What is the BRRRR method?

September 2024

BRRRR! No, it’s not cold outside — that’s just one of the hottest strategies for real estate investors. This is a five-step process that has gained attention for its potential to generate income. While the BRRRR method started out as a tactic for buy-to-let landlords, it also has enormous potential in the world of holiday rentals. Here’s what you need to know about it.

What does BRRRR mean in real estate?

The BRRRR method consists of five steps: buy, rehab, rent, refinance, repeat. To go into a little more detail about the BRRRR meaning, here’s what BRRRR investors do:

• Buy: find an undervalued property and purchase it.
• Rehab: rehabilitate the home. This may involve simple repairs or more complex work to make the property more appealing.
• Rent: in the traditional BRRRR method, landlords rent out their properties to tenants. You may also prefer to rent it out as holiday accommodation.
• Refinance: now that you’ve increased the value of the property through your rehabilitation work, you can refinance it. This will give you a lump sum to continue with the next step.
• Repeat: go back to the first step and start again with a new property.

Looking at those steps, the BRRRR method might sound simple, but before you try it for yourself, you’ll need to consider the pros and cons.

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A BRRRR strategy example

Still wondering what BRRRR is in property? Here’s a quick example of how it works:

• Buy: John sees a fixer-upper property on the market. He takes out a mortgage to buy it, ensuring that he still has enough in his budget for the repairs it needs.
• Rehab: Using his rehab budget, John gets to work improving the property. If he’s lucky, he may even find that he doesn’t need to use his entire budget. This gives him some extra money to put towards his next investment.
• Rent: Once the property is ready, John decides to advertise it as a holiday home on a holiday rental portal. Soon he has a regular stream of guests providing him with rental income.
• Refinance: Now that John’s holiday rental is up and running, it’s time to move on to the next project. John refinances his property to receive a lump sum of cash.
• Repeat: It’s time for John to find a new property to add to his portfolio, which he can now buy with the lump sum he just received.

Pros of the BRRRR method

Wondering why you should choose BRRRR investing? Well, it’s a good way to increase your property portfolio. Rather than sell one property to buy another, you’ll be able to use the refinancing method to have multiple properties at once. As you are refinancing rather than selling, there’s no capital gains tax to worry about.

By using the BRRRR method, you’ll have a continuous flow of rental income. Of course, it’s worth noting that holiday rental income is not the same as having a regular tenant. In many cases, it’s more profitable to rent a holiday flat rather than use your property as housing. However, that’s not always true, especially as your property may only be used seasonally.

Another advantage of the BRRRR method is that it can be easier to get started. As you’ll be looking for distressed, undervalued properties, you’ll generally find places with a lower purchase price. That’s a good point for newcomers to the world of property investment.

Cons of the BRRRR method

Does the BRRRR method sound like a winner to you? While it can be an extremely effective strategy, it’s not for everyone, and there are some disadvantages to consider. Firstly, you need to be a whizz with a budget. The success of the method hinges on buying undervalued properties in need of renovation. This means you’ll have to budget very strictly when it comes to the rehab step, or you’ll be way out of pocket before you even start.

The method also relies on the idea that the property will increase in value over time. While this is mostly true, it can never be guaranteed. If you’re unlucky, you may find yourself stuck in limbo, waiting a very long time before you can take on the costs of buying your next property.

If you’re planning to use the BRRRR method for holiday homes, there are a couple of added drawbacks. For one thing, you may find it difficult to find suitable properties, as fixer-uppers in prime holiday destinations might be rare. For another, setting up a property as a holiday rental can be a little trickier than finding a tenant to move in —it’s never as simple as just posting a “rent my holiday home” ad and hoping for the best! You might find that it takes some time to have a regular stream of guests renting out your property.

How to choose a BRRRR property

If you’ve decided to go with the BRRRR method, you’ll need to carefully appraise potential properties. There are a few metrics that are common among BRRRR investors:

• Maximum allowable offer (MAO). Before you start, you should have a clear idea of your maximum purchase price. This is non-negotiable, so don’t be afraid to walk away if necessary.
• Added value from rehab. This is the amount that you expect the property’s value to increase after your improvements. If you are new to BRRRR, you might want to consult a professional for advice here.
• After-repair value (ARV). This is the original purchase price plus the added value —in other words, the amount that you expect the property to be worth when all your renovations are complete. Of course, this can only ever be an estimate.
• The 70% rule. Most BRRRR investors agree that you should never pay more than 70% of the estimated ARV for your property. This gives you a handy financial cushion to help offset the costs of renovations; it will also mean you have equity for your planned refinance.

Remember, it’s not just about the price. If you’re planning to use your property as a holiday rental, you’ll want to make sure that it’s suitable. After all, you don’t want to spend all that money only to find that you’re struggling to get guests. Have a look at listings on holiday rental websites to get an idea of popular property types in your destination. Keep an eye on both the location and the type of property, as these are essential factors in helping you make the right choice.

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