BRRRR is a way to buy rental property and get most of your cash back to do it again. You buy a house that needs work, renovate it, rent it, and refinance based on its new, higher value. The refinance repays the original loan and returns your investment.
The idea is simple. The arithmetic has enough moving parts that it is easy to fool yourself, so this guide follows a single deal all the way through.
The deal
A tired three-bedroom house bought for $112,000. It needs $36,000 of renovation. Renovated homes nearby sell for about $215,000, and it should rent for $2,150 a month.
Buy: the purchase loan
Banks rarely lend on houses in poor condition, so the purchase uses a short-term hard-money loan: 15% down, 11% interest-only, 2 points, with the lender funding the rehab.
- Down payment: $16,800
- Loan: $95,200 for the purchase plus $36,000 for the rehab, $131,200 in total
- Closing costs (3%) and points (2% of the loan): $5,984
Rehab: the meter is running
The work, the lease-up and the refinance take five months. During that time you pay interest of about $1,200 a month, plus taxes and insurance, with no rent coming in.
Holding costs over five months: $7,493
Add it up and the cash you have put in by the time the house is rented is $30,277.
Rent
With a tenant paying $2,150, the property’s net operating income is $16,419 a year after vacancy, repairs, reserves and management. That figure matters now, because the next lender will underwrite the property on its income as well as its value.
Refinance: the moment of truth
A long-term lender offers 75% of the appraised value at 7% over 30 years.
- New loan: 75% of $215,000 = $161,250
- Pays off the hard-money loan: $131,200
- Refinance closing costs: $4,000
- Cash back to you: $26,050
Cash left in the deal: $30,277 − $26,050 = $4,227
You own a renovated $215,000 house with $53,750 of equity, and all but $4,227 of your money is back in your account.
What it earns afterwards
The new mortgage is $1,073 a month. After it, the property produces about $295 a month of cash flow, with a DSCR of 1.28.
On $4,227 left in the deal, $3,546 a year is a cash-on-cash return above 80%. That number is real, but read it carefully: it is large because the denominator is small. In dollars, this is a $295-a-month rental that you acquired almost for free.
Repeat, carefully
With $26,050 back, you are most of the way to the next purchase. That is the appeal. Three things most often break it:
- The appraisal. If the house appraises at $195,000 instead of $215,000, the new loan drops by $15,000, and all of that stays stuck in the deal.
- The rehab. A 20% overrun is $7,200 more cash in, plus another month or two of interest.
- The payment. A bigger loan returns more cash and leaves less cash flow. Pulling out every dollar from a property that then loses money each month is not a win.
Before you buy, change those three inputs against yourself and check that you can live with the result.
Run your own
The BRRRR calculator does this arithmetic as you type. The ARV calculator and cash-out refinance calculator cover the two numbers the whole strategy depends on.