Many investors see their first rental property as a steppingstone towards a bigger, more diversified portfolio. If you can relate to that, there’s a strategy to scale up your investments in rental properties: The BRRR. It’s a strategy designed to grow a rental portfolio by using the same capital more than once. Think of it as recycling your capital.
The BRRR, stands for “Buy, Renovate, Rent, Refinance”. If you execute this strategy correctly, you could recycle capital very efficiently, and eventually build a long-term portfolio while minimizing how much extra capital you put into your next deal.
Let’s break it down.
BRRR Step 1: Buy for Value
All steps are important in the BRRR, but starting out with a good purchase is key. The strategy usually involves getting an asset that is a little outdated, needing repairs, or generally mismanaged. We’re looking for purchases below market value, which we will then increase through renovations. Think of a “fixer upper”.
Seasoned investors have a good eye for distressed properties, estate sales, or properties in need of renovation. The lower your purchase price relative to the value of the property post-renovation, the better this works.
Let’s run through a quick example!
| Item | Amount |
| Property Purchase Price | $300,000 |
| Bank Loan (75% Loan-to-Value) | $225,000 |
| Out-of-Pocket Investment | $75,000 |
| Monthly Rent Income | $3,000 |
| Monthly Operating Expenses | $800 |
| Net Operating Income | $2,200 |
| Monthly Mortgage Payment | $1,900 |
| Net Monthly Cash Flow | $300 |
Based on your equity of $75,000 and a monthly cash flow of $300, your property already generates 4.8% per year of cash flow. We arrived at this by taking the $300 per month net cash flow multiplied by 12 to get annual cash flow of $3,600. You then take the $3,600 in annual cash flow divided by the equity you put into the deal of $75,000, voila, 4.8%!
BRRR Step 2: Add Value Through Renovations
Now that we have our property, we need to increase the value of it. We need to be very strategic though. We’re looking at things like new flooring, fresh paint, new kitchens and bathrooms, better lighting, etc. Strategic upgrades appeal to both potential tenants and appraisers. Let’s assume these strategic upgrades in our example cost $50,000.
The key is: don’t over-renovate. Focus on improvements that offer the best return.
With this additional $50,000 in renovations our total out of pocket investment is $125,000 ($75,0000 initial + $50,000 renovation)
After renovations our newly appraised value is $400,000, leading to a $100,000 increase in value. Given we contributed $50,000 towards this that is a 2X ROI (return on investment).
BRRR Step 3: Rental Returns
Now that our property is worth more, we’re able to charge a premium for rent. With the first few months of rent, we’re proving that the property is worth more than before. For single-family homes, we just need to ensure that the tenant is all settled in. In the case of multifamily deals, you may want to model out a stabilization period (check out our blog on real estate financial models for some help!) and wait until the property is at a stable vacancy rate.
| Item | Amount |
| Monthly Rent Income | $3,500 |
| Monthly Operating Expenses | $800 |
| Monthly Mortgage Payment (still old loan) | $1,900 |
| New Net Monthly Cash Flow | $800 |
At this stage, the property is “stabilized,” meaning it has consistent tenants and stable income—crucial for the next step.
BRRR Step 4: Refinance (Tax-Free)
Here’s where the magic happens on a tax-free basis.
With this new $400,000 property, we re-appraise the property and go back to the lender. Based on this valuation, let’s be conservative and assume that they still offer the same 75% loan-to-value.
Here’s how the numbers shake out:
| Item | Amount |
| New Loan (75% of $400,000) | $300,000 |
| Pay Off Old Loan | $225,000 |
| Cash Proceeds from Refinance | $75,000 |
You have just recovered your original $75,000 investment! Indeed, the mortgage payment will be higher since you borrowed more. But your property is earning more, too!
| Item | Amount |
| Monthly Rent Income | $3,500 |
| Monthly Operating Expenses | $800 |
| New Mortgage Payment (est.) | $2,100 |
| New Net Monthly Cash Flow | $600 |
Summary
The BRRR method is simple on paper, but as you saw when we dove into the numbers, there’s more to it! You need to have a clear understanding of the numbers, to renovate with discipline and know-how, and stay patient during the process. When done right, this method can help build a very lucrative real estate investment portfolio.
Where do you go from here?
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