BRRRR Method Explained

BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. You buy a rundown property below its fixed-up value, renovate it, rent it, then do a cash-out refinance based on the new appraised value so that most of your cash comes back to you for the next deal. It works when you buy cheap enough and the appraisal cooperates, and it ties up more cash than planned when either of those slips.

This page covers the whole method from start to finish. Each step links to a deeper post on the part that tends to cause trouble.

How BRRRR differs from a normal rental purchase

With a normal purchase you put 20% to 25% down on a finished rental and that cash stays in the property until you sell or refinance years later. If you have $60,000 saved, you buy one house and start saving again.

With BRRRR you create the equity yourself. You pay a low price because the house needs work, you add value through the rehab, and the lender then lends against the higher value. If the numbers line up, the new loan pays back most of what you spent. You end up with a rented house, a long-term mortgage and most of your original cash back in the bank.

The trade is more work and more risk in exchange for recycling capital. You are running a renovation project and a refinance on top of being a landlord.

The five steps

1. Buy

You need a property priced well below its after repair value (ARV). That usually means a house a regular buyer cannot finance or does not want: dated, damaged, vacant, an estate sale, a tired landlord's rental. Most of these get bought with cash, hard money or private money, because a conventional lender will not write a 30-year loan on a house with no working kitchen.

A common rule of thumb for the maximum offer is the 70% rule: pay no more than 70% of ARV minus the rehab cost. Treat it as a quick screen. It will not guarantee a good deal, but it keeps you from paying retail for a project.

If you borrow for the purchase, the cost of that short-term money matters a lot. Points and interest for six to nine months can run into five figures. The post on hard money versus private money compares the two side by side.

2. Rehab

The goal of the rehab is a house that appraises at your target ARV and rents without trouble. That means fixing everything a lender, an insurer and a tenant care about (roof, mechanicals, electrical, plumbing, kitchen, baths, flooring, paint) and stopping there. Finishes should match what the rental comps have, not what you would put in your own home.

Budget a contingency. A rule of thumb many investors use is 10% to 15% on top of the contractor's bid, more on older houses where you cannot see behind the walls. If you want to see what a blown budget does to the whole deal, read analyzing a BRRRR deal when contractors go over budget.

3. Rent

Get a qualified tenant in place at a market rent with a signed lease. Most refinance lenders want to see the lease, and for a DSCR loan the rent is what qualifies the loan. Price the unit to fill within a few weeks. A month of vacancy chasing an extra $50 rarely pays for itself.

4. Refinance

This is the step that makes or breaks the strategy. You replace the cash or short-term loan with a long-term mortgage sized on the new appraised value. Three things decide how much cash comes back:

• The appraisal. The lender uses the appraiser's number, not yours.
• The loan-to-value (LTV) limit. Cash-out refinances on investment properties are commonly capped around 70% to 75% of appraised value, depending on the lender and loan type.
• Seasoning. Many lenders make you wait before they will lend against the new value instead of your purchase price. Six to twelve months is common, and some DSCR lenders are shorter. Ask before you buy, because the wait drives your holding costs.

The loan options are usually a conventional investment property loan, which qualifies you on personal income and debt, or a DSCR loan, which qualifies the property on its rent. The post on DSCR loan requirements explains the second route. For how the rate on the new loan changes your cash flow, see modeling the BRRRR refinance at different rates.

5. Repeat

Take the cash that came back and do it again. In practice you rarely get 100% back, so each round leaves a little more cash behind. That is fine as long as you planned for it.

A full worked example

This is an example with round numbers. The 7% rate is an example rate used only to show the arithmetic. It is not a quote of current rates.

An investor pays cash for a three-bedroom house at $110,000, spends $40,000 on the rehab, and pays $10,000 in purchase closing costs and holding costs (taxes, insurance, utilities) over the six months of the project. The house appraises at $200,000 and rents for $1,900 a month.

Now the monthly picture after the refinance, with a 30-year loan of $150,000 at the 7% example rate:

Cash flow is $98 a month, or $1,176 a year. On the $14,000 left in the deal that is a cash on cash return of 8.4% ($1,176 divided by $14,000). The investor also holds $50,000 of equity ($200,000 value minus the $150,000 loan).

Compare that with buying the same house already finished for $200,000 with 25% down. That buyer puts in $50,000 plus about $6,000 of closing costs, carries the same $150,000 loan and earns the same $1,176 a year. That is a 2.1% return on $56,000. Same house, same loan, same cash flow, but the BRRRR investor has $14,000 tied up instead of $56,000. That difference is the whole point of the method.

Notice two other things. The 70% rule would have capped the offer at $100,000 (70% of $200,000 is $140,000, minus $40,000 of rehab). This investor paid $110,000, and that extra $10,000 is most of the reason $14,000 stayed in the deal. Second, the cash flow is thin. A property refinanced to 75% of its value carries a big loan, so BRRRR deals often cash flow less than people expect. You can run your own version in the single family rental calculator, which has a BRRRR mode.

What happens when the appraisal comes in low

Take the same deal but the appraiser says $185,000 instead of $200,000.

A 7.5% miss on value nearly doubled the cash left in. The deal still works (the smaller loan actually raises monthly cash flow to about $173), but if you were counting on that cash for the next purchase, you are now short $11,250. The post on what to do when a BRRRR appraisal comes in low covers your options, including challenging the appraisal and trying a different lender.

How much money should you expect to leave in

The popular version of BRRRR promises all of your money back and an "infinite" return. It happens, but plan on it being the exception. Purchase prices on distressed houses have been bid up in many markets, rehab costs run over, and lenders cap the LTV.

A more useful target is to decide ahead of time how much cash you are willing to leave in and what return you need on it. Leaving $14,000 in a house that earns 8% on that cash and carries $50,000 of equity is a good result by most standards. The post on money left in the deal after a BRRRR refinance goes through how to judge that number.

Who BRRRR suits

BRRRR fits you if you have cash or reliable access to short-term financing, a contractor you trust or real renovation experience, and a good read on values in a specific area. It also helps to have the time and patience to manage a project with many moving parts.

It is a poor fit if your cash reserves are thin. You need enough to cover a budget overrun, a few extra months of holding costs and a refinance that returns less than planned, all at once. If one bad surprise would force you to sell, buy a finished rental instead.

Common mistakes

• Using an optimistic ARV. Base it on recent sold comps of similar size and finish within a short distance, not on list prices or the best sale in the neighborhood.
• Forgetting holding and financing costs. Taxes, insurance, utilities, loan interest and points for six to nine months belong in the total cash in.
• Not talking to the refinance lender first. Find out the seasoning period, maximum LTV and how they qualify you before you close on the purchase.
• Over-improving. Granite and custom tile do not raise the appraisal or the rent in a neighborhood of basic rentals.
• Judging the deal only by cash back. A refinance that returns every dollar but leaves the property with negative cash flow is a bad deal. Check the cash flow after the new loan.
• Assuming the rate. The refinance happens months after you buy. Test the deal at a rate a point higher than what you see today.

Bottom line

BRRRR lets you own a rental with far less cash tied up than a normal purchase, because you build the equity through the purchase price and the rehab and then borrow against it. The math is simple: total cash in, minus 75% or so of the appraised value, less refinance costs, equals the cash you leave behind. Be conservative on the ARV, the rehab budget and the rate, make sure the property still cash flows with the new loan, and keep reserves for the deal where the appraisal lets you down.