How Does the BRRRR Method Increase ROI?

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If you have been around the BiggerPockets community long enough, you have probably heard the phrase BRRRR referred to several times. No, we do not need to adjust our heater. This has been one of real estate investors’ go-to strategies for years, and it just now received a fancy acronym. The investor finds a distressed property, locks in short-term financing for it, rehabs it, rents it out to a tenant, and then refinances it instead of selling it. 

What Is BRRRR?

BRRRR stands for buy, rehab, rent, refinance, and repeat. 

You can acquire an asset, stabilize it, make it cash flow, and then withdraw your money back out. Although you may have little to no money to invest, the return can become infinite when done properly. 

Do you think Masterchef competitors get the ingredients to their dish, throw it uncooked onto a plate, and present it to Gordon Ramsay? No, they ensure it is as pristine as possible so they are not told to kick rocks out of the kitchen. You must treat your real estate property similarly when presenting it to banks for potential refinancing loans. A fully rehabbed property with beautiful finishes will help you earn the highest possible value when it matters. 

How Does BRRRR Increase ROI?

Forced appreciation

By rehabbing the property, you aim to increase the property’s after-repair value (ARV) to be higher than your initial costs. This boosts your property’s equity and overall ROI without relying on natural market appreciation. If your asset is worth $100,000 when bought and once rehabbed is now worth $250,000, net worth is trending in the right direction.

Maximizing cash flow

Once rehabbed, the property can be rented at a higher rate than before. The house next door may have been built the same year as yours, but since you brought yours to the top value in the market, it rents for more. 

This increase in rental income leads to more consistent cash flow, improving your returns over time. You can only increase the rent so much when you still have appliances from 1993.

Refinancing to pull out capital

After the property appreciates through rehab, refinancing allows you to recover your initial investment or a portion of it. Nothing feels better than seeing that money you deployed return to your bank account, ready for round two. You can reinvest that capital into new properties while holding a stable asset. Your initial money put down is continually reinvested, essentially compounding your ROI.

Building long-term equity

By holding the property after the rehab and refinance, you’re building long-term equity through the tenant’s rent payments (principal paydown) and market appreciation, further improving returns. It is starting to add up tremendously at this point. Real estate is a marathon, not a sprint. 

Scaling your portfolio

BRRRR’s “repeat” aspect allows you to rinse and repeat the strategy with new properties, growing your portfolio quickly. Your total ROI across the portfolio grows exponentially as you accumulate more properties. 

Is This a Good Strategy for You?

The BRRRR method seems like it could be an infinite money glitch, but you need to be aware of the problems that can arise. You must win on several fronts, including due diligence, the discount the property is bought at, how successful the rehab is, the rental process, and smooth refinancing. 

If you are a brand-new investor, it is always helpful to lean on a mentor or group of like-minded individuals (like those in the BiggerPockets forums) when analyzing deals. The chance of things slipping through the cracks goes down every time a set of seasoned eyes look at it.

BRRRR properties take patience, as well as dedicated time to oversee the project. You will need to source a distressed property, which will have plenty of challenges in today’s market. The deals are still out there, and properties are being rehabbed daily, but you must be prepared to analyze them. 

If you know and study your local market, your analysis period will shrink each time, so you’ll be ready when a deal comes up. Even in 2023, I still found two deals on Craigslist (yes, you read that right).

Having a contractor you trust is a must, but you must also be able to monitor the project on your own time. No one will ever care about your project as much as you do (except any partners). Time is of the essence for a BRRRR property, and any delays can cost your bottom line. 

I’ve showed up at properties, but no workers showed up that day. I never used these contractors again, but I learned a lot of lessons about trust and building a team to help keep things in line. 

Final Thoughts

The BRRRR method can have an astonishing return on investment, but is not a set-it-and-forget-it method. The more knowledge you gain and connections you build, the faster you reach your goals. The top investors know how to leverage other people’s money (OPM), and this experience helps them move from beginner to expert. Developing these skills may be challenging and frustrating initially, but the payoff in the long run is well worth it.

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