BRRRR Method: The real estate strategy you need to know
People love real estate. In fact, 34% of Americans believe it’s the best investment out there.
If you want to get started, you might be wondering what the best route is. Should you flip houses like on HGTV? While those shows are popular and entertaining, that’s not always the best approach. In my experience, there’s a better strategy for building long-term wealth in real estate – it’s called the “BRRRR method.”
If you’re already familiar with BRRRR, you might question if this strategy still works in today’s market. The short answer is yes, but it doesn’t apply to all areas of the country. You might need to look outside of where you currently live to find the right opportunities.
Here are my best tips for using the BRRRR strategy to start and grow your real estate portfolio.
What is the BRRRR method?
Let’s first cover what this strategy is and how it works. Note that you’ll need to consider each step before you get started as part of your due diligence process.
Step 1: Buy
To have success with the BRRRR method you need to find properties at 60%-70% below their after-repair value (ARV). This can be more difficult in today’s market and you may need to use various strategies to find the right opportunities. Here’s how to approach it:
- Use the 1% rule: My top advice for quickly evaluating properties is to use this rule which states that monthly rent should be at least 1% of the purchase price.
- Investor-friendly agents: Work with agents who understand your investment criteria and can help find opportunities that match your needs.
- Wholesaler relationships:Build relationships with wholesalers who can provide access to off-market properties at better prices than you’d find through traditional channels.
- Choose the right markets: Invest in cash-flow markets versus appreciation markets. Take Detroit versus San Diego. In August 2024, Detroit’s median listing price is $99,000, compared to San Diego’s $998,000. Applying the 1% rule for rent, you can see that Detroit is a better location for BRRRR investing.
Step 2: Rehab
The next step is to renovate the property to increase value so you can more easily find renters. Important considerations for this stage of the strategy include:
- Budget: Keep your renovation budget around 10% of the property’s value. Don’t over-renovate and focus on making the property livable and safe. You should also add a 20% buffer for unexpected costs.
- Tenant preferences: Invest in updates that renters want like stainless steel appliances.
- DIY and financing: You can reduce expenses by doing some work yourself. Another strategy is to fund the costs by using financing like Home Depot’s 0% interest for 2 years.
Step 3: Rent
Once your property is ready, find reliable tenants to generate cash flow. Research local market details using Zillow or Realtor.com to compare similar properties and help you set competitive rates.
Be sure to compare like-for-like properties in terms of size, amenities, and location. Also factor in potential vacancy periods when calculating your expected returns.
Step 4: Refinance
Now that your rehabbed property generates cash flow, you can focus on pulling out your initial investment through a cash-out refinance. Here’s what to keep in mind:
- Timing: Wait at least 6 months after purchase before refinancing to meet most lenders’ seasoning requirements.
- Compare loans: Work with a mortgage broker who can shop around various companies to find the best financing terms for your situation.
- Target optimal LTV: Make sure you can meet a loan-to-value ratio of 70-80% to maximize your cash-out and still have equity.
- Monitor interest rates:Watch rate changes so you can time your refinance at the best rates possible.
- Realistic expectations: You may not always recover 100% of your investment in the refinance and that’s OK. The goal is to pull out as much capital as possible that still gies you room for positive monthly cash flow.
Step 5: Repeat
The final step is when you get to decide what’s next. You might buy another property to grow your portfolio or hold it long-term. If you decide to sell, leverage a 1031 Exchange to defer taxes and put your money into new investments.
Real-world example of a BRRRR investment
To show how all these steps come together, here’s a real-world example of a BRRRR investment I made in Atlanta, Georgia.
Buy
- Purchase price: $70,000
- Property type: 3-bedroom, 2-bathroom townhome
- Size: 1,500 square feet
- Condition: Interior needed rehab work
- Purchase date: 2020
Rehab
- Renovation cost: $10,000
- Total cash invested: $80,000 ($70,000 purchase + $10,000 renovation)
Rent
- Monthly rental rate: $1,400
- Cash flow: $700 ($1,400 rent – $700 mortgage)
Refinance
- Appraised value after renovation: $100,000
- Loan-to-Value (LTV) ratio: 80%
- Refinance loan amount: $80,000
- Closing costs: Approximately $5,000
Result and repeat
- Total out-of-pocket after refinance: $5,000
- Property sale: I sold the property after 4 years in 2024 for $189,000
Analysis
Initial investment: $5,000
Returns:
1. Cash flow: $700/month x 36 months = $25,200
2. Profit from sale: $189,000 – $80,000 = $109,000
3. Total return: $25,200 + $109,000 = $134,200
Return on investment: $134,200 / $5,000 = 26.84x or 2,684%
Note that this analysis doesn’t account for selling costs, taxes, or other potential expenses.
How to get started with the BRRRR method
Now that you understand the BRRRR method, you’re probably wondering how to put it into practice. Here’s a roadmap to help you launch your BRRRR strategy:
Education
I highly recommend the BiggerPockets website and forums. You can also find books specifically on the BRRRR method and out-of-state real investing.
It’s also a good idea to join real estate investor meetups to learn from other investors. A word of caution though… while education provides value, don’t get caught in analysis paralysis. Sometimes you just need to take the plunge and do your first deal.
Build your network
Success in real estate investing hinge on who you know. Get connected to a team in your target market. This includes real estate agents, mortgage brokers and contractors.
Scaling your operations
Start by self-managing to understand the process. I actually still self-manage my entire portfolio today. You can use software tools to help you find reliable tenants and collect rent automatically. In the future, as your portfolio grows you may want to hire a property manager to help you scale.
Conclusion
The BRRRR method is not a get rich quick scheme but rather a great way to grow a estate portfolio without putting all your money into each property.
It is work and you’ll probably hit some bumps along the way but you’ll learn from each deal. Stick with it, and you might just surprise yourself with what you can achieve.
Why not give it a shot? Your first BRRRR deal could be the start of something big.
