Grow Your Portfolio and Passive Income with the BRRRR Method for Commercial Real Estate

August 5, 2021

One of the most significant barriers to growing a commercial real estate portfolio—and realizing the passive income it provides—is raising capital to purchase and rehab new properties. With the BRRRR (buy, rehab, rent, refinance, repeat) method, you can overcome this hurdle by using cash-out money from a loan refinance to buy your next piece of real estate.

Essentially, you can purchase an unlimited number of properties using the same down payment dollars over and over again.

Originally conceived by David Greene of the real estate forum BiggerPockets, BRRRR is most commonly used by single-family and small multi-family property investors. But the strategy might be even more useful for commercial real estate, where larger capital requirements create even bigger barriers to growth.

The BRRRR method isn’t a cheat code or get-rich-quick scheme. Instead, it’s a standardized, repeatable template for buy-and-hold investors who want to steadily build wealth and passive income over time.

What is the BRRRR strategy?

The BRRRR method is a real estate investment strategy that follows five steps: buy, rehab, rent, refinance, and repeat. Using this method, an investor quickly creates equity in a value-add property, then uses that equity to buy the next building. They do this all while retaining ownership of the original investment property.

Buy

The first and most important step is to buy an undervalued property that’s not maximizing its rent potential.

Here’s why. You need to increase the property value quickly so you can borrow against the newly created equity to fund your next deal.

Since commercial real estate (CRE) lenders use a property’s net operating income (NOI) to assess its value, the best way to get a higher valuation is to increase NOI by increasing the total amount of revenue (mostly from rent) that building generates.

For BRRRR, you don’t want to get into a building that will take years to rehab. Here are some good opportunities to look for:

  • Buildings with poor management. Can your management company market the property better to fill empty spaces with higher-paying renters?
  • Rebranding. Could a few cosmetic changes allow you to rebrand the building for more desirable renters?
  • Repositioning. Will current zoning allow you to add storage or office space to a retail property (or can you re-zone)?
  • The current owner needs to get out. Is the building’s owner motivated to cash out because they inherited the building, want capital for another project, or are just not interested in managing the property?

Start with an aggressive initial bid and be prepared to be patient. Your offer may not be attractive when you first send it, but let the property sit on the market for a while and the holding costs will motivate the seller to accept—or at least counter—your offer.

Rehab

The goal of the rehab phase is not to perfect a distressed building. It’s to fill empty spaces, improve rent, and increase NOI. So, only spend on things that increase value for prospective tenants.

Consider quick improvements like new landscaping, repairing sidewalk cracks, replacing kitchen appliances, upgrading floors, and giving the front desk a facelift.

Rehab isn’t only about physical improvements. You can create a higher value perception through better marketing and management.

Make sure you’ve completed your due diligence and created a detailed list of rehab costs before you make your offer to buy. Long, expensive repairs will crush the potential of a fast refinance for your next project.

Rent

Speed is the name of the game here. Get good-quality renters to fill empty spaces fast, stabilize income, then refinance and repeat ASAP.

You’ll be able to do this because you bought below the market rate and spent wisely on rehab. As a result, the property is now more attractive than others in the area, and you can afford to offer rents at, or a little below, market.

Refinance

This is where the BRRRR method differs from a traditional buy-and-hold strategy. Instead of prioritizing only cash flow, you’ll unlock some of the newly acquired equity through a refinance. That gives you the capital you need to add more properties to your portfolio.

And with your property rented at near capacity with higher-paying tenants than when you bought, a lender will assess its value against a higher NOI—giving you the new equity needed to borrow against.

Repeat

With your process and framework in place, take your recaptured capital and purchase the next investment for your portfolio.

Why the BRRRR Method works for CRE

Although BRRRR started in the single-family residential space, the strategy has some unique advantages for the CRE investor.

You can lease part of a property out while you rehab the rest

Rent collection on a single-family home is all or nothing. However, with a multi-tenant CRE building, you can collect some revenue from operational spaces while work continues on the rest.

You can lease unfinished spaces as storage before rehabbing them

If some unfinished space in your commercial building will remain empty for a while, you can collect rent on it as short-term storage. That provides an additional source of revenue during the rehab phase of your BRRRR project.

It’s easier to increase the value of CRE than residential

A residential home is largely valued against comparable homes that were recently sold in the local market. Therefore, no matter what you do, it’s difficult to increase a residential property’s value beyond those comps.

CRE, on the other hand, is valued by the net income it produces. With some creativity, you have the flexibility to increase rents, reposition, and add new value adds (like paid parking) to a CRE building—creating more revenue and increasing the value of your building even beyond local comps.

The scale of CRE makes BRRRR even more useful

The larger down payment, holding, and rehab costs of commercial projects make them less accessible than lower-cost residential projects. BRRRR makes investment capital available, putting CRE within reach for more investors.

An example of the BRRRR Method

The goal of your first BRRRR deal is to complete a cash-out refinance that pays you back for any upfront, out-of-pocket expenses and leaves you with some capital for your next deal.

This hypothetical shows how that happens.

Buy an undervalued $500,000 building

Purchase an office building for $500,000 that’s 70% occupied with a yearly rent roll of $40,000 and $10,000 in operating expenses.

Purchase: $500,000 ($450,000 loan, $50,000 down payment)
Gross revenue: $40,000
Operating expenses: $10,000
NOI: ($40,000 - $10,000) $30,000
Cap rate: ($30,000 / $500,000) = 6%

Increase property value through rehab

Invest $100,000 in rehab and have $30,000 in carrying costs (for simplicity, we’ll include loan fees, lease brokerage costs, appraisals, etc.).

Out-of-pocket expenses
Down payment: $50,000 down payment
Rehab: $100,000 rehab
Carry costs and fees: $30,000 carry cost and fees
Total cash out of pocket: $180,000

Place higher-paying renters

With the upgrades, we’ve attracted more and better tenants, so the property is now 90% filled and gross rent revenue is $70,000.

New gross revenue: $70,000
Operating costs: (still) $10,000
New NOI: ($70,000 - $10,000) $60,000

Using the new NOI and keeping the same 6% cap rate, our building would now assess for about $1,000,000.

6% (cap rate) = $60K / (new building value)

or

New building value = $60K / 6% = $1,000,000

Cash-out $700,000 from our refinance

Lenders will typically refinance at 70% of the new assessed value. We’re going to pull the maximum out and use some to repay our original loan.

Cash-out from refi: $700,000
Payback original loan: $450,000
Leftover cash: $250,000

Pay ourselves back and move to the next deal

Finally, we need to repay ourselves our out-of-pocket expenses and then see how much we have left for the next deal.

Remaining cash-out from refinancing: $250,000
Out-of-pocket expenses: $180,000
Leftover for the next deal: $70,000

So, here’s what happened after our first BRRRR project:

  • We own an office building that’s 90% leased up and cash flowing
  • We paid ourselves back 100% of our initial out-of-pocket investment
  • We have $70,000 ready for the next investment

And this is how you can re-use the same initial capital investment from a single deal to buy the next.

The goal is to re-use the same out-of-pocket cash for an infinite number of future investments. That’s how the BRRRR method snowballs your portfolio growth.

Best practices to consider when using the BRRRR Method

The BRRRR method has a lot of potential for growing your investment business. But it’s not without risks. For example, a refinancing delay or unexpected cost will reduce profitability and make it hard to move on to the next project.

These best practices will reduce the most common risks of the BRRRR method.

Have a trusted team before you start

Once the wheels of a BRRRR project start rolling, there are many moving pieces to manage: legal/zoning, financing, physical rehab, property management, lease marketing.

To keep it all under control, have a team of professionals you trust vetted and established well before placing an offer.

Your CRE investment team should include:

  • Attorney
  • Lender
  • Insurance agent
  • Accountant
  • Title company
  • Commercial rehab contractor
  • Property management
  • Leasing brokerage

In addition, make sure everyone has access to a common set of communication and project management tools. That’ll reduce the amount of time you spend keeping each person up to speed.

Minimize seasoning time

A lender may require a waiting period after you’ve fully leased your property before you can refinance. It’s called “seasoning,” which helps prove to the lender that the revenue you’ve claimed is stable.

The longer the seasoning, the longer it will take before you can pull cash out of your property to buy the next. However, you may be able to reduce this waiting period by working with lenders that know you and are familiar with your strategy.

Worst case, you cash flow from the property during the hold period because you bought below market value and placed better tenants.

complete thorough due diligence

If buying at the right price is the cornerstone of a good BRRRR deal, due diligence is the foundation it’s laid upon.

Thorough due diligence will turn up hidden but costly repairs, positive or negative neighborhood features, tax breaks or costs, value-add opportunities, and alternative exit strategies.

By the time you make an offer, you should be confident that you can rent, rehab, and refinance successfully at the given purchase price.  

Have quality tenants lined up beforehand

You can speed up and reduce the costs of a BRRRR project if you have quality tenants lined up before you make a purchase offer.

For starters, you can tailor your rehab to the tenants’ needs. That’ll save you the cost of any re-fitting down the line.

Also, with tenants lined up on day one, you can prove the stable income to your lender faster. That should shorten the seasoning period.

Reduce Carry cost with an interest-only loan

Carry costs are the amount of money you’ll spend owning the property on things like loan payments, taxes, insurance, utilities, etc. Rental income isn’t either low or non-existent during the rehab phase, so you’ll want to keep carry costs down as well.

One way to cut carry costs is to get an interest-only loan during the duration of your rehab work. Then when you cash-out refinance, you can move back into a more traditional finance agreement.

Learn more about the BRRRR Method

There are plenty of nuances to the BRRRR method. Here are a few places you can learn about it from people with personal experience.

BRRRR method on Reddit

Reddit is an excellent place to learn about CRE and showcase your own knowledge. These subreddits (conversations within Reddit) address BRRRR from different angles.

In this subreddit, the poster challenged people to share their BRRRR failures. It’s amassed 155 comments, including plenty of cautionary tales to help you avoid common pitfalls (like not catching structural issues that drain your profitability).

For a more positive spin, read through this subreddit about BRRRR success stories. There are dozens of projects broken down by dollars and cents, so you can see exactly how it works in the real world.

To find more, just enter “BRRRR” into Reddit’s search tab and scroll through the results.

BRRRR method books

While these books are written for residential investors, the concepts are similar enough to give CRE buyers a strong foundation to get started with BRRRR.

Learn right from the man that coined the phrase with “Buy, Rehab, Rent, Refinance, Repeat: The BRRRR Rental Property Investment Strategy Made Simple.” In this guidebook, David Greene starts with a high-level description of BRRRR, then takes you through a step-by-step process on how to do it.

David Dodge and Mike Slain, Hosts of the “Discount Property Investor” podcast, apply their detailed style and personal experience to the topic of BRRRR in their book “The BRRRR Method: Build a Rental Empire With Nothing Out Of Pocket.”

BRRRR method on BiggerPockets Podcast

The “BiggerPockets Podcast” has more than a dozen episodes dedicated to BRRRR. From how-to tips to investor stories, you’ll find a ton of useful information to help you start your own BRRRR project.

A good place to start is with episode 33. In it, a military veteran and his real estate veteran mentor explain how they purchased a property with the BRRRR method and what they learned along the way.

Improving your BRRRR investment with PropTech

While the BRRRR method is straightforward and easily repeatable, it will take a lot of time and brainpower to evaluate each new potential deal and managed each project.

Luckily there are plenty of property technology (PropTech) tools available to help. For example, you can use Biproxi to surface your next investment property, Property Fixer to analyze the financials, and Matterport to capture 3D walk-throughs of your newly rehabbed building.

Ember Hansen
With over a decade of marketing & business development experience, Ember brings a fresh perspective on CRE to the biproxi leadership team by turning her passion for SaaS into actionable insights for brokers and investors looking leverage technology to create a more successful business.
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