Investing in real estate can get complicated, but certain methods, like the buy, rehab, rent, refinance, repeat (BRRRR) method offer many opportunities to earn profits and diversify your portfolio.
If you’re new to real estate investing, you may have heard of the BRRRR method in passing. If it piques your interest, keep reading to learn the strategy as you learn how to invest in real estate to see if it’s right for you.
What is the BRRR method?
BRRRR method is a real estate investing strategy that stands for buy, rehab, rent, refinance, and repeat. Here’s a simple breakdown of what each stage of the process entails:
- Buy: Find a great deal on a rental property and buy it
- Rehab: Fix up the property
- Rent: Find tenants and rent the property
- Refinance: Get a loan that covers the purchase price plus the repairs
- Repeat: Use that money to buy another property and do it again
The idea behind the BRRRR strategy is to start real estate investing and not leverage a ton of your own money, creating streams of passive income in the process. The BRRRR method is a viable investing strategy for people who are relatively new to real estate investing because you can usually get started without a lot of money. In short, you buy with a little bit of money and make your money work harder for you.
My personal BRRR method story
I’m a big fan of the BRRRR method. I first learned about it four years ago when I decided to get serious about being a real estate investor — and it’s been working great for me. As an example of what I mean, here’s what’s going on with my most recent BRRRR venture.
I’m currently in the process of buying an 8-plex: a multi-family property that has eight rental units. Five of the eight units are already rented out for $450 a month. I plan to spend between $10,000 and $15,000 per unit rehabbing the property. I’ll renovate the three vacant units first and give the current tenants the option to move into those at $625 a month. Then, I’ll rehab the remaining units with the end goal of raising the rent on every unit to $625 a month.
At $625 a unit for eight units, that’s $5,000 I plan to bring in each month. Using the 1% rule (which I’ll explain in a bit), that gives this property a $500,000 value. I offered to pay $205,000 in cash for this property. There was another offer on the table for $30,000 more, but offering to pay in cash was the deal-maker in my favor.
After paying $205,000 for the property and putting $80,000-$120,000 worth of renovations into it, I’ll earn a profit of between $175,000 and $215,000. That will be money I’ll have in my pocket to go do this again.
How to buy a property
I can’t stress this enough: knowing how to buy a property for the BRRR method is the key to a successful process. You must get a good deal on a property and have room to make improvements while still earning a profit.
It’s a delicate balance, but it can be done with these tips.
Screen a property using the 1% rule
The simplest way to judge a property’s worth is by using the 1% rule. Essentially, the 1% rule is a bird’s-eye view of a deal and it tells you the minimum amount of rent you should charge for it to be a good deal.
For example, let’s say you want to buy a specific house that’s listed at a selling price of $100,000. You plan to use the BRRRR method and turn the house into a rental. If you can’t rent it for at least 1% of the purchase price per month, which is $1,000, you should look elsewhere.
Here’s the big question, though, how do you know what price you should rent the house for?
Fortunately, that answer is simple, but requires some legwork. Do your due diligence and “pull comps” or comparable properties in the area to see what rent they charge. Try to find properties that are as close to the subject property as possible in size, features, and upgrades. If their rent is within 1% of what you’re about to spend, you could be onto something.
However, some areas have really high appreciation (such as California), where you could maybe get away with renting a property at half a percent of the purchase price per month and still come out profitable. On the flip side, one of the reasons I moved to Tulsa was because I saw that I could rent out properties at 1.5 to 2% of the purchase price which made my money work harder for me.
Use the cash-on-cash return formula
Another way to value a property is to use the cash-on-cash metric as a screening tool. This is the return you’re going to get back on your money before taxes divided by the amount of money you put into a property. Here’s an example.
An 8-unit rental property is for sale for $200,000 and you plan to pay the full amount in cash. In addition to the purchase price, there are $10,000 in closing costs and you expect to invest $80,000 in rehab costs so you can charge $625 per month in rent. In total, you’re looking at an equity investment of $290,000.
At $625 a month, the property is expected to produce $60,000 in before-tax income in a year. You also expect the operating costs of the property to run you a third of the rental income, leaving you with a net operating income of $40,000 (2/3 x $60,000 = $40,000).
To calculate the expected cash-on-cash return, you divide the NOI by the equity invested.
$40,000 ÷ $290,000 = 13.79% cash-on-cash
So, the cash-on-cash return you could generate from this 8-unit rental property in one year is 13.79%. This tells you how hard your money is working for you when compared to other investment opportunities. The stock market, for instance, has historically provided around 10% annual returns before accounting for inflation.
Avoid these properties as a beginning investor
As a beginning investor, you want to keep your portfolio simple as managing real estate can be stressful. Two types of properties that don’t work for new investors are properties with a Homeowner’s Association (HOA) and historic properties.
HOA properties have rules you must follow, such as:
- Paying fees for a common area and amenities
- Landscaping restrictions
- Paint colors you can choose
- Restrictions on renting out the property
While you can read the HOA clauses and determine if renting is allowed, they are often more headache than they are worth for new investors.
Historic properties often have similar limitations on what types of updates you can make. This is especially true if the property receives Federal assistance as a part of a preservation project. In general, however, there are just too many little things you can run into that can cost you a lot of money with properties of this age.
Tip
The best properties for beginners are single-family homes in decent condition. Unless you’re a talented contractor, stay away from properties that have major issues, such as foundation, roof, or structural problems. Your best bet is to stick to properties that need cosmetic or minor repairs, and then learn as you go.Buy a property that allows you to add value yourself
Undervalued properties you can purchase for a low price and fix up are your best bet for the BRRRR method as long as the upgrades are within your budget and still allow you to meet the 1% rule.
Your “sweat equity” or the time spent working on the property is where the true returns are because you’ll see a financial return on your work. Sweat equity measures the time and effort you put into your real estate project to drive up its value.
If you purchase a property that already had the work done, it’s called a turnkey property, which is a property that doesn’t require any renovations and can immediately welcome tenants. If you buy a turnkey property, it means someone else has already made money on their sweat equity.
In general, you want a property where you can at least paint, slap some shutters on, or refinish the hardwood floors. This is important for two reasons:
- You’re building your own sweat equity
- You may increase the property’s value and be able to get better refinance rates
Some examples of value-add renovations include:
- Converting a garage
- Adding more square footage by extending the bathroom
- Adding a room
- Rehabbing the kitchen
How to rehab
Whether you’re doing the repairs yourself for hiring a professional, you must consider the best use of your funds and how you’ll finance the upgrades.
Credit cards can help you save money on repairs
When you start the repairs, consider using a good credit card for your real estate expenses. If you take advantage of sign-up bonuses and high-paying categories, you can get a lot of money back on your purchases via gift cards or cash back.
Some people I know are spending $400,000 a year on rehabbing their BRRRR properties and they’re not using credit cards. But with a straightforward, cashback card like the Citi Double Cash® Card, they could earn up to 2% cash back on all the purchases they make toward their BRRRR properties. On that $400,000 spend, that’s $8,000 in cash back. That’s a good chunk of money.
Whether it’s a personal credit card or a business credit card, the point is that credit cards can help you cut repair costs by earning you rewards on your spending. Ultimately, this improves your bottom line.
Should you make repairs yourself or hire a pro?
For the actual repairs, you might be wondering whether you should go the DIY route or hire a contractor. This really boils down to how much time you have and your skill level.
If it takes you a month to make the repairs that a skilled craftsman could complete in no time, it may make more sense to hire a contractor. Plus as you start to scale and purchase more properties to BRRRR, you might not be able to spend a month on each property. Simply put, what’s your time worth? Would it be better spent researching properties and securing financing or painting cupboards?
That said, not all contractors are created equal. Finding good contractors is important. My advice is to join Facebook groups and get recommendations from real people. Word of mouth usually works out well.
How to rent
A big part of the BRRRR method is to rent your property, as that’s how you earn income. You’ll need a rental agreement in place to do the next step (refinance), so the quicker you get tenants into the property, the better.
However, there are some key factors to consider when renting your properties:
- You must screen properly. Properly screening your applicants can help you avoid tenants with histories of late or missed payments and evictions. You can also weed out potential tenants who might cause damage to the property.
- Consider using property management. If there is room in your budget, you can hire a property manager to take the physical demands off your shoulders. Just make sure to take the property management fee into account in your bottom line numbers. This fee is usually 8 to 10% of the rental value per month. You could also use a property management service such as Apartments.com (formerly known as Cozy). They provide tools for landlords including screening, marketing and rental payment services. But, if you go the Apartments.com route, you’ll still need to figure out who will take care of repairs and maintenance.
- Cover your bases in your lease agreement. Address everything you want as a landlord in your lease agreement. This includes security deposits, utility responsibilities, whether you will allow pets, whether other people can live in the unit, and if tenants can sublet their unit.
- Be even-handed. You’re running a business so you need to treat every tenant the same. If you give certain tenants privileges you don’t give others, you can open yourself up to a lawsuit; consistency is key.
- Invest in a conversation with a CPA and an attorney. It’s not a bad idea to spend money to sit down with a CPA and an attorney to ask all the questions you have and get their expert advice — whether it’s with general questions or help with drafting a lease agreement.
How to refinance
You purchased a property, completed all your renovations, and rented it out. Now it’s time to refinance.
First, decide on the bank or lender you want to work with. Finding a good mortgage lender is important and the big banks aren’t necessarily your best bet. In my experience, local credit unions are a good option for the BRRRR strategy. They tend to offer easier underwriting and more flexible terms, and they often have lower rates because they don’t have shareholders and a lot of overhead.
Other options are hard money lenders or private loans from people you know. Hard money lenders specialize in lending for real estate ventures such as BRRRR properties or house flipping. Costs and interest rates tend to be higher with hard money loans, though, so make sure to take that into account when you’re running your numbers.
To refinance, you’ll do the following:
- Discuss what you’ve done with the property in regards to upgrades
- Provide proof of the upgrades
- Provide a copy of the executed lease agreement
- Pay for a new appraisal to show the new value
The lender will use these numbers to determine how much equity you have in the property and how much you can borrow. Many lenders lend between 70% to 90% of the value of the home.
When you refinance, you’ll usually get a percentage, if not all, of your initial investment back. In some cases, you might even receive a refinance loan that’s more than your total equity investment. You can then take that money and go do the exact same process again.
Tips for refinancing
Here are some things to consider when you’re ready to refinance your BRRRR property:
- Shop around to find the best rate
- Avoid large and hidden fees
- Consider using a mortgage broker
- Check with small companies; don’t assume big lenders are better
- Consider online lenders
The process of refinancing a BRRRR property is a little different than getting a regular home mortgage. You want to be sure the lender offers cash-out refinancing so you can receive your funds as one lump sum.
Tip
Cash-out refinancing is when the lender gives you a new mortgage that’s higher than your previous mortgage. The loan proceeds first go toward paying off your previous mortgage, and the remaining money is yours to use as you please.As you shop around, look for lenders that require a short seasoning period. A seasoning period refers to the age of your previous mortgage. In short, it’s the amount of time you must hold a mortgage before a lender will approve refinancing that loan. According to Fannie Mae, the seasoning period required for a cash-out refinance is typically six months. Some lenders may require you hold your previous mortgage for a year before refinancing and others don’t require a seasoning period at all.
How to repeat
With cash in hand from the refinance, it’s time to repeat the process on a new property. Follow the same steps as before, incorporating anything you learned along the way and making your second BRRRR property even better than the first.
Did you spend too much time and money on renovations when you could have hired a pro to do it in less time and for less money? Are you unhappy with the lender you chose? Ask yourself critical questions. But remember this was your first time so don’t beat yourself up if you made mistakes. Just try to learn from them for your next BRRRR project. You’ll gain the most knowledge the more you do it.
I recommend that you always be on the lookout for your next property. You never know when an opportunity may arise.
Here are a few ways to stay on top of the latest real estate deals:
- Find a local real estate agent to send you the hottest deals
- Get on wholesalers’ mailing lists
- Set up alerts on Zillow and other MLS aggregators
- Network with other real estate investors
BRRRR method vs. flipping
Flipping houses is another form of real estate investing in which an investor buys houses and then sells them for a profit, usually after making repairs or improvements. The difference is house flippers usually sell the house within a few months of purchasing it. The faster you turn it around, the less holding costs you have and the higher your profits.
The BRRRR method, on the other hand, is typically used as a buy-and-hold method to create monthly cash flow. It tends to be more popular in the FIRE (Financial Independence, Retire Early) community because you can sit back and collect money each month. It’s a way to create passive income.
Additionally, there are tax advantages to opting for BRRR over flipping. When you flip properties, you pay short-term capital gains taxes. Short-term capital gains are typically taxed as ordinary income, so your rate could be high depending on your income bracket. For example, if you buy a flip for $50,000, spend $20,000 on rehabbing it, and sell it for $150,000, you’ve got $80,000 profits. If you held the property for less than one year, that $80,000 would be taxed as ordinary income. If you fall within the 24% bracket, that’s $19,200 in taxes.
On the flip side, if you buy and hold a property for more than a year (which you would do with a BRRRR property) and then sell it, your profits would be taxed as long-term capital gains. Depending on your taxable income and marital status, long-term capital gains are taxed at 0%, 15%, or 20%.
Tips to make your first property purchase successful
- Run the numbers. The largest piece of advice I can give to you is to fall in love with the numbers, not the property. It doesn’t matter how cute the property is; focus on the numbers. Numbers don’t lie.
- Investigate a potential property. If you see a property listed for a price that falls outside the norm of other houses in the neighborhood, it might be a good opportunity. But ask yourself why this property is selling for less. View the property yourself to see what it needs. Does it need a new roof or is the foundation crumbling? Does it have unruly neighbors who will make things difficult when it comes time to rent or it could just be a bad layout that needs some remodeling to bring out the true value (there’s your sweat equity).
- Stay active in finding a good BRRRR property. Always be on the lookout for your next property. If you don’t move quickly on a good deal, someone else will snatch it up.
- Learn who the wholesalers are in your area. Wholesalers make money by finding people with distressed properties. A distressed property is usually one that is under foreclosure. Wholesalers buy the property so the person doesn’t have to foreclose. They then sell it to people like you who are looking to flip or BRRRR. As a result, you get a better deal, the wholesaler makes money, and the original owner doesn’t have to go through the foreclosure process.
Bottom line
My advice is don’t get into the BRRRR method — or any real estate investing for that matter — on a whim. Doing your research is always important, and you’ll want to keep up on the real estate market so you know when it’s a good time to buy real estate. But the real experience comes from doing it a few times and practicing how to invest money.
If you’re interested in real estate investing, the BRRRR method is worth considering. It doesn’t take a whole lot of money to get started, which makes it ideal for beginners.