BRRRR stands for buy, rehab, rent, refinance, and repeat. The basic idea is to use short-term financing to buy and rehabilitate a property, then replace that loan with long-term financing that allows you to recover a large portion of the cash you put into the deal. For this strategy to work, each stage must be properly financed, and the refinancing stage is particularly important.
BRRRR financing is actually a series of loans
When investors are looking for a “BRRRR loan,” they are usually looking for financing that supports the entire strategy. In reality, there is no single loan that covers all stages. Instead, each stage typically uses its own financing, and these loans must align with your timeline.
The process typically looks like this:
- Purchase: Purchase the property with cash or short-term financing, such as a hard money loan.
- Renovate: Use renovation funds provided by a short-term lender. These funds are usually released in stages, or in the form of installment payments (draws), as the work is completed.
- Lease: Complete the property and place a tenant in the property under a lease agreement so that the property can show rental income.
- Refinance: Replace the short-term loan with long-term financing, often a DSCR cash refinance. The new loan pays off the original loan and may return some of your cash.
- Recurrence: Use the cash recovered from the refinancing to make a subsequent investment.
A “recurrence” is not actually another loan. This stage is simply the point where you take the money recovered from a property and put it toward your next purchase.
It’s the refinancing that ultimately determines whether the deal numbers work out. This means that the purchase price, renovation budget, expected value, and projected rent should all be planned with the eventual refinancing in mind.
Which loan should you use to purchase the property?
Many BRRRR investors use short-term financing to purchase. Properties that need significant repairs may not qualify for traditional financing, while a short-term lender can often close the deal faster. Sellers may also prefer the assurance of a faster closing.
However, you should still expect to put some of your own money into the deal. Experian says borrowers may need a down payment of around 20% to 30% of the property’s value or after-repair value (ARV). Use these figures as a general range for planning, not a guarantee, as each lender has its own requirements.
Cash payment is another option. For investors with the necessary funds, a cash purchase can sometimes shorten the waiting period before refinancing. Our guide to delayed financing explains this approach in more detail.
Before signing a short-term loan, find out if it includes an early repayment penalty. Since the loan is usually planned to be paid off within a few months, the cost of early repayment can reduce the amount of cash you ultimately recover.
Renovation funds are usually paid in stages, so timing is important
Renovation funds are often held with the lender and paid in stages. Once an inspector verifies that a particular stage of work is complete, the lender releases the funds for that stage.
This staged payment process is especially important in a BRRRR deal. Your renovation budget will affect the final value of the property, and that final value needs to be high enough to make a final refinancing make sense.
ATTOM reports that experienced flip investors typically spend about 20% to 33% of the ARV on renovations and related costs. Building some extra margin into your budget can help protect you in the event of unexpected repairs.
You should also have enough cash on hand to cover contractors and other expenses while you wait for the next stage to be paid. Ask the lender how long it typically takes to review, inspect, and release funds. A slow phased payment process can make the project take longer and increase your interest costs.
The Lease Phase Provides Important Numbers to the Refinancing Lender
After the renovation is complete, the next step is to find a tenant. The lease agreement is important because rental income can play a significant role in determining your eligibility for refinancing.
A DSCR loan uses the property’s income to measure its ability to cover its debt. The debt service coverage ratio is generally calculated by comparing the monthly rent to the monthly payment of principal, interest, taxes, and insurance.
A DSCR above 1.0 means the property’s income will cover that payment.
Set the rent at a realistic, market-based level. Asking a higher rent than similar properties may look better on paper, but the lender’s appraiser may use a lower-than-market rent when evaluating the property.
Some lenders also require a pre-approval before allowing the completion of the loan. Find out about these requirements before you buy the property, not after the renovation is complete.
Can a DSCR cash refinance give you your money back?
It can, provided the value of the property is high enough after the renovation and the lender’s requirements are met.
In a cash refinance, a new loan is used to pay off an existing short-term loan. If the new loan is more than the amount owed, the remaining funds can be paid to you in cash.
The amount of loan you can get depends largely on the appraised value of the property and the maximum loan-to-value (LTV) ratio set by the lender. Our page on DSCR cash refinancing covers the loan itself in more detail.
A conventional cash refinance is also another option. However, Fannie Mae typically requires borrowers to have six months of title in the deed before completing a conventional cash refinance, although there may be exceptions. DSCR lenders have their own title period requirements, so confirm the rules with your lender early in the process.
Example: How a property appraisal can change the amount of cash back you get
Consider a hypothetical example.
Andre is a nurse making his first BRRRR deal. He purchases a rental property for $140,000 and spends another $40,000 on renovations, bringing his total investment to $180,000.
His short-term lender is financing $162,000, meaning Andre is putting $18,000 of his own money into the deal.
After the renovation is complete, the appraiser appraises the property at $250,000 and the property rents for $2,200 per month.
Suppose the lender allows a refinance with a maximum LTV of 75%. This creates a new loan for the following amount:
$250,000 × 75% = $187,500
Andre uses the new loan to pay off the short-term loan of $162,000. This leaves him with $25,500 before closing costs. Since he initially put $18,000 into the deal, he will recover this cash and have some additional income.
Now suppose the property is appraised at only $230,000.
With the same LTV of 75%, the maximum refinance would be:
$230,000 × 75% = $172,500
After paying off the short-term loan of $162,000, Andre would only receive $10,500. This means that $7,500 of his original cash will still be in the property.
Assume the new loan has a monthly payment of $1,850, including taxes and insurance. With a monthly rent of $2,200, the DSCR would be approximately 1.19.
This example is hypothetical and is provided for illustration purposes only. This example is not a loan offer or quote, does not include an interest rate or APR, and the actual terms will depend on the lender, property, borrower, and other factors.
How should you choose lenders for a BRRRR deal?
A BRRRR deal often involves two different lenders: one for the purchase and renovation and one for the long-term refinancing. For this reason, transitioning from one loan to another is as important as the terms of each loan.
As a mortgage broker, The Mortgage Shop can present an investor’s deal to multiple lenders, which can help coordinate short-term financing with an eventual refinance.
Before committing to a loan, compare at least these six factors:
- Early repayment penalties: Expect to pay off the short-term loan early, so find out what that will cost.
- Staggered payment schedule: Ask how quickly the renovation funds will be released after an inspection.
- Refinancing requirements: Check the lender’s required ownership period and see if the property needs to be rented out first.
- LTV on cash refinancing: Find out the maximum LTV and see how the lender will handle appraisals.
- Ownership Structure: If you are purchasing the property through an LLC, confirm that both lenders accept this structure and that the ownership structure will be applicable to both loans.
- Closing Costs and Cash Reserves: Compare the timing of the closing and the amount of cash reserves required by each lender.
Try to get the refinancing terms in writing before you buy the property. If you find out after the renovation is complete that the lender will only finance a lower percentage of the property’s value, you may end up with much more cash in the property than you expected.
