Does the BRRRR Strategy Work? (And Introducing the BRRSR & BRRHR Methods)

by | BiggerPockets.com

Today we’re talking about the BRRRR strategy—a term coined by BiggerPockets meaning “buy, rehab, rent, refinance, repeat.” A lot of you know that I am a contrarian, but I actually agree with this method. I kind of used the BRRRR method back in Australia, but I didn’t do it correctly and it was pretty ugly. I had a lot of debt and it didn’t end up well, but I was able to get out of it. That was one of the first mistakes that I made in my real estate career.

Growing Your Portfolio With the BRRRR Strategy

I think the BRRRR strategy is a great way to grow your portfolio. This is my only word of caution for the BRRRR method: When you buy, rehab, and rent, you really need to make sure that when you refinance and pull out that equity that you still have positive cash flow. Again, before you refinance, make sure that you crunch the numbers and when you pull out that equity that there is enough cash flow covering all of your expenses, especially the mortgage.

Related: Forget BRRRR: Introducing the BARRRR Strategy for Investors

Now, I shot myself in the foot back in Australia, and a lot of people did that here on the West coast when they were buying, rehabbing, renting, refinancing, and pulling out the equity to go into another deal, but they were losing money on their monthly mortgage repayments. I would not bet on that strategy because you are betting that the property will appreciate more in value every single year than what you’re losing on your mortgage repayments. I know the market is hot now and everyone is buying on the East coast and West coast, but it doesn’t last. Eventually, it stops and it goes south just like it did in 2008. So don’t think that the property price is going to continue appreciating even if you’re losing a little bit on your monthly mortgage repayment because you’re still going to have a large capital gain profit as long as you can get into as many deals as possible. I did it, I tried it, and it didn’t end up well. That is kind of why I went down the cash flow path.

When you are crunching numbers on the BRRRR method, be sure to overestimate your expenses and underestimate your income. By overestimating your expenses, you are giving yourself a margin of safety. Something that I do to this day is discount the rent. If I know a property is going to rent for $1,000, I do my numbers at $900. If I know the property management fees are 8 percent, I calculate them as if they were 10 percent. Even if my mortgage is $1,000, even though I don’t have any mortgages, I would still estimate $1,100. Then, when I overestimate on my expenses and the numbers still make sense, I proceed with that particular investment. Guys, please do not get caught with your pants down like I did. Make sure you have positive cash flow after you do that refinance. Then, of course, repeat. By all means, do it five, 10, 15, 20, 100 times because it’s positive. You’re making money. Just make sure you have that margin of safety.

Related: How to Take the BRRRR Strategy to the Next Level with a 198-Unit Apartment Building

BRRSR

An alternative and something I’ve been doing very successfully ever since I moved to the U.S is the BRRSR method. What this means is “buy, rehab, rent, sell, and repeat.” I’ve probably done this around 500 times.

I am happy paying taxes because the more I pay, the more money I’m making. Look, I get to cash out of the deal, I get to use that money, I get to invest it in more transactions, and then I just keep throwing gasoline on the fire. Back in the day, I was doing one deal a month, and now I’m doing 20 deals a month. I’m doing commercial deals and buying multifamilies. I just keep growing because cash is king. The more cash that you have, the more deals that you can do, and the more profit you can make.

BRRHR

Next is buy, rehab, rent, and hold—the BRRHR method. When you have enough capital lying around and you do not want to continue the cycle of either refinancing and repeating the process or selling and repeating the process, you might as well just buy, rehab, rent, and hold instead. At the end of the day, you want that passive income and financial freedom. I think that would beat just buying and holding because you won’t be buying distressed.

Guys, that is pretty much it. The BRRRR method is great and can work in your favor—just make sure you crunch the numbers. And don’t forget the BRRSR method! You heard it here first.

Do you use any of these strategies? Why or why not?

Comment below!

About Author

Engelo Rumora

Engelo Rumora “The Real Estate Dingo” is a successful property investor, motivational speaker and serial entrepreneur that quit school at the age of 14 and played professional soccer at 18. He is also a soon to be published author along with becoming a TV personality in his very own real estate house flipping show. To find out more go to engelorumora.com . Engelo Rumora has been involved in over 400 real estate deals and founded five businesses in Ohio. The most successful is Ohio Cashflow, a company that specializes in providing turnkey properties in several Ohio markets. The newest venture is List’n Sell Realty, a real estate brokerage based in Toledo, Ohio and soon to be known as the #1 discount broker in the country.

12 Comments

  1. Dominick Alfano

    Hey, thanks for posting but maybe I’m missing something here. The BRRRR strategy as I understand it is to both get out of a less than ideal financing situation (e.g. HML or PL with less than desirable terms) and cash out on the work you’ve put in.

    Your concept of BRRSR has you sticking with original acquisition terms or assumes you bought the property with great ones in the first place, until you’re able to sell.

    Your concept of BRRHR is BRRRR but again assumes original acquisition terms are desirable for longevity.

    In my opinion, there is no need for a fancy title to this, you bought with desirable terms or for cash at the very beginning and are capable of sustaining those terms in the mid to long term.

    Again, I could be missing something.

    • Ray J.

      It could definitely be used to get out of unfavorable terms, provided you had unfavorable terms in the beginning.

      But the only thing I’d say you’re missing is the fact that, when starting out with your own cash, there’s a limit to that cash for most of us. That’s why, I think, in the article, he says “When you have enough capital lying around…” for his BRRHR variation. But for BRRRR, as it applies to me (and I’d guess others too), some of us have enough cash to buy Deal 1 and rehab cash. The terms are great (cash), but now we don’t have cash to do another deal. We just have our cash flow from the BRR part of Deal 1. Options could be to keep Deal 1 as-is and get a favorable loan for your next deal, or (third R) get a loan against the property you bought with cash in Deal 1, which is theoretically worth more than what you bought and rehabbed it for, like a flip. If that was your plan from the start, and you ran your numbers right, you should be able to get the same amount of cash back (or more) that you used to buy Deal 1 while still cash flowing after paying the new mortgage and expenses. The last R (Repeat), use the proceeds that you pulled out of the property in Deal 1 and do the same for Deal 2, 3, 4…

      I said all that to say that BRRRR is not used ONLY to cash out of unfavorable terms.

      I think the article is just saying that refinancing isn’t the only way if you aren’t interested in leveraging or holding for long term cash flow, or if you have enough startup capital to just buy enough to create enough cash flow. BRRRR is for people who want to use leverage to acquire a larger portfolio faster than they can afford alone. My plan (at least right now) is to BRRRR, but eventually stop refinancing when I have enough cash flow to buy cash deals fast enough with the profits from all previous deals.

  2. John Murray

    I’m doing the BRRSR on one of my rentals right now. Have to pay recapture but I can hold down my income to avoid capital gains. I’ll make about $75K but have about 500 hours of my time in it before closing in about a month. Great exit strategy.

      • Rick Martinez

        So what length of time to you shoot for on your terms before you need to sell or refi?
        I have a 4plex I’m considering selling in Tulsa but I thought why should I sell so soon. I might as well enjoy the rents at higher cashflow because of only having to make interest only payments.

    • Cora Kemp-Epps

      Hi John,
      I’m a new investor so I just need more clarity on your BRRRSR strategy. First if you’re going to sell the property, why do you rent it? Why not go directly to the sale? Or are you you renting via Lease Options to would-be home owners anyway?? Thank you for sharing. I have been trying to Flip, but with no success so I believe the BRRRR strategy will work better for me.

      • John Murray

        Hi Cora,
        The house I’m selling I have owned for 3 years. I elected to sell because of rapid appreciation and the money and time investment for sell or rent was almost the same. A bit more to sell but I have a bunch of rentals so I’m experimenting with my exit strategy. I have been toying with a few ideas since the tax change of this year. This is fun part of being and entrepreneur, you get to experiment a bunch more than most. Best wishes in wealth!

  3. Alex Kim

    When you do BRRSR, what’s the usual timeline from rental to sell? It sounds like a flip to me except you are renting it for some time and/or putting a tenant in right before you sell it. Would you clarify this for me? Thank you!

    • Cindy Larsen

      No new ideas here with this attempt at new acronymns. if you read Brandon Turner’s BRRRR strategy or watch his videos, the comcept of having multiple exit strategies for ANY deal is mentioned frequently. Selling is obviously one exit strategy.

      As to when to sell, obviously not unless the numbers work. For example if the forced appreciation from rehabbing, plus market appreciation make it a good idea to get your cash back out ( for example, if you had a crystal ball and knew your market was at or near a peak, it might make sense to sell, and then buy a better property when the downturn came).

      Selling is expensive, and you need to make sure it results in your net worth increasing. The seller pays all kinds of fees, starting with 5% to 6% to the real estate agents, but also including a whole host of other fees and taxes. possibly even some of the buyer’s closing costs. Selling could cost you 6% to 10% of the sales price. So one thing is not to sell until you can recoup your investment, including the costs you paid to buy (points, imspection fees, closing costs) and also recoup the costs to sell.

      If sales price $2,500) aka capital expenditures, have to be depreciated. A new roof, for example is depreciated over 27.5 years, just like a house, so even though you spent $15,000 for the roof this year, you only get to deduct around $600 of it each year. If it is your personal residence, when the roof is replaced, then the cost of the new roof is added to your tax basis in the property, which reduces your capital gains by the cost of the roof, when you sell.
      3. The capital gains exclusion: live in the house for two years out of the five years before selling, and you can exclude $250,000 of capital gain ($500k if you are married) from being taxed at all. it doesn’t even have to be two years in a row. For example, it could be the first six months after you buy it, while you get it ready to rent (except you defer maintenance and small expenses like appliances) Then, you decide to make it a rental, move out, advertise it for rent, and start doing that maintenance and finishing touches while you are imterviewing renters. Later, obviously, you can’t expect renters to live in a construction zone, so you move back in while the new roof goes on, and you do other upgrades. You live in it for another year and a half and then sell it. No tax on the forced apprciation from the upgrades. No tax on the market appreciation. The capital gains exclusion is the best way to achieve a great return on investment and grow your capital for future investments. And, you have to live somewhere. This even works with duplexes. Live first in one side, and then the other, so you have lived in each side for two of the last five years: no capital gains tax when you sell, as long as your gain is under the exclusion limit. And, if you have more than a $250k profit, you still only pay capital gains tax on the portion over $250k.

      I hope that was helpful.
      CJ

      • Cindy Larsen

        Sorry I seem to have deleted several paragraphs in the middle of my comment, after the words “If sales price”
        Here is the missing text as well as I can reconstruct it:

        If sales price < (purchace price + buying costs + selling costs + capital gains tax)
        Then do Not sell
        Because selling when that is true will actually decrease your net worth.
        Also selling often results in a new purchase which has additional buying costs.
        It’s all about the numbers.

        Whenever you do sell, make sure you take full advantage of the tax laws (disclaimer, I am not a tax professional, so please do your own research to verify what I have to say)
        1. Wait at least a year after buying so you pay long term capital gains tax, instead of short term. This can be a huge difference. If you are in the 25% tax bracket, this can save you 10% of your profit that you would loose to the IRS if you sold too soon.

        2. When you rehab a property, there are two kinds of expenses: ones that reduce your taxes immediately, and ones that reduce your taxes when you sell. Whether you live in or rent the property when you incurr an expenses can result in better or worse ROI.
        2.a Maintenance and small improvements (capital expenditures less than $2,500 per item, suct as a faucet or an applicance. These can be deducted from rental income in the year the expense is incurred, which, of course reduces your taxes and improves your ROI. If you live in the property when maintenance is done, there is no deduction, it is just an out of pocket expense. So advertise it for rent and then fix it up (See Brandon Hall’s article on BARRRR)
        2.b Capital expenditures (improvements that cost more than $2,500)
        [ 2.b continues in the original coment above, after the words “if sales price”

        Sorry. The popup keyboard on my ipad has an undo key that I seem to have hit by mistake.
        I hope this doesn’tresult in too much confusion.

  4. Cindy Larsen

    Sorry I seem to have deleted several paragraphs in the middle of my comment, after the words “If sales price”
    Here is the missing text as well as I can reconstruct it:

    If sales price < (purchace price + buying costs + selling costs + capital gains tax)
    Then do Not sell
    Because selling when that is true will actually decrease your net worth.
    Also selling often results in a new purchase which has additional buying costs.
    It’s all about the numbers.

    Whenever you do sell, make sure you take full advantage of the tax laws (disclaimer, I am not a tax professional, so please do your own research to verify what I have to say)
    1. Wait at least a year after buying so you pay long term capital gains tax, instead of short term. This can be a huge difference. If you are in the 25% tax bracket, this can save you 10% of your profit that you would loose to the IRS if you sold too soon.
    2. When you rehab a property, there are two kinds of expenses: ones that reduce your taxes immediately, and ones that reduce your taxes when you sell. Whether you live in or rent the property when you incurr an expenses can result in better or worse ROI.
    2.a Maintenance and small improvements (capital expenditures less than $2,500 per item, suct as a faucet or an applicance. These can be deducted from rental income in the year the expense is incurred, which, of course reduces your taxes and improves your ROI. If you live in the property when maintenance is done, there is no deduction, it is just an out of pocket expense. So advertise it for rent and then fix it up (See Brandon Hall’s article on BARRRR)
    2.b Capital expenditures (improvements that cost more than $2,500)

    [ 2.b continues in the original coment above, after the words “if sales price”
    Sorry. The popup keyboard on my ipad has an undo key that I seem to have hit by mistake.
    I hope this doesn’tresult in too much confusion.

Leave A Reply

Pair a profile with your post!

Create a Free Account

Or,


Log In Here