Joan Ryder
July 2024
Your #1 Choice For Real EstateTM

How Does the BRRRR Method Work?

BRRRR is a popular term in real estate that stands for Buy, Rehab, Rent, Refinance, Repeat. This method of investing in real estate is focused on flipping distressed properties, renting them out, then getting a cash-out to refinance so you can fund more investments in rental property.

The difference between the BRRRR Method and investing in property in other ways is that you’re focusing first on distressed properties and second on refinancing what you bought to buy another.

How BRRRR Works

If you use the BRRRR Method, it’s intended to help you create passive income and the ability to continue to buy and own rental properties. The steps include the following:

  • First, you buy a distressed property requiring work to get it ready to rent. You’ll likely find it for a lower price because of the condition.
  • Rehabbing the property is the next step since it’s distressed. You’ll need to bring it up to code and make safety and structural improvements, as well as aesthetic improvements, so it’ll appeal to potential renters and be ready for them to move into.
  • You next determine a rental price and find renters.
  • Once you have renters in place, it’s time to do cash-out finance, converting the equity you hold in the property into cash. You access your equity by getting a bigger mortgage and borrowing more than you currently owe.
  • You can use your refinance funds to buy another property, starting the process over.

The Pros and Cons of This Method

The pros of the BRRRR Method include allowing you to make passive income and build a portfolio of rental properties. As you’re rehabbing the property, you’re also building equity.

The cons are the work that’s going to be required to rehab the property, and you may end up having to get a riskier, more expensive loan since you might not qualify for traditional financing.

You could get ready to refinance and then find out you don’t qualify for as much money as you thought.

Plus, it can be a while before you can tap into cash with this method. You have first to do renovations, then you have to find renters, and it can take some time to complete the cash-out refinance.

The Current State of the BRRRR Method

While the BRRRR Method is something that real estate investors have been doing for quite some time, right now might not be optimal for this approach. One reason is that the 30-year mortgage rates have been bouncing between 6% and 7% for the past year.

Other factors that have made the BRRRR Method more challenging include the rising costs of building materials and increasing taxes.

While prices are slowly inching back up, they’ve been for the past year, appraising for less and selling for less, and that reduces the size of the cash-out refinance. Plus, you have to keep in mind that lenders are much more risk-averse right now.

Rather than doing an 80% cash-out as was common, people are doing 70% or 75% cash-outs, so you only get that much of your loan value back, and the rest has to stay tied up in the property.

Are There Better Alternatives?

If you crunch the numbers and the BRRRR Method isn’t going to work, you can consider holding onto the property and renting it out, or making it a short-term rental, if you’ve already bought something.

If you haven’t bought something, you might buy a home in good condition and then rent it out rather than buy something that needs work.

Another more out-of-the-box approach is participating in crowdfunding a real estate investment. This pools investor funds to buy real estate, and you can get the rewards of being a real estate investor without so much money and work being put in upfront.

Finally, the CEO of BiggerPockets, once a huge proponent of the BRRRR Method to build wealth, has pivoted and recently spoke out, saying it’s not the right time for this type of investment.

E-mail: [email protected]
(410) 893-1792 x 11

Joan Ryder & Associates Real Estate Inc.
(410) 893-1792
3 Vale Road Suite 200
Bel Air MD 21014

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