As you pursue your real estate investing education, you’ve no doubt encountered the acronym “BRRRR.” Whether you’re listening to Brandon and me on the podcast, perusing the forums, or reading the blog posts, someone always mentions BRRRR.

No, they’re not chilly. BRRRR stands for “buy, rehab, rent, refinance, repeat.” In other words, the smart investor’s investment cycle.

The traditional method of buying rental property involves buying a property with financing, such as a mortgage, then rehabbing, renting, and eventually repeating the process later. You might call this BFRRR: buy, finance, rehab, rent, repeat. (But nobody calls it that. BFRRR is a ridiculous acronym—and because so many people purchase property this way, there is no need for a special name.)

The traditional method of buying properties is popular because it’s the most convenient. Here, you purchase properties with a loan, usually from a bank. You’ll need a 20% to 25% down payment. The investor doesn’t have to work as hard to save up the full purchase price or find a hard or private money lender through financing. The ease of this method can be seductive!

However, like most things in life, easiest is not often best. Through the BRRRR method, you’ll buy homes quickly, add value through rehab, build cash flow by renting, refinance into a better financial position—and then do the whole thing again. Over time, you’ll build a real estate portfolio that’s the envy of your fellow investors.

Here’s how.

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Breaking down the BRRRR method

When you buy a property, fix it up, improve its value, and then refinance, you’re borrowing against the value of the property at its highest. Done correctly, this allows you to recover more of—or sometimes all of—the money you invested in the property.

Here’s what you need to know.

1. Buy

They say you make your money when you buy, and that’s definitely true. But to paraphrase Tolstoy’s opening line of Anna Karenina, all good deals involve a good purchase, but each bad deal is bad in its own way.

Most lenders will finance 75% of a property’s value, so holders should aim for 75% all-in. And they generally do— because they have some money they can leave in the deals and are prioritizing volume. If that doesn’t describe you, I would argue you should stick with the 70% guideline for two reasons.

1. Refinancing costs money. Most banks charge a point, and there will be an appraisal, title work, and loan processing fees that eat away at your margin.
2. Aiming for 75% offers no contingency. People go over budget more often than under budget, so building in a bit more of a margin is a better idea unless you are going for volume.

Several options can help you purchase a rental property, such as cash, a hard money loan, seller financing, or a private loan. Deciding which upfront financing to use is outside this article’s scope, but what’s important to note here is that different upfront financing options will result in different acquisition and holding costs. You need to account for those when analyzing a deal to hit your 70% or 75% goal.

So what’s the key to BRRRR success? Buying properties under market value and never investing more than 75% of the property’s after-repair value (ARV). This ensures you never run out of capital and can continue buying forever.

Let’s start with your ARV. I recommend having a trusted source like an experienced agent, lender, or other investor give you a conservative number they believe the house will appraise for once it’s been repaired the way you intend. Take that number and multiply it by .75. This is your “target.” Your goal is to get the rehab and the purchase price to add up to this target goal.

If you pay too much for a property, there is very little you can do to recover from surprises and problems.

2. Rehab

There are two key questions to keep in mind when rehabbing a rental.

1. What do I need to do to make this house livable and functional?
2. What rehab decisions can I make that will add more value than their cost?

If you rehab correctly and make sure you add value when you do, you are pretty much guaranteed to recover your money—and then some. However, unless you buy and hold luxury rentals, generally speaking, these things aren’t necessary:

• Granite countertops
• Brazilian hardwood floors
• High-end stainless steel appliances
• Bay windows
• Skylights
• Hot tubs
• Chandeliers

It’s also rarely worth finishing a basement or a garage for a rental. Instead, consider changes like two-tone paint, refinished hardwoods, and new tile.

And, of course, the house needs to be in good shape. Everything needs to be functional. Being a slumlord will hurt you in the long run—and the industry’s reputation.

Of course, your new investment won’t be in good shape when you purchase it. That’s the point! I intentionally look for properties that need massive repairs because I know other investors will ignore them and the sellers will be more motivated to drop their prices.

Some of the best problems to look for are:

• Roofs. If you add a new roof, appraisers tend to give you back the money you spent in property value.
• Unfinished kitchens. An outdated kitchen is ugly but still usable. A partially demo’ed kitchen makes a house ineligible for financing and, therefore, much easier to buy with cash.
• Drywall damage. Drywall damage makes a property ineligible for financing while also scaring away most home buyers. The good news? Drywall isn’t super expensive to repair.
• Horrific landscaping. Overgrown vegetation frightens the competition but costs very little to repair. You don’t need a skilled landscaper to hack down overgrown landscaping, so a few hundred dollars will take you farther than you think.
• Outdated bathrooms. I routinely completely remodel bathrooms for $3,000 to $5,000. Most bathrooms aren’t huge, so the material and labor costs come in low. This allows your house to compare to much nicer homes in the neighborhood with higher ARVs.
• Too few bedrooms. Homes with more than 1,200 square feet but less than three bedrooms offer easy ways to add value. Adding a third or fourth bedroom helps it compare to much more expensive properties, increasing your ARV.

By targeting properties like these and making repairs at below market value, you can add big equity to your deals.

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3. Rent

Banks rarely want to refinance a property that isn’t occupied, so renting your house comes first. It’s critical to screen diligently so you get tenants that will pay each month. But it’s also important on the financing side. While appraisers shouldn’t put too much value on how clean and pleasant the tenant is, everyone is human. First impressions make a difference.

You need to notify the tenant before an appraisal. I always recommend you request interior appraisals versus drive-bys: Appraisers are more cautious and may downgrade your property unfairly with drive-bys. Send out or post a note on your tenant’s door about the date and time and give a reminder call the day before, unless your local laws require something else. Tenants don’t need to be present, but you should ask them to clean up and kennel any pets if they aren’t home.

One thing to keep in mind with the BRRRR strategy: Your mortgage will typically be slightly higher than with the traditional method because you are borrowing more money against the house. This is well worth it. Capital in the bank can be used to grow wealth, while you can’t use the equity in a property for much. The flip side of this argument is that your cash flow will be slightly lower with the higher mortgage payment.

This means you have to be that much more careful when running rental comps to know what you can expect for rent once you purchase your property.

4. Refinance

Not too long ago, it was tough to find a bank that was willing to refinance single-family rental properties. Now it’s much easier. Still, when looking for such banks, there are a few things that you will need to ask.

1. Do they offer cash out, or will they only pay off debt? If they don’t offer cash out, move on.
2. What seasoning period do they require? A “seasoning period” is how long you have to own a property before the bank lends on the appraised value instead of how much you’ve invested. For the BRRRR strategy to work, you must borrow on the appraised value. These days, some banks are willing to lend on the appraised value as soon as a property has been rehabbed and rented. These are the best banks to find.

To find great BRRRR banks, ask around. Ask investors you know, or query the BiggerPockets Forums users. A bank already lending to another investor will likely lend to you, too.

Here’s another unique way to find banks to help you refinance your property. Go to a website such as ListSource or CoreLogic and search for every loan made in your city and price range in the last year to non-owner occupants. This search will probably cost a couple hundred dollars.

Right off the bat, you know these banks lend to investors at the price point you require. They’ve done it before, so there is a good chance they will do it again.

Provide the lender with thorough, clear information. This impresses them—remember, these are human beings, not computers—and helps them decide quickly.

The trick to being successful here is getting as high an appraised value as you possibly can. A big part of success in this area is a combination of how well you rehabbed your property and how strong your initial comps were.

Sinking a lot of capital into a deal and then failing to pull it out is a big problem. I recommend getting pre-approved for a loan before buying.

5. Repeat

The “repeat” part of the BRRRR cycle is the most fun. Take everything you learned, gained, and improved upon and put it back into action.

Work on building systems, too. Systems help you accomplish your objectives by repeating the same process over and over. Systems cut down on mistakes and stress. The more documented your systems are, the less you’ll worry about something being missed, overseen, or forgotten about.

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Why “traditional” isn’t always best

BRRRR beats the traditional method of real estate investing because it allows you to recover the capital you left behind.

The traditional method involves putting a percentage of the home’s value down upfront when the home’s value is lowest. Think about it: Investors are always looking for deals. If an investor does their job well, they pay less for a property than it is worth. Banks base the amount of money they will let you borrow off of the purchase price of a property. If you pay $70,000 for a $100,000 property, the bank lets you borrow a percentage of that $70,000.

The loan-to-value (LTV) ratio determines that percentage. If a bank allows an 80% LTV, the borrower needs 20% for a down payment. Higher LTVs equal less money down for the investor.

When you use the traditional method, this down payment gets left in the deal. That means if you pay $70,000 for that $100,000 home and put 25% down, you drop $17,500 for the down payment. You’ll still need money for the rehab.

Every deal is different, but the rehab budget for most houses purchased the traditional way equals 20% of the home’s ARV (after-repair value). In this example, that would be $20,000. Negotiating that cost down half leaves you with a $10,000 rehab budget. When all is said and done, you will have spent $80,000 ($70,000 purchase price plus $10,000 rehab) for an investment property worth $100,000. The good news? You’ve gained $20,000 in equity. The bad news? You dropped $27,500 of your hard-earned money to do so.

Leaving your down payment in the property as equity hurts your ability to buy more properties. Leaving your rehab budget in the property hurts your ability to buy more properties—and discourages you from spending more money to create more equity.

The traditional method hurts your deal flow

Maintaining investment capital is crucial to finding better deals and growing your investments. Investment masters are active in the game. Using the traditional method, you simply run out of money too fast.

If you want to land hot deals, you must be ready, willing, and able to close. If you’re not in a position to move, someone else will swoop in and buy it before you can.

Traditional method loans slow you down. Lenders require appraisals, and they also require livable properties. Many of the best properties aren’t in great shape—that’s why they’re priced so low!

The traditional method also causes investors to run out of capital quickly, miss out on truly distressed properties, and close slowly. These factors hurt your odds of landing the contract first.

The traditional method stops your wealth from growing

Buying properties under market value is the best way to grow your wealth. In the earlier example, you spent $80,000 on a property worth $100,000. This added $20,000 to your net worth before appreciation, loan paydown, and cash flow.

With every house you buy traditionally, you add another $20,000 to your net worth. Doing this every two months adds $120,000 to your net worth. In a little over four years, you would have accumulated a net worth of a million dollars. Not too shabby—right?

Except you needed $27,500 of cash to add $20,000 to your net worth. This prevents you from buying more, slows your growth, and limits other aspects of investing, like getting the best deals first.

If you want to grow your wealth quickly, efficiently, and safely, you need to acquire cash-flowing rentals—quickly. Think of buying rentals like planting trees. Every year that tree grows, puts off more fruit, and increases in value—most of the time. The wealthiest own orchards, not small gardens.

Can you grow an orchard using the traditional method? Maybe if you have a ton of cash laying around. Even then, it would still be slower than with BRRRR.

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Advantages of BRRRR investing

Unlike the traditional method, BRRRR is designed to win you deals quickly—and keep your money growing. Here’s why.

1. Paying less for properties

In most cases, you will pay less for properties with the BRRRR method.

1. Pay with cash—or at the very least, without a financing contingency
2. Buy properties that don’t qualify for traditional financing
3. Close quicker and with fewer contingencies
4. Improve the property’s value more through rehab so that you can buy odd homes for less

Let’s imagine you pay $70,000 cash for that $100,000 property, then put $10,000 in for repairs. This leaves you all-in for $80,000 on a property worth $100,000. With the BRRRR method, the refinance portion comes after rehab. The bank bases the property’s value on its $100,000 worth, not the $70,000 you paid. At the same 75% LTV, you could refinance and recover $75,000. Considering you only spent a total of $80,000 on buying and fixing up the house, this means you only left $5,000 in the deal.

Compare that to the traditional method, which left $27,5000 in the deal. The BRRRR method returns $22,5000 that would have been held up in the property had you bought it the traditional way. That’s a big difference!

2. …Or potentially paying no money at all

Here’s a BRRRR trick if you lack the cash to finance your first deal: Work with a private or hard money lender for that initial down payment. After successfully rehabbing, renting, and refinancing the property, you can pay off that initial loan—and then, of course, reinvest the profits.

3. High return on investment

You don’t need a ton of money out-of-pocket to pull off a successful BRRRR. Less money down means a higher ROI, thanks to BRRRR. As investing superstar Brandon Turner breaks it down here, let’s imagine you invested $10,000 in a property. If it cash flows $2,500 per year, that’s a 25% cash-on-cash return—and we haven’t even started analyzing the built-up equity.

4. Building equity

Speaking of equity, it’s one of the best parts of BRRRR. Because you’re specifically choosing properties with serious rehab potential, you immediately build up equity in the deal. That equity waterfalls to the next deal, keeping your net worth growing.

5. Renting a class A property

You put good money (or literal blood, sweat, and tears) into your property—and you can definitely improve its property class. Maybe it veered more toward class C (or even worse!) when you bought it, but now you have a class A stunner. This means better tenants and fewer maintenance expenses.

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What to consider before BRRRR-ing

This strategy gives investors the most bang for their buck. But that doesn’t mean there aren’t a few risks of BRRRR you should look into before diving in. Here are some considerations.

1. The short-term loan

If you have the cash to finance your first deal without getting a lender involved, this isn’t something to worry about. (And let’s not forget the hearty congratulations!) However, if you need financing, it’s important to consider the costs of the loan. What will your carrying costs look like? What kind of rate can you get? Remember, private and hard money lenders often charge higher interest rates, which can reduce your cash flow.

One alternative: Using a home equity loan on an existing property to get started. This gives you initial funding without quite the same risk.

2. Appraisal risks

Refinancing is an important part of BRRRR—otherwise, it would just be BRRR. However, refinancing involves a home appraisal, which makes careful math ever-so-important. If you miscalculate your after-repair value and the property doesn’t appraise, you’ll have trouble repeating the deal.

3. Waiting for seasoning

Here’s another refinancing annoyance: Many conventional and portfolio lenders require properties to “season” first. Seasoning means you’ll need to wait between six and 12 months before refinancing. If you’re using a private or hard money lender, it’s imperative to calculate exactly how much this period of time will cost you.

4. Rehab pains

You might love the idea of renovating houses, but the rehab stage is nothing like HGTV. Prepare to juggle absentee contractors, surprise problems like asbestos, and many other headaches. Rehabbing certainly isn’t a dealbreaker, but don’t stride into this stage wearing rose-colored glasses.

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How to pay for your BRRRR

If you can pay cash outright, that’s always best. But you don’t need to have significant savings to start your BRRRR journey. Here are some options to cover purchasing the property and funding the rehab.

1. Use a HELOC

If you already own existing property—either an investment or your primary residence—a HELOC, or home equity line of credit, can provide your startup capital.

This option lets you close in about 10 days, depending on your state, and means you won’t need an appraisal. But there’s a downside to that: You need to be spot-on when determining your ARV. Otherwise, you may lose your investment.

2. Try a conventional loan

This strategy isn’t ideal for BRRRR, but it’s not completely infeasible, either. Start by talking with your current lender if you already own property. They can walk you through the ins and outs of financing a rehab with a conventional loan.

A few things to keep in mind: Conventional loans severely limit the types of properties you can purchase. And BRRRR works best when the property has big problems, like a bad roof or HVAC system. Additionally, conventional loans close significantly more slowly, which eliminates one of the major advantages of BRRRR.

3. Use hard money or a private lender

The right hard money lender will finance up to 90% of the purchase price and 100% of the construction. And when you’re buying, they’re treated like cash—which keeps you competitive.

However, some hard money or private lenders will require an appraisal, which decreases your competitiveness. They’ll also pay close attention to potential rents and may have requirements for how much the property should bring in.

And then there’s the biggest downside: rates. These are typically much higher than a standard mortgage, so calculate your holding costs carefully.

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Refinancing your BRRRR

Assuming you’ve made it through the rehab and gotten your place rented, it’s time to refinance.

Pro tip: Plan your refinance before you buy. Think about it too late, and you might find yourself scrambling for an acceptable solution. There are two primary refinancing options.

1. Conventional financing

This is the most common option for BRRRR investors. It involves working with a traditional lender to procure a mortgage backed by Fannie Mae or Freddie Mac. (Although you should seek out lenders familiar with investors.) These loans can have up to 75% loan-to-value ratios.

Generally, these loans offer the lowest interest rates and fees and have no prepayment penalties. However, conventional lenders often have strict underwriting guidelines, so make sure you walk through the requirements before buying the property to prevent surprises.

2. Commercial financing

Commercial financing can be a fabulous choice for investors. It involves underwriting the property as an income property and can garner up to 80% loan-to-value.

However, unlike conventional financing, these loans offer higher interest rates and prepayment penalties, and you may have to guarantee the loan personally.

Consider looking for commercial lenders who do both rehab loans and commercial loans. That saves time and money.

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Becoming a black belt investor

The good news for you is that by following the principles that lead to a good BRRRR deal, you will inevitably follow the same principles that lead to good real estate investing. By mastering the five elements of BRRRR, you will also master wealth-building through real estate.

A black belt martial artist practices specific movements, maneuvers, and techniques until they can perform them to perfection.

When investors do the same thing over and over, they too can reach a point where they can perform that action at a very high level. Through BRRRR, you recover a higher portion of your capital, which allows you to buy more deals and grow your net worth faster.

Become a black belt investor by doing more deals, which:

• Creates a reputation within the community of someone who can close. This means more deals will come your way.
• Builds your experience, making you smarter, faster, and better.
• Gets you better rates on your rehab projects from your contractors because you make them more money.
• Gives you a bigger portfolio, allowing you to pay less for property management fees.
• Provides the flexibility to earn more money by wholesaling, flipping, or selling your properties to other investors, turnkey style.
• Opens more leverage with local banks to get better financing terms.

There is value in volume. If you want to become a black belt investor, you need more repetition and more practice. This is much easier when you take advantage of the BRRRR method and your ability to create wealth by recovering more capital and buying more real estate.

BRRRR investing is the most efficient way to invest in real estate. It’s so powerful that I often tell investors not to buy anything until they can BRRRR. It will change your investing life and have a huge impact on your wealth.