Buy, fix, rent and refinance (BRRRR)

Buy a home that needs work, renovate it, rent it out, then refinance against the higher value to get some of your cash back for the next one.

How it makes money

• It earns like a rental: rent left after every cost, the loan being paid down, and any value your repairs add.
• The refinance doesn’t earn anything. It lets you borrow against the higher value to get some of your cash back for the next property, but that cash is a new, bigger loan you repay, with its own fees. The appraisal, the lender’s approval and the new rate aren’t certain.

The honest risk

• Cash you need to start: The purchase price and the whole repair budget until you refinance. Fannie Mae generally needs you on title for 6 months before a cash-out refinance. If you’re paying off a loan you used to buy, such as a hard-money loan, that loan must be at least 12 months old. If you paid all cash, you may refinance sooner, but the new loan can only give back what you paid for the property plus closing costs, not your repair money. Plan to have cash tied up for a year or more.
• Worst realistic outcome: Repairs run over or the appraisal comes in low, so the refinance returns less of your cash and it stays stuck in the property.
• What you keep owing: You owe every loan payment, tax and insurance bill even when a unit is empty or repairs run over. If you can’t pay, you can lose the property and the equity in it, so you can lose more than the cash you start with.
• How long a first deal takes: Months to buy and renovate, then months more before you can refinance.

What goes wrong on a first deal

• The refinance depends on the appraisal and the lender’s waiting period (often 6 to 12 months). A low appraisal leaves more cash in.
• The new, bigger loan must still leave positive cash flow at the new rate.
• Short-term money (hard money, credit) gets expensive if the refinance is late.

Your first steps

• Read “Refinancing after a cash or hard-money purchase” in the financing lesson, then the lesson on analyzing a deal.
• Before you buy, ask a lender what they’ll lend on a cash-out refinance, how long you must own it first, and what they need from the appraisal.
• Estimate the value after repairs from sold homes already in finished condition, and plan for an appraisal that comes in lower.
• Get a written bid from a qualified contractor (licensed where required) and add a cushion for what you can’t see.
• Run the rent calculator at the refinanced loan amount: the rental must still pay for itself.
• Keep cash in reserve in case the refinance takes longer or returns less than planned.
• Practice a purchase first.