Advantages of the BRRRR Strategy
The greatest advantage for the BRRRR strategy, of course, is you can invest in real estate with a zero-net investment of your own cash. Once you refinance, you have exactly $0 of your own money invested in the property.
That is not the same as buying a rental property with no money down. You still need cash for the initial down payment, even though you’ll get it back a few months later when you refinance through a private lender like Visio. Luckily for you, there are plenty of creative ways to come up with a down payment for your next property.
You’ll also need cash for the first round of work; while the purchase-rehab lender finances the property renovations, they only reimburse you after each round of work is completed.
But because the BRRRR method returns your original cash to you, it removes the restraint of cash. You can recycle your same down payment cash, over and over. All the while, your rental income grows with every property.
And because you’re forcing equity by renovating the properties, you (ideally) don’t end up overleveraged with negative cash flow, despite financing 100% of your purchase costs. At least if you calculate your cash flow accurately.
You also get all the real estate investing tax deductions that come with buying, renovating, and holding rental properties. Including mortgage interest and closing costs — without having to itemize your personal deductions, either.
The BRRRR strategy is precisely how many real estate investors reach financial independence from real estate at a young age, without needing millions of dollars following the 4% Rule for retirement with stocks. More on that shortly.
Disadvantages & Risks of the BRRRR Method
Before you go on a buying spree, beware of the BRRRR strategy’s risks and downsides.
You incur two rounds of closing costs, each of which costs thousands of dollars. Even if you use the same lender for both the purchase-rehab loan and the refinance to a long-term mortgage (LendingOne offers both), they still require a fresh round of title searches, appraisals, lending fees, and other settlement charges. Don’t be surprised to spend $5,000-$10,000 on each settlement in non-refundable, lost-money fees.
As mentioned above, it normally takes major renovations to create enough equity to pull your original cash back out. That means months of overseeing contractors and repairs, pulling permits, and the other attendant headaches of renovating real estate.
Then there’s the risk of overleveraging. You need to make damn sure the property will cash flow well — use this free rental ROI calculator to forecast the property’s eventual cash flow. Remember to build in the extra expenses of the second round of closing costs, in your long-term refinance loan numbers.
Some long-term mortgage lenders also require a seasoning period. This refers to a minimum period of time that you must have owned the property, before the lender will work with you. However you’ll likely only see seasoning requirements from conventional mortgage lenders.
Like any property, rental properties bought through the BRRRR method come with risks. Always ask yourself these nine questions before buying any rental property to evaluate risks accurately.
How the BRRRR Method Fits into Your Financial Independence & Retirement Strategy
The BRRRR strategy is ideal for reaching financial independence and retiring early (FIRE). How’s that for an alphabet soup of acronyms?
Most people’s instinctive reaction when I ask them how much they need to retire is “Huh? A lot, I guess. Over a million dollars, maybe several million.”
When I ask them if they think they’ll be able to reach financial independence and optionally retire at 40 or some other young age, most doubt it. These reactions make sense — if you’re following the 20th Century model of retirement. Save up a huge nest egg, retire at 65, then gradually draw it down over the next 20-30 years.
To do that, most people follow the 4% Rule for retirement. In short, it says you need 25 times your annual spending in order to retire, so that you can withdraw 4% a year. Thus, if you want $40,000 in annual income in retirement, you need $1,000,000 saved.
And let’s be honest, it’s not easy to save up a million dollars.
I love stocks, don’t get me wrong. I invest in them for diversification and long-term growth. But the math changes dramatically, when you look at real estate vs. stocks for financial independence and early retirement.
How Much You Need to Save Up for Retiring with Rentals
The BRRRR strategy throws that old 20th Century model out the window.
Say you have $30,000, and you use it as a down payment to buy, renovate, and refinance a duplex rental property over the course of several months. After refinancing, your new property generates $300/month in net passive income.
You repeat that process twice more that year, for a total acquisition of three properties for the year. Each property generates $300/month in net income.
At the end of the year, you have your original $30,000 back in your pocket, plus $900/month in passive rental income. That’s $10,800/year, and you don’t have a dime of your own money tied up in the properties.
Even if you never saved another cent, and only re-used that same $30,000 to repeat the process, you’d have $43,200 in annual rental income after just three more years. Just imagine if you put that additional income to work buying more properties, or bigger properties that cash flowed better?
Real-Life Examples
And it doesn’t just work in theory. This is exactly how the Hoeflers reached financial independence in under five years (see our free masterclass we hosted with Scott Hoefler, breaking down exactly how they did it).
Nor are they unique; we’ve interviewed dozens of people who have reached FIRE with real estate in five years or less. For another example, here’s how Leif reached FIRE from real estate by 32.
(Spoiler: The key to Leif’s success was a strategic approach to property investment, which covers initial implementation, scaling, effective leveraging, and management. All this allowed him to retire early and enjoy a financially secure lifestyle well before the typical retirement age—something he wouldn’t have been able to achieve if he’d continued working in a lab. But you should read the full blow-by-blow, as he has a lot of great things to say about strategic real estate investments.)
