What Is The BRRRR Method in Real Estate? [+ Pros & Cons] Understanding the BRRRR method is useful whether you’re a seasoned real estate professional or looking to develop your career in the field. A four-step real estate approach, the BRRRR strategy is based on its acronym: Buy, Rehabilitate, Rent, Refinance and Repeat the process. BRRRR method is just one of many approaches to maximize investment returns and optimize property portfolios. Steps of BRRRR Pros & Cons of the BRRRR Method Alternatives to BRRRR Example of BRRRR How to finance BRRRR properties Who should use BRRRR Who should not use BRRRR Tips for getting started with BRRRR Steps of BRRRR The BRRRR method resembles flipping — in which a home that needs improving is purchased, renovated, and sold — but instead, the buyer opts to lease the property once it’s fixed up, focusing on long-term value. These are the steps explained: Buy a fixer-upper at a discounted price. It could be a foreclosure or pre-foreclosure, but a property with realistic potential to be improved is key. Location is also important, as you’ll need to find renters once construction is finished. Rehabilitate with renovations, ranging from quick cosmetic fixes to more extensive construction. It’s important to make the right repairs, meaning projects that add value — such as updating appliances, adding a deck or patio, energy efficiency improvements, and curb appeal. Rent it out. Find renters who you believe to be reliable and have them sign a lease agreement. This step will require you to be involved as landlord, or hire a property manager, to keep tenants happy. Refinance by taking out a new loan using the increased value of the property as security. This will help set you up for success in the next, and final, step. Repeat the process by using the money you made on the latest investment to help fund the next venture. Pros & Cons of the BRRRR Method As with any business venture, there are positives and negatives to be weighed. Here are some considerations that relate to the BRRRR method: PROSCONSPassive income can be achieved once renters are in the space, especially after the mortgage is paid off High return on investment Scalability; take on a project at any size you are equipped to handlePatience is a must as projects come together, markets fluctuate and renters require support Significant financial risks through each step Time consuming Alternatives to BRRRR Those seeking an alternative to the BRRRR real estate method have several other options. Here are a few to consider: Traditional investment approach, in which a property is purchased in good condition and rented after minimal changes are made. This is easier and requires less effort than the BRRRR method. There is a lower rate of return, however, it still allows for the collection of rental income to help cover the cost of the mortgage — and then some. Flipping is when a property is purchased, fixed up and sold with as little turnover time as possible. Turnkey investing involves the purchase of a home that is ready for renters to move into, requiring no work from you to fix it up first. Raw land investments involve the purchase of land that is later divided and sold for development. Example of BRRRR This is just one example of the BRRRR method in action: Let’s say that you’re an investor who purchased a foreclosed property for $100,000, but you’re able to refinance it for $130,000. The $30,000 difference can be used to cover new appliances in the kitchen and some landscaping to boost curb appeal. In the meantime, renters sign a lease and move in. You decide to pay down the mortgage with the money you’re making from rent payments and are also able to buy another spot that you will eventually collect rent from. With the BRRRR real estate method, you’re able to take advantage of extra income and earn more. How to finance BRRRR properties There are several options to finance properties with the BRRRR method: Cash is widely considered the most ideal. Not only is there no loan interest to consider, but it gives an advantage over other offers, especially in a competitive market. Conventional bank loans are not backed by the federal government, as are Federal Housing Authority loans, Department of Agriculture loans or Department of Veterans Affairs loans. Those designations come with higher interest rates. Home equity loans (or HEL) will allow you to borrow money using equity in your own home as collateral. Bridge loans are shorter-term loans that cover the time between two transactions, for example, the purchase of one property while the sale of another is pending. Who should use BRRRR To take advantage of the BRRRR method, investors should be willing to take risks and be able to pay for improvements and renovations without assurance of when or if the money will be made back in full. Investors should also be capable of conducting research and have the skills and resources to find information relevant to BRRRR investing — from real estate market research to home improvement know-how and many facets in between. Who should not use BRRRR BRRRR strategy may not be the best option for investors who don’t have the time or resources to see a project through. These types of investments can take an extended period of time depending on the level of improvements needed, the rental market and other economic factors. Another consideration is the time needed to take care of tenants who will eventually move into the space. If an investor doesn’t personally have the time required for the job, they should plan to hire a professional. Tips for getting started with BRRRR Work with a financial advisor for guidance on what you can afford. Acknowledge your strengths and weaknesses; consider if it will be best to bring in experts in other fields to assist. Research the markets: Determine how much the property will cost, the estimated price tag on repairs and renovations and how much you’ll be able to rent it out for. Stay current on trends, rates and laws to keep projects on track. Complete USD’s real estate courses, covering more about BRRRR method and beyond, to advance your real estate career.