Real-estate investors seized upon a tried-and-true strategy to fix up homes and make money. Then the market turned.

• Rental-property owners look for reliable ways to scale up quickly and ensure steady cash flow.
• One way: buy a home, fix it up to rent out, then refinance to get cash and buy the next one.
• Two investors lay out the reasons they're now shying away from that model, nicknamed BRRRR.

Jessica Davis Holland, an Austin, Texas real-estate investor, and her husband recently spent $225,000 on a three-bedroom, two-bathroom home in the growing suburb of Cedar Creek.

It was the fourth property in the last three years that the couple had purchased and renovated. Their initial goal, as with their previous projects, was to turn the house into a cash-flowing rental property, then use money they'd get after refinancing to purchase their next fixer-upper. 

After all, the Austin market was booming. Home prices were increasing at what seemed like an exponential rate, which meant cash-out refinances were lucrative. Rents were also climbing, which meant the money coming in from tenants often exceeded the cost — including principal, interest, taxes, and insurance — of holding onto the home.

Except, this time, the numbers didn't work out as Holland had originally planned. In addition to the purchase price, they spent roughly $65,000 on the renovations, $5,000 on property taxes, and another $22,500 on carrying the property — including closing costs and monthly mortgage payments — for a few months while the renovations wrapped.

With the $2,000 per month rent they could likely get, their monthly costs would exceed their income, so the couple decided that their best path forward was to sell the house after completing the renovations. The $354,000 they earned from the sale was more than what they put into the house in total, so they came out on top.

"We looked at long-term rent and we would have been in the hole a few hundred dollars per month based on interest rates and property taxes," Holland told Insider. "We decided to flip it because we weren't in a position to say, 'I'm fine if I lay out $400 a month to carry this property.'"

Home rehabbers like Holland are quickly finding that the once-reliable method known as "BRRRR" — short for buy, rehab, rent, refinance, and repeat — has become much riskier as home prices in hot pandemic markets fizzle out and 30-year mortgage rates reach the 7% threshold. 

While mom-and-pop landlords have practiced the BRRRR strategy for decades, it became even more popular in the years leading up to the pandemic as investor influencers on social media and podcasts with large online forums, including BiggerPockets, extolled its virtues. And then, when interest rates fell and rents skyrocketed between 2020 and 2022, rehabbers across the country  embraced the strategy even more enthusiastically, believing it was a surefire way of adding new properties to their portfolios and making more money. 

But a perfect storm of softening home prices, increasing taxes, higher mortgage rates, and steep building-material costs has made the BRRRR model less attractive to investors. And Austin is particularly vulnerable, as home prices have fallen drastically since last summer, when they peaked. 

The BRRRR method has become more challenging

John Crenshaw, a 27-year-old Austin investor who owns several rentals acquired via the BRRRR method, said that using it has become more challenging for him and his fellow investors since mortgage rates increased. 

Not only are homes selling and appraising for less than they were six months ago, which dampens the size of cash-out refinances, but lenders have become more risk-averse.

"Instead of doing an 80% cash-out, a lot of people are only doing 75% or 70% cash-out, so you'll only get 70% of your loan value back and the remaining 30% has to remain in the property," Crenshaw told Insider.

While a 5% or 10% difference may not seem like much on paper, it is more than enough to change the equation for most investors, Crenshaw said. After a 70% cash-out on a house that the lender said is worth $300,000, the borrower would get $210,000 — or about $30,000 less than they'd get in a 80% cash-out. And borrowers who refinanced a house two years ago would have gotten a 30-year mortgage right around 3%, Freddie Mac data shows. Today, they'd get a rate of around 6.65%, which could increase monthly mortgage payments on a $300,000 house by nearly $500 a month. 

What landlords can do instead of BRRRR

And because it's impossible to just raise rents to whatever covers their costs, landlords are looking to expand their options — and ideally, portfolios — when they have to pivot.

When the BRRRR numbers don't work, Holland said, there are a few strategies investors could consider instead.

"What are your exit strategies?" she asked. "Can you hold it? And if you can hold it, are you going to long-term rent it or short-term rent it, or are you going to flip it?" 

While Holland and her husband ended up selling the Cedar Creek property, she said that they did explore all of their options, including using the property as a short-term rental on Airbnb. But even that strategy has its own competitive advantages and disadvantages, she said, such as seasonality and uncertain income. 

In their case, when the cost of the renovation and high mortgage rates dovetailed, the best option was simply to sell the property to someone who wanted a nicely rehabbed home — and move on to the next one.