Complete Walkthrough of a BRRR Deal Example

While many new real estate investors choose to focus on fix & flips, BRRR deals offer another outstanding investment option. And, this approach helps investors build long-term wealth, too. As such, I want to use this article to provide a BRRR deal example to help guide investors considering this strategy. 

BRRR stands for buy, renovate, rent, and refinance. Like fix & flips, BRRR investors buy and rehab a distressed property. But, rather than sell it for a profit, they rent it out and do a rate/term refinance. This allows investors to profit through rents, loan amortization, and appreciation. 

I’ll dive into more details of BRRR deals in the following article. Specifically, I’ll cover the below topics: 

  • What Is a BRRR Deal? 
  • Keys to BRRR Success
  • Why I Like the BRRR Strategy
  • BRRR Deal Example
  • Final Thoughts

What Is a BRRR Deal? 

BRRR stands for buy, renovate, rent, and refinance, and it’s a frequently-used strategy of real estate investors looking to build a portfolio of rental properties. And, while not technically part of the strategy, a fourth “R” exists: repeat. As I’ll explain in this article, a successful BRRR deal will allow investors to move from their initial deal into subsequent deals. 

Here’s a more detailed look at each element of a BRRR deal: 

Buy

Similar to fix & flip deals, BRRR investors purchase distressed properties – typically at a significant discount. Most of these properties don’t qualify for traditional financing, that is, your standard 30-year residential mortgage. Consequently, motivated sellers who want to convert their equity into cash need to find other buyers, as people looking for primary residences can’t finance these properties. 

Enter real estate investors as problem solvers. Unlike primary homebuyers, BRRR investors use either cash or hard money loans to finance the purchase and renovation of a property. When approving a mortgage, traditional lenders look to A) the condition of the underlying property for collateral purposes, and B) the borrower’s entire financial picture. On the other hand, hard money lenders look solely at the “hard asset” – the property – when approving loans. More precisely, these lenders look at what the property will look like in the future

When you apply for a hard money loan to buy and renovate a distressed property, the lender completes two types of appraisals. First, they determine the “as-is” value of the property to ensure the purchase price is reasonable. Second, lenders hire appraisers to determine the after-rehab value, or ARV, of the property. These specialized appraisers look at the contractor renovation bids and local area homes with similar renovation work to determine what the property will be worth after the renovation

Hard money loans hinge on this ARV number. While every lender varies, Do Hard Money will issue loans at 70% loan-to-value (LTV) based on ARV. For example, say a property has an ARV of $300,000, meaning that the appraiser believes this property will be worth that much following the renovation. With this ARV, we’d lend $210,000 ($300,000 ARV x 70% LTV). 

But, these loans function more like acquisition/construction loans in that borrowers don’t receive the full lump sum at closing. Instead, hard money lenders issue loan funds in accordance with predetermined draws. Generally, you’ll receive an initial amount to purchase the property. Then, the lender will release funds to pay the contractors as work progresses. This provides a level of protection to hard money lenders, as they don’t lend out more money than costs put into renovating the property. 

This hard money loan amount also plays a critical role for investors analyzing potential BRRR deals. With particularly good deals, investors can complete the purchase and renovation with 100% financing. Continuing the above example, if you can find a $300,000 ARV property to purchase and renovate for $210,000 (the hard money loan amount) or less, you can complete the deal with no contributed capital. Put simply, you can end up owning a rental property without investing any of your own cash. 

This is one of the primary goals of BRRR investing: to find deals that require little to no up-front capital. In addition to significantly increasing your ROI on individual deals, this also provides you the flexibility to keep investing in new properties. 

Renovate

Once you close on the purchase, the renovation work begins. During the deal analysis of the BRRR buy phase, you’ll work with a general contractor (GC) to develop a detailed scope of work. This will include a line-by-line accounting for all work the contractor will complete – and the associated prices. In addition to making sure that you and the GC are on the same page, this document also serves as an outstanding project management tool, allowing you to tangibly measure renovation progress. 

As an investor, you likely have too much on your plate to supervise every step of the rehab period. But, I recommend that you go to the property at least once a week, as you’ll want to make sure that the work is progressing as scheduled. At these weekly meetings, I suggest walking the property with your GC and always asking two questions:

  • What did you do last week, by scope of work line item?
  • What are you doing this week, by scope of work line item?

These questions A) let you track the progress and make sure you hit milestones, and B) let you submit loan draw requests to pay your GC accordingly.

Occasionally, a contractor falls significantly behind schedule. When this happens, I recommend holding a status of rehab work meeting. In this meeting, you discuss a plan for the contractor to catch back up on the work. If not possible, I bring in a back-up contractor to finish the work. However, I will definitely provide some time liberties if a delay is documented by third parties (e.g. a city delaying permit issuance). 

In many respects, this BRRR renovation period parallels the rehab work in a fix & flip deal. However, investors should recognize one major difference: they must account for the wear and tear tenants put on rental properties. 

When you sell a fix & flip, you don’t need to worry about this. But, with a BRRR property, investors absolutely do not want materials breaking every year or so. Instead, investors need to use far more durable materials during the renovation. Ideally, you can find a happy medium between cost, style, and durability. The home needs to look nice enough to appeal to potential tenants while A) holding up to their wear and tear, and B) not breaking the renovation budget

Rent

Following the renovation period, BRRR investors rent the property out to high-quality, long-term tenants. Unlike fix & flip investors who profit on the sale of the renovated property, these investors instead seek cash flow and loan amortization via quality tenants. 

Additionally, renting a property proves critical to the next step in the BRRR strategy: refinancing. Traditional lenders require that borrowers meet certain debt-to-income (DTI) criteria. Conceptually, DTI represents the percentage of every dollar of income you use to make monthly debt payments, including the future mortgage. Mathematically, you solve for DTI by dividing all of your monthly debt payments by your monthly gross (pre-tax) income. 

While lenders vary, many require a DTI of 40% or lower to qualify for a mortgage on an investment property. Without these new rent payments offsetting the future mortgage, many investors will not meet this DTI requirement. 

Refinance

After renting their property to long-term tenants, BRRR investors need to refinance their short-term, high-interest hard money loan into a long-term mortgage – often referred to as takeout financing. Of note, this refinance qualifies as a rate and term one. Investors use the proceeds from the takeout financing to pay off the hard money loan, in effect extending the term and changing the interest rate from one loan to another. Very few lenders will provide a cash-out refinance in this situation. 

If BRRR investors fail to refinance their hard money loans into long-term mortgages, they face two bad options: 1) continue paying the high interest rate of a short-term loan, or 2) change strategies and sell the property. This begs the question, how can investors refinance a BRRR property? 

If investors ask this question during a BRRR deal, they’ve already set themselves up for failure. Instead, before beginning a deal, BRRR investors need to get pre-qualified for the eventual permanent, or take-out, loan. They need to find a lender who will provide this sort of refinance loan on an investment property, apply for pre-qualification, and then purchase the property with a hard money loan. 

This sequencing is the result of credit requirements. With hard money lenders, credit scores and income qualifications largely don’t matter. These lenders only concern themselves with the “hard asset,” the property – and its after-rehab value. As a result, hard money loans are often easier to qualify for than traditional mortgages. 

On the other hand, traditional lenders do care about credit scores, income requirements, and other personal financial information. This means that, of the two loans, the long-term financing proves far more difficult to receive. Due to this reality, BRRR investors will want to confirm that they’ve tentatively secured their long-term financing before jumping into a deal. If not, they can face an unpleasant surprise during the refinance period of the BRRR deal. 

From a loan amount perspective, most lenders will provide 75% to 80% LTV takeout financing on investment properties. If you have analyzed the deal correctly, this long-term mortgage will completely pay off your hard money loan balance. 

Let’s continue the above example of the $300,000 ARV property and the $210,000 hard money loan. First, it’s important to note that ARV is an estimate, meaning that the actual market value following the renovation may differ. But, assume the market value also equals $300,000. With 75% LTV, you could borrow $225,000 – $15,000 more than the hard money loan. Therefore, if interest payments are less than $15,000 on the hard money loan, the takeout financing will completely pay off the balance. However, if interest payments exceed $15,000, you’ll need to contribute cash to pay the difference between the hard money loan balance and the total takeout financing. 

NOTE: During the pre-qualification process, investors should ask lenders about any required “seasoning” period. Some lenders require that an investor own a home for a certain amount of time – the seasoning period – before approving a refinance. Accordingly, you want to confirm that, if a seasoning period exists, it does not exceed the projected renovation period. 

Repeat? 

Traditional BRRR deals don’t technically include the repeat step. But, this is almost implied with most real estate investors pursuing this strategy. As stated, investors must meet certain DTI measures to qualify for long-term financing. If analyzed correctly, the rents from a BRRR property can completely offset the associated debt service – even with some lenders only considering 75% of rental income towards DTI. 

This debt/rent offset frees investors up to pursue subsequent deals. And, as each BRRR deal increases cash flow, most investors do not stop at a single deal. 

Keys to BRRR Success

Financial Situation to Qualify for Takeout Financing

With fix & flip deals, investors largely don’t need to worry about their personal financial situation, as hard money lenders focus on the property. But, BRRR investors need to qualify for traditional financing to successfully complete this strategy. This means investors need to have excellent:

  • Credit scores
  • Income
  • Debt-to-income ratios
  • Cash reserves

If you do not meet lender requirements, you can consider wholesaling as an alternative. With this strategy, you don’t actually purchase or refinance an investment property. This means you have no need to apply and qualify for traditional financing. Instead, wholesalers find off-market properties, and they enter contracts to purchase these properties. Rather than actually close on the purchases, they assign the contracts to a third party, typically a fix-and-flip investor. 

And, they assign these contracts for a fee. As such, wholesalers find deals, connect the sellers with investors, and collect a fee in the process – all without dealing with the financial requirements of qualifying for a mortgage. By doing several wholesaling deals, investors can A) pay off debt to boost their credit scores and reduce DTI and B) increase cash reserves, both of which can help towards meeting permanent financing qualification requirements. 

Find Great Deals

This may appear self-evident, but I want to reiterate: successful BRRR investing depends on finding great deals. Properties listed on the MLS at retail generally won’t qualify. You just won’t be able to buy and rehab these homes for less than 70% ARV, meaning you’ll need to contribute a lot of cash to make the deal happen. 

Instead, investors should pursue off-market properties. These homes have far less competition than MLS ones, and they can offer investors significantly discounted prices. To help find these homes, we highly recommend our Investor’s Edge software. This tool includes a database of over 160 million deals. Investors can search through these to find deals fitting their particular investment criteria, filtering to find owner’s with equity and motivation to sell. And, once you find these deals, Investor’s Edge lets you directly market to the owners via pre-filled postcards or voicemails. 

Why I Like the BRRR Strategy

For investors who want to build long-term wealth, the BRRR strategy is a great option. In particular, it offers the following profit avenues:

  • Cash flow from rents: With a properly analyzed deal, investors will collect excess cash flow from a rental property every month.
  •  Loan amortization: When tenants pay rent, they also pay your mortgage. With an amortizing loan like a mortgage, a portion of every payment reduces your loan balance. As your loan balance decreases, your equity – or ownership – in the property increases, building your overall wealth.
  •  Property appreciation: BRRR investors also benefit from long-term property appreciation. While home values may fluctuate in the short-term, if you hold for an extended period, you’ll likely benefit from property appreciation, or increases in value.

BRRR Deal Example

Continuing the above scenario, I’ll provide a brief BRRR deal example to tie everything together. I stated that the hypothetical property had an ARV of $300,000, meaning that the investor would qualify for a $210,000 hard money loan. 

In analyzing this deal, the investor determined that the purchase price, renovation, and holding costs (e.g. loan interest, utilities, property taxes, etc.) would total $220,000. As a result, the investor needs to contribute $10,000 in additional capital to the deal, either through cash or gap financing. Assume this investor chooses the cash option so is into the deal for $10,000 in personal funds. 

Following the rehab, the market value of the home has increased to $310,000 – $10,000 more than the ARV. With 75% LTV, this means the investor will qualify for $232,500 in takeout financing – more than enough to cover the $210,000 hard money loan balance. 

But, before refinancing, the investor needs to secure a long-term tenant. In doing the rental cash-flow analysis, the rent needs to cover the operating costs and monthly debt service on the property, guiding the investor’s pricing decision. Once rented, the investor can then move forward with the refinance, which will pay off the hard money loan. With the takeout financing in place, the investor can focus on operating the stabilized property and looking for the next BRRR deal. 

Final Thoughts

The BRRR strategy of buy, renovate, rent, and refinance offers investors an outstanding option for building long-term wealth. If interested in pursuing this approach, our Do Hard Money team has project managers and coaches to guide you through the entire process. Drop us a note to get started! 

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