The BRRRR Method Explained: Buy, Rehab, Rent, Refinance, Repeat

BRRRR stands for buy, rehab, rent, refinance, repeat. You buy a property that needs work, fix it up, find a tenant, then take out a new loan based on the higher value of the finished house. If the numbers line up, the new loan pays back most or all of what you put in, and you can use that cash on the next property.

It can look like free money. In practice you're recycling the same cash, and several steps can go wrong.

The five steps

Buy. You pay cash or use short-term financing, such as a hard money loan, for a house that's priced low because it needs repairs. The price has to be low enough to leave room for the work.

Rehab. You fix the house to the point a tenant will rent it and an appraiser will value it at the higher number.

Rent. You put a tenant in. Many lenders want a signed lease, and some want a stretch of rent history, before they refinance.

Refinance. You take out a long-term loan on the new, higher value. Lenders commonly cap a cash-out refinance on a rental at 75% of value for a single-family house and 70% for two to four units.

Repeat. The cash from the refinance goes toward the next purchase.

An example

Say you buy a house for US$95,000 and put US$30,000 into repairs. Closing costs and the cost of carrying the house during the work add another US$7,000. You're all in for US$132,000.

When it's finished, the appraiser values it at US$160,000. A lender that loans 75% of value gives you US$120,000. You get that back and pay off your original funding.

US$132,000 minus US$120,000 leaves US$12,000 of your own money in the deal. Refinance closing costs, often 2% to 3% of the new loan, come on top of that, so plan on leaving in closer to US$15,000. If the house rents for US$1,500 and the new loan is US$120,000 at 7.5%, the principal and interest is about US$840 a month. After tax, insurance, vacancy, repairs and management, whatever is left each month is earned on a US$12,000 investment, which is why the cash-on-cash return can look very high.

Check the same deal in the calculator with your own down payment, rate and expenses. A thin one can turn negative once the actual costs are in.

The rule that decides it

The deal only pulls out all your money if your total cost is at or below 75% of the finished value. In the example, 75% of US$160,000 is US$120,000, and the total cost was US$132,000, so US$12,000 stayed in. To leave nothing behind, you'd have needed to buy for US$83,000, or hold the rehab to US$18,000.

Get comparable sales for the finished value before you make an offer. The lower your price is compared with that value, the more likely the plan works.

Where it goes wrong

The appraisal comes in low. If the house appraises at US$145,000 instead of US$160,000, the 75% loan is about US$109,000, and you have US$23,000 stuck in the property. This is the most common problem.

The rehab goes over. First rehabs often run over budget, because old houses hide things behind walls. A US$30,000 plan that becomes US$45,000 wipes out the margin.

Interest rates changed the math. At 4% or 5%, the payment on a US$120,000 loan was low enough that many BRRRR deals cash flowed easily. At 7% or more, the payment is much higher, and a deal that needed the refinance to cash flow might not.

Lenders have waiting periods. Many want six months of ownership first. If you refinance sooner, they often base the loan on your purchase price plus documented repairs, not the new appraisal. You carry the costs while you wait, and DSCR lenders set their own rules, so ask each one.

The tenant doesn't show up. The refinance usually needs a lease. A hard-to-rent house stalls the whole plan.

Who it fits

BRRRR suits someone who can manage a renovation or hire contractors they trust, knows the local rental and sales market well, and has reserves for overruns. It's a poor first deal for someone who has never been through a rehab. The more common beginner route is to buy a house in decent condition and run the numbers on the one percent rule first.

If you still want to try it, buy in a market where you can check comparable sales, get three bids on the work, add 15% to 20% to the rehab budget and size the deal so it still works if the appraisal comes in below your target.

If you'd rather start with a smaller down payment, house hacking is the simpler first step, and the 1% rule is a quick way to screen the finished-value rent before you buy.