The BRRRR method: buy, rehab, rent, refinance, repeat

The five steps

1. Buy a property that needs work, at a price well below what it will be worth once it's fixed (its after-repair value, or ARV). Purchases are often made with cash, a hard-money loan or a private loan, since many conventional lenders won't finance a house in poor condition.
2. Rehab it into a rentable, appraisable condition. The goal is the largest increase in value per dollar spent, not luxury finishes.
3. Rent it to a tenant at market rent. A signed lease supports the refinance and proves the property can carry a long-term loan.
4. Refinance into a long-term mortgage based on the new appraised value. The new loan pays off the purchase loan, and anything left over comes back to you as cash.
5. Repeat with the cash you got back.

It works only when the gap between what you paid (purchase plus rehab plus costs) and the appraised value is big enough. A common rule of thumb for the buy step is the 70% rule used by flippers.

A worked example

You buy a dated three-bedroom house for $140,000 with a hard-money loan for 80% of the price at 11% interest-only, and pay the $40,000 rehab in cash. The work takes six months. Comparable renovated houses nearby sell for about $240,000, and the refinance lender offers 75% of the appraised value.

The new $180,000 loan at 7.25% for 30 years costs $1,228 a month. With rent of $2,300, after vacancy and operating expenses the property earns about $16,760 of NOI a year, leaving about $2,030 of cash flow (around $169 a month). On the $18,160 still in the deal, that's a cash-on-cash return of about 11%, and you have $63,000 to put toward the next property.

What can go wrong

• The appraisal comes in low. If the house appraises at $220,000 instead of $240,000, the new loan is $165,000, the cash back falls to $48,000, and $33,160 stays stuck in the deal: almost twice as much. The ARV is the number the whole plan rests on, so base it on recent sales of truly comparable renovated homes.
• Seasoning requirements. Many lenders won't do a cash-out refinance based on the new value until you've owned the property for a period, often 6 to 12 months. Your hard-money interest keeps running while you wait. Ask lenders about their rules before you buy.
• Rates rise during the project. A higher rate on the refinance means a larger payment, which can turn positive cash flow negative or keep you below a lender's DSCR minimum.
• The rehab runs over. Budget a contingency (often 10–20% of the rehab) and extra months of holding costs.
• Cash-out lowers the cushion. Pulling all your money out means a bigger loan and thinner cash flow. Getting your cash back is good; a property that can't survive a vacancy is not.

Common mistakes

• Using the listing price of the nicest house on the street as the ARV.
• Forgetting refinance closing costs, which can be several thousand dollars.
• Counting on 80% loan-to-value when investment-property cash-out refinances are commonly capped lower; confirm the lender's limit.
• Judging the deal only by cash left in. A deal that returns all your cash but loses money every month isn't a win.

Try your own numbers, including a lower appraisal and a higher rate, in the BRRRR calculator.