Is a BRRRR Right for You? Let’s Talk About the Pros and Cons

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The BRRRR strategy has risen to real estate stardom in previous years as a popular way for investors to grow their net worth, while deploying less of their own capital. BRRRR stands for buy, rehab, rent, refinance, and repeat, and it has unlocked income opportunities for investors all over. You can buy a distressed property like a traditional flip, but the power move is intending to rent it out instead of selling.

In BRRRR real estate investing, the property is financed with fix-and-flip short-term financing such as private money, hard money, a home equity loan, or cash to acquire properties that won’t qualify for traditional financing. You begin to rehab the property diligently, and once you have brought it back to life, you choose to rent it to a tenant. 

This is when your due diligence before purchasing comes into play so you know how much your new spruced-up property will be worth in after-repair value (ARV). You can work with an investor-friendly real estate agent to find out this crucial information and what rental prices may go for the area.

The best part is that you can get the money you have put into the property back out by obtaining a cash-out refinance for the new value of the house. You receive the money in your account and can complete the last step: repeat. This process may seem simple when written into a few paragraphs, but some pros and cons apply to any real estate investing segment. 

Here is when the due diligence process becomes crucial when working to get your money back out: Banks typically only lend up to 75% of the new value on a refinance. Even if you aren’t a mathematician, you can see that you will need to buy this property at a significantly lower market value and nail your rehab estimation costs (pun intended).

For example, let’s say you can secure a property for $200,000 and estimate the property will need at least $50,000 to prepare for the rental market. You talk to an investor-friendly lender, and they can help fund the purchase and rehab costs for a property. You need to bring 20% of the purchase price to the table; they will take care of the rest. 

The property is now rehabbed and ready for a refinanced loan. The new lender sent out an appraiser, and they now value the property at $335,000. The bank might give you 75% back of that, which equals $251,250. This would pay back all your loan costs and give you a stable, long-term rental with over $80,000 in equity. This is an example of a slam-dunk BRRRR, and they may only sometimes go this way. 

Imagine if the bank returned on the new appraisal, which was only worth $215,000. You would now have money stuck in the deal and cannot pay off the short-term loan. Making sure your ARV is rock solid is only one of the cons (or pros if you do your homework) of BRRRR. 

Let’s highlight some of the pros and cons of BRRRR.

Pros to BRRRR

Potentially no money down

If you find the right deal at the right price, you may not even have to put up any of your own personal money. The juicier the deal, the more likely someone will lend you money. 

High return on investment (ROI)

Utilizing the low money down needed for the deal, the ROI explodes compared to other strategies when appropriately completed. If the investor has $10,000 left in the deal and cash flow is $2,500 yearly, the cash-on-cash return is 25%. This does not account for the equity built into the property once it is refinanced. If the investor never sells, the return can even become infinite.

Equity

You can buy a few rental properties instantly with potentially thousands in equity. The BRRRR method is one of the few strategies to help you achieve this while holding on to a solid rental. I’d much rather start each rental with some extra cushion in equity. 

Renting a rehabbed property

Once a total rehab is completed and the property is rented out, the investor now owns a property in Class A condition, often leading to better returns and fewer headaches.

Take two properties in Little Rock, Arkansas, valued at roughly $117,000. Property A, built in 1952, rents for $1,100 per month thanks to recent updates and modern features. Meanwhile, Property B, built in 1960, only brings in $800 per month, since it hasn’t been renovated in years.

Not only can a rehabbed property command higher rents, but it also tends to rent out faster, attract higher-quality tenants, and entail lower maintenance costs, making landlording much easier in the long run.

Expedited scaling

After your first house, you should have a solid grasp of the steps to a successful BRRRR. The money earned is created in value and can be deployed continuously for your next deal. Every single one you work on will not be a home run, though, so don’t get discouraged. Know your numbers, find deep discounted deals, find the right financing, and your success rate will always lean positive. 

Cons of the BRRRR method

Short-term loans

The financing needed to get the distressed property will likely have high interest rates and expensive add-ons attached to it. The short-term nature of these loans can really crank up your carrying costs, sometimes leaving you with a cash flow situation that feels more like a leak than a stream. That’s why a lot of investors prefer to use home equity loans or good ol’ cash to get the ball rolling on the project. 

Potential to go over budget

When inspecting the property, you need to remember that this is not your traditional fix-and-flip. You plan on renting this property out, so rental-grade materials will make more sense. The project can easily go over budget when the investor tries to increase cosmetics instead of functionality and safety. The chance for setbacks is also high on these types of projects, so make sure to budget enough cushion for holding costs and delays. 

Low appraisal

The appraiser who comes out once the property is done can be your best friend or your worst enemy. A bad appraisal is the worst case for a BRRRR investor, which is why the due diligence before purchase is where it all starts.

Seasoning

Most refinancing banks will make investors wait at least six months, sometimes up to 12 months, after the original purchase before they’ll even consider refinancing. This waiting period, known as “seasoning,” is something nearly all conventional and portfolio lenders require. If you’re stuck with a 12-month seasoning period, but your short-term loan only lasts nine months, you’ve got a problem.

That’s why, whenever I use this hybrid real estate strategy, I make sure my short-term loan lasts at least 18 months. This gives me enough breathing room to get through the refinance process. And if things go off the rails after month 12 and refinancing isn’t in the cards, I’ve still got an extra six months to either sell the property or find a new loan solution.

Two potential closing costs

The BRRRR method uses two different closings—one during the first short-term financing, and one during the refinancing. Of course, each time you close, there will be new fees and costs associated with it. There are lenders that can help mitigate these costs, so the investor must do their research before signing any papers. 

Problems at the rental stage

The seasoning period becomes a little “spicy” whenever you are rushing to put a tenant into the property so you can get your money out. This is when investors let potentially troubling tenants get into a property without doing due diligence. This can lead to evictions, damaged property, and more if you don’t take the proper steps to vet your tenants.

Dealing with a rehab

The biggest challenge in the BRRRR strategy is tackling the complications of a large rehab project. Rehabbing a property isn’t for the faint of heart—it’s not exactly a dream dealing with contractors, hidden issues, mold, asbestos, theft, and all the other headaches that come with it.

Is BRRRR Right for You?

BRRRR can be an incredibly powerful way to build wealth and is one of my favorite real estate strategies. It combines the forced appreciation a house flipper would seek while locking in a rental property that generates cash flow and passive income for years. It really is the best of both worlds. 

However, this strategy is far from simple, with plenty of pros and cons. It requires sharp math, careful planning, and, of course, finding the right deal. But for those willing to take on the challenge, BRRRR real estate investing can truly supercharge a business and put investors on the fast track to success.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.