BRRRR stands for buy, rehab, rent, refinance, repeat. It is a strategy investors use to acquire a property, fix it up, place a tenant, and then refinance into longer term financing to free up capital for the next deal. Two types of business purpose loans typically show up in this process: a short term hard money loan for the purchase and renovation, and a DSCR loan for the long term hold. Understanding how these two pieces fit together can help you plan each stage of a project with more clarity.
What the BRRRR Strategy Involves
The BRRRR approach is built around five steps. An investor buys a property that needs work, usually below market value because of its condition. The investor then rehabs the property to bring it up to a standard that will attract tenants and support market rent. Once renovation is complete, the property is rented out. After the property is stabilized with a tenant in place, the investor refinances the original purchase and rehab costs into new financing. The cash from that refinance can then be used to repeat the process on another property.
This strategy depends on lining up the right type of financing for each stage, since the needs during the buy and rehab phase are different from the needs once the property is a stabilized rental.
Why Hard Money Often Fits the Buy and Rehab Phase
During the acquisition and renovation stage, a property is not yet generating rental income and may not be in a condition that a long term lender would consider ready to finance. Hard money loans are a form of short term business purpose financing often used in this stage because they are structured around the property and the project, not around a stabilized income stream.
This type of loan is generally used to fund the purchase price and some or all of the renovation costs. Because it is short term, it is designed to be paid off once the project reaches its next stage, typically through a refinance or a sale.
Refinancing Into a DSCR Loan
Once renovation is finished and the property has a tenant in place with rent being collected, the property has different characteristics than it did at purchase. It is now generating income, which opens the door to a different type of long term financing option known as a DSCR loan.
DSCR stands for debt service coverage ratio. A DSCR loan is a business purpose loan that is evaluated based on the rental income the property produces relative to its debt obligations, rather than focusing primarily on the borrower's personal income documentation. This can make it a fit for investors who hold property through an LLC or similar entity and want financing tied to the performance of the asset itself.
The refinance into a DSCR loan is the step in BRRRR that pays off the hard money loan and converts the project into a longer term hold. This is also typically when an investor may access cash from the increased value created by the renovation, depending on how the deal is structured.
An Illustrative Example
Consider an illustrative example only, with rounded numbers. An investor identifies a property priced at 200,000 dollars that needs renovation. The investor uses a hard money loan to fund the purchase and an additional 50,000 dollars in rehab costs. After the work is completed, the property is rented and reaches a stabilized value that supports a DSCR refinance. The DSCR loan is then used to pay off the hard money loan, and the investor moves the property into a long term hold. This example is for illustration only and does not reflect any specific rate, fee, or approval outcome.
Questions to Think Through Before You Start
Before using a BRRRR strategy, it helps to think through a few practical questions. How much renovation work does the property actually need, and how long will it realistically take. What rent can the property support once it is stabilized, and is that rent enough to make a DSCR refinance workable. How will the exit from the short term loan to the long term loan be timed, and what happens if renovation takes longer than expected.
Working through these questions early, and discussing them with a loan originator who works with both short term and long term business purpose products, can help you plan a project with fewer surprises along the way.
Common questions
Is BRRRR only used with hard money loans?
Hard money is a common choice for the buy and rehab stage because it is structured around short term, project based financing rather than a stabilized income stream. Some investors may use other forms of short term financing as well, depending on the project.
Do I have to refinance into a DSCR loan?
No. The refinance step in BRRRR can take different forms depending on the investor's goals and the property's situation. A DSCR loan is one common option because it is built around rental income, but it is not the only path.
What happens if the property is not fully rented when the hard money loan comes due?
This is one of the key risks in a BRRRR project. Timing between renovation completion, lease up, and the refinance is something to plan for carefully, since short term loans are designed to be repaid within a defined period.
Can I use a DSCR loan if the property is held in an LLC?
DSCR loans are a form of business purpose lending and are often used by investors who hold rental property through an entity such as an LLC. Specific requirements can vary, so it is worth discussing your ownership structure with a loan originator.