental income is $3,000. She’s making a 30% cash-on-cash return each year. Also, she’ll enjoy that income perpetually, as long as she has tenants and manages it as a rental property.

The BRRRR real estate investing strategy is scalable. Once you’ve gone through the initial steps, they become easy to replicate—and each time you do, you’ll become that much wiser and (when successful) more financially comfortable. 

Imagine if Bailey expands her real estate business from one investment property to five, each with the same rental income. She’ll be making $15,000 a year from her initial $10,000 investment, and that’s still not including equity gains. Speaking of…

Rental income isn’t the only way to enjoy a high ROI. You’re also building equity—and since you’re rehabbing your property to increase its value—you’re building equity quickly. BRRRR properties are unique in nature. Not only do they give you amazing cash on cash return investments, but they can expedite your net worth every time you close. Based on the 70% principal, every BRRRR will increase your net worth by the 30% equity gain. 

Velocity of money is more than just a cool term. It describes how you can make the same source of capital work for you over and over again. For example, if you buy a property that earns you a 10% return each year, you’ll have to wait ten years before you get your money back to reinvest again. With the BRRRR method, you can buy a property and pull out 100% of the capital you put into it, then immediately buy another property.

That money adds up. Let’s say James pulls out 100% of his cash from each BRRRR deal he makes, and buys a new property every three months for five years. Let’s assume he averages $25,000 in equity and $400 in cash flow for each home he BRRRRs, and increases the rent 5% each year for five years. At the end of five years–-even if none of his then-20 properties appreciates in value—James will have added $500,000 to his net worth (20 houses at $25,000 in equity each) and $13,000 in passive income cash flow (20 houses at $650/mo). Go, James! 

Once you own multiple rental properties, you can achieve economies of scale. Economies of scale are the cost advantages you enjoy when you become an efficient investor. If Bailey owns five properties instead of one, she can reduce her costs by spreading her risk and lowering her average cost per property.

Owning and managing real estate investment properties can be tricky. With the BRRRR approach, you’ll learn by doing so with minimal upfront costs. You’ll get an intimate knowledge of the real estate market, construction and design, and learn how to be a landlord. You’ll also gain valuable experience as a business owner for less money than most startups cost.

Five Steps to Financial Freedom

How do you BRRRR? Buy a property under market value, add value with renovations, rent it out to tenants, complete a cash-out refinance, then use that money to do it all over again. In this book, author and investor David Greene shares the exact systems he used to scale his real estate business from buying two houses per year to buying two houses per month using BRRRR.

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BRRRR Method Strategy Cons

No investment strategy is without risk. All you can do is mitigate that risk as best you can. Here are a few drawbacks of the BRRRR method you should be weary of:

Once you buy, you want to make your property functional and livable ASAP. Hire a general contractor you trust to inspect the property, then consult with an investor-friendly real estate agent before purchasing. You should know:

  • What repairs must be made?
  • Who is making them?
  • How long they’ll take
  • How much they’ll cost

Don’t let the rehab phase become your regret phase. When making your budget, you need to be as thorough as possible. It never hurts to increase your total estimations by 10%, or even 25%, if you’re a newbie. 

Renovations can easily go over budget, take longer than anticipated, and/or lead to more necessary repairs. Be financially prepared for any potential setbacks. When looking at your next BRRRR property, you can mitigate these risks by adding contingencies to the rehab total and add an extra month of hold time for delays.

Get your property appraised after the rehab phase is over. If your initial calculations about your ARV were right, then you’re good to go. However, if your ARV goal is $300,000, but it’s only appraised for $275,000, the $25,000 difference cuts into your net gains. 

It’s for the best if you get through the rehab and rent phases quickly. The faster you can refinance your property and get a conventional loan, the sooner you’ll stop hemorrhaging money.

Pro tip: The benefit of hard money is that you can often put less money down than a conventional lender. On many occasions, they will include the costs of your renovation in your loan.

The BRRRR strategy has at least two waiting periods: 

  • The first period is your rehab phase. It takes time to make the necessary repairs and renovations before you can rent out your property. 
  • The second period is the seasoning period. As a reminder, this is how long you have to wait to get your cash-out refinance approved.

If you have trouble finding tenants, you’ll experience a third waiting period. You want to find tenants quickly, but you also need to be selective. 

Here are a few suggested guidelines for your tenants to meet, including: 

  • Minimum income-to-rent ratio
  • Minimum credit score
  • Positive references
  • Clean background check
  • Job stability and steady income
  • Do they smoke?
  • Do they have a pet?

Once you find the right tenant, your property could generate rental income for years.

If you manage to buy, rehab, and rent your property in just a few months—good for you! 

Unfortunately, most refinancing banks will require you to wait six or even 12 months between the time you buy and when you can refinance. If your short-term loan is shorter than your seasoning period, you could end up in trouble. We recommend a short-term loan for at least 18 months, just in case problems arise. 

Who is the BRRRR method best for?

The BRRRR method isn’t for everyone. BRRRR investors need to devote time to identifying worthwhile properties, rehabbing them, and then serving as a landlord for potentially multiple tenants simultaneously. You also need to have knowledge and experience in real estate and a keen eye when it comes to renovations. If you fail to miscalculate market value, rehab costs, or failure to secure tenants when you need them, you can take a loss. 

If you’re going to BRRRR, we don’t recommend doing it alone. Work with a team of skilled experts who have the time and know-how to make the most of the BRRRR experience. 

 How do you get your money back with BRRRR?

You earn your money back for a BRRRR in the refinancing stage. When you work with a lender who offers cash-out refinancing, you can convert your home equity into cash. 

Since your payday depends on cash-out refinancing, you’ve got to shop around to find your best loan options.

BRRRR Loan Options

If you can fully fund your BRRRR, that’s great! However, most of us don’t have $100,000s of disposable income, especially when you’re new to real estate investing. Luckily, you have plenty of loan options available—and one that usually isn’t. We’ll start with that one first.

Traditional Loans for BRRRR

Traditional loans are bound to Fannie Mae and Freddie Mac’s guidelines. Fannie Mae and Freddie Mac are government-sponsored enterprises that purchase real estate notes from lenders. Traditional lenders want to sell their notes, these are the guidelines they need to follow.

Distressed properties often fail to meet those requirements, and those that don’t often aren’t worth using the BRRRR strategy for. The BRRRR method works best with problematic properties, like those with failing roofs or HVAC systems, because when these issues are repaired, they can substantially increase your ARV. 

Also, traditional loans are slow. They often take a month or longer to close, while short-term loans have fast-tracked approvals. 

Home Equity Line of Credit (HELOC)

If you already own a home or investment property, you can take out HELOC for your startup capital. 

HELOCs act as a second mortgage. They often offer better rates, lower closing costs, and longer repayment periods than most other short-term loans. 

HELOCs are usually used to renovate and repair a home, but you can also use one to rehab an investment property. They take around 10 days to close, and you typically don’t need an appraisal. 

Still, they’re not without risk. If you miscalculate your ARV, it could cost you. Also, read the fine print before taking out a HELOC. Some lenders will charge your prepayment fees if you try paying your HELOC off early. 

Hard Money Loans

Hard money loans are short-term loans you get from individuals or private lenders, instead of banks and credit unions.  

These loans are secured loans that don’t have the rigorous approval process you’ll experience when working with a conventional lender. As such, you can get approved quickly and have cash-in-hand in a matter of days. Hard money typically will finance more than a traditional bank because they factor in the stabilized value rather than the AS-IS value.

Hard money lenders accept tangible assets as collateral, instead of diving deep into financial history. This collateral is often the property you’re buying or another home you own. However, it can be almost another tangible and equivalent value. Just be careful. If you default on a hard money loan, your lender can take ownership of that tangible asset. 

Private Money Loans

Private money lenders are people with extra capital who want to invest with you. They can be pretty much anyone: an angel investor, a family member, a real estate agent, etc. The terms of your private loan are incredibly flexible. Your only true limits are the confines of the law. 

Local Bank Loans

Local banks lack the flexibility of hard money and private loans but have greater flexibility than traditional lenders. These banks will still require a down payment comparable to a conventional loan, but they might also loan you cash to cover rehab costs. They’re worth looking into, at least so you can weigh your options.

Types of BRRRR Properties

You can apply the BRRRR method to most property types, including:

  • Single-family homes
  • Townhouses
  • Condos
  • Apartment units
  • Duplexes, triplexes, or fourplexes

If you’re new to real estate investing, we recommend starting small. Even if you have experience in construction and/or as a real estate agent, real estate investing has a huge learning curve. When something goes wrong (and something inevitably will), it’s best if you make a newbie mistake on a $50,000 condo, rather than a $1,000,000 fourplex. 

After BRRRR becomes second nature, you can start getting more ambitious and rehabbing larger spaces, converting offices into multi-family homes, or even break into commercial real estate! 

Tips for Finding Properties

Here are seven surefire ways to find distressed properties to BRRRR:

  • Multiple Listing Service (MLS): Real estate agents can find distressed properties on the MLS. Usually, real estate agents are the only ones with access to view the house in person. If you’re going the MLS route, work with an investor-friendly agent.
  • Real estate sites: Popular real estate sites like the one you’re reading now – BiggerPockets! Others like Redfin, New Silver, Zillow, and Trulia get their syndicated data from the MLS. Some of these sites specifically list distressed properties, pre-foreclosures, foreclosures, and bank-owned homes.
  • Online marketplaces: You can find distressed properties on sites like Facebook Marketplace and Craigslist.
  • Networking and marketing: Join real estate investment groups to connect with investors, investor-friendly agents, lenders, and everywhere else in the real estate sphere. These people often have an ear to the ground and know what’s going on in the area—or at least what to look for! 
  • Auctions: Many homes up for auction are under foreclosure, need repairs, and may even require you to evict the current tenants. To learn more about foreclosed properties and house auctions, check out Bidding to Buy by Aaron Amuchastegui and David Osborn.
  • Driving for dollars: Don’t overthink it. Drive around up-and-coming neighborhoods or anywhere you believe people are looking to rent. Keep an eye out for homes in foreclosure or boarded up. It’s likely the owner wants to sell the property ASAP. 
  • BiggerPockets Forums: Take advantage of our forums. Connect with other real estate professionals or inquire about properties in your area.

BRRRR Alternatives

The BRRRR strategy isn’t meant for everyone. According to the IRS, rental income is passive, but BRRRR is anything but! Much like house flipping, BRRRR requires you to be active in your investment every step of the way.

If you’re looking to become a more passive investor or want to assume less risk, here are a few alternatives to the BRRRR method:

Traditional Buy and Hold

The traditional method requires a lot less work than BRRRR, because you usually only do one of the R’s: renting your property to tenants. Depending on the condition of your property, you might have to do some rehabbing, but nothing compared to the level of work required when renovating a distressed property. 

Because the property is in great condition, you’ll qualify for a traditional bank loan. Once you do, you can rent it out and use the income to cover your mortgage and other expenses. You’ll grow your portfolio at a slower pace than with the BRRRR method, but it also requires a lot less work. 

Learn even more about buy and hold investing opportunities through the house flipping and house hacking investing strategies.

Turnkey Real Estate

The turnkey strategy is similar to the traditional buy and hold, but with even less work required. Turnkey properties are completely renovated and ready for tenants immediately. Most turnkey investment providers will even select a renter for you, so you can start earning passive income the moment you close the deal.

Turnkey properties are almost as hands-off as you can get, but that’s not always a good thing. You’ll have less control over the appearance, layout, appliances, and other items, which could be an issue if you ever decide to live there. Also, because you’re investing in a property already in premium condition, your ROI will be less than it would with a successful BRRRR.

Equity Crowdfunding

Equity crowdfunding is a viable way for real estate investors to diversify their investments and own several properties while assuming less risk. In real estate crowdfunding, multiple investors pool their funds to buy an investment property. It’s similar to how Kickstarter campaigns operate, except instead of getting a product or service, you’re building equity and reaping tax benefits. 

You can start equity crowdfunding with very little capital. You can start a portfolio with DiversyFund for $500. With Fundrise, all you need is $10!

Read the terms and conditions of your portfolio carefully. Equity crowdfunding investments are subject to fees, and fee structures vary from company to company. Also, some portfolio options don’t let you select which property(s) you invest in. 

Real Estate Investment Trusts (REITs)

REITs are to real estate with mutual funds are to stocks. REITs allow you to invest in real estate assets by purchasing an exchange-traded fund (ETF), a mutual fund, or individual company stock. You then earn a share of the income without having to buy, sell, or manage a property. However, you may not see higher returns or tax benefits associated with property ownership.

BRRRR Resources

The BRRRR method is a tried and true way to grow your real estate portfolio–fast! By mastering the BRRRR cycle, you’ll build wealth, gain real estate investment experience, and even achieve financial independence. All you have to do is buy, rehab, rent, refinance, repeat. 

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How to “Invest on Repeat” with The BRRRR Strategy
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Is BRRRR Investing About to Get Even Better?
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50 Properties in 6 Months Using the Supercharged BRRRR Strategy

Are you ready to jump into the BRRRR method? Check out some of our helpful resources below!