Real Estate Investing: The BRRRR Approach

One of the bigger challenges in purchasing investment properties is coming up with enough money for a down payment. Say you want to purchase a single-family home costing $150,000. A down payment of 10% of this home’s purchase price would be $15,000. That’s a lot of money. But don’t let this dissuade you. The BRRRR investment method can help.

What is the BRRRR approach?

BRRRR stands for buy, rehab, rent, refinance, and repeat. And it’s a tested method that real estate investors have long used.

Buy: First, you buy a distressed home or one that is in foreclosure for a lower price than you’d pay for most properties in that community. Buying a home for a price that is low enough is key. If you spend too much money upfront, it’s difficult to earn enough profit on your real estate investment efforts. Unless you have a lot of cash, you’ll typically need to take out a mortgage loan to finance the purchase of this investment property, meaning that you’ll need to make mortgage payments each month.

Rehab: Next, you either rely on your own sweat equity or work with contractors to rehab this property. The goal is to immediately increase the value of your investment property with these renovations.

Rent: Once the renovations are complete, it’s time to rent it out. This is another key step in the BRRRR process. When you rent out your property, you generate a new monthly income stream, something that boosts your profits and can help you cover the mortgage payments on your investment property.

Refinance: The next step is to refinance the existing mortgage on your investment property with a cash-out refinance. In this type of refinance, you refinance your existing mortgage for more than what you owe, taking the extra cash as a lump-sum payment that you can spend however you like.

Maybe you owe $175,000 on a home that you purchased and renovated. You might refinance $245,000, receiving the extra $70,000 in cash. You'd then repay the entire amount that you borrowed with regular monthly payments, with interest.

Repeat: Finally, there’s the repeat part of the BRRRR formula. During this step, you’ll use the proceeds from your cash-out refinance to cover the down payment on another investment property. This way, you’ll always have enough money to cover the down payments you need to keep investing. And once you buy your second investment property, you start the BRRRR approach again.

Of course, the end goal is to hold onto the investment properties you purchase until they appreciate enough in value so that you can sell them for a higher profit. That’s where you’ll make the big money on your investment properties. And as you wait for this, you can continue to collect monthly rent payments to help cover the mortgage payments on these rental properties.

As with any investment strategy, speak with the team at LMJ CPAs before committing to make sure it fits with your overall strategy and risk tolerance.