brrrr method vs notes investing: Which Passive Income Strategy Works Better in 2026?

If you are deciding between brrrr method vs notes investing, you are really choosing between two very different engines of wealth: an active, operations-heavy real estate model versus a more paper-based cash flow model. Both can work in 2026. Both can fail if underwritten casually.

The right choice is less about social media returns and more about your constraints: time, liquidity, risk tolerance, lending relationships, tax profile, and your ability to manage people. If you need background first, start with the BRRRR overview, the cash flow calculator guide, and this cash flow vs notes comparison. You can also browse broader strategy context in the investing topic hub.

brrrr method vs notes investing at a glance

TouchStay and Sammamish Mortgage both describe BRRRR as Buy, Rehab, Rent, Refinance, Repeat. That definition is useful, but the capital behavior matters more: BRRRR tries to recycle capital through forced appreciation, while notes investing aims to earn yield from loan payments or discounted debt purchases.

A practical shortcut: if your edge is operations and local deal flow, BRRRR may be your better lane. If your edge is underwriting documents and credit risk, notes are often cleaner.

How each strategy creates returns

BRRRR return stack

BRRRR returns usually come from five layers:

1. Discount at purchase price.
2. Value increase from rehab.
3. Rent spread after expenses and debt service.
4. Principal paydown over time.
5. Long-term market appreciation.

The first two layers are where most outperformance comes from. If you miss those, BRRRR can become average cash flow with high effort.

Notes investing return stack

Notes returns typically come from:

1. Interest income from borrower payments.
2. Discount capture if you buy below unpaid principal balance or collateral value.
3. Workout upside from loan modification or payoff.
4. Collateral recovery if a default is resolved effectively.

Notes can look passive, but due diligence is technical. You need collateral valuation, title chain clarity, payment history, servicing quality, and legal process estimates. CFPB servicing standards, state foreclosure timelines, and local counsel quality can materially affect outcomes.

Decision framework for 2026: capital, time, and risk

Use a weighted scorecard before picking a strategy. Score each category from 1 to 10, then multiply by weight.

After scoring, apply threshold rules:

• If BRRRR weighted score is at least 1.5 points higher, run BRRRR.
• If notes weighted score is at least 1.5 points higher, run notes.
• If scores are close, split capital and collect real-world data for 6 months.

Also pressure test macro variables. Federal Reserve policy direction affects refinance costs. If rates stay elevated, BRRRR refinance assumptions need tighter stress testing.

Fully worked numeric example: one BRRRR deal vs a notes portfolio

Assumptions are illustrative and should be customized to your market.

Case A: BRRRR single-family rental

Assumptions:

• Purchase price: $180,000
• Rehab budget: $40,000
• Closing, carrying, and contingency: $20,000
• Total all-in basis: $240,000
• Post-rehab appraised value (ARV): $300,000
• Refinance loan: 75% LTV of ARV = $225,000
• New loan rate/term: 7.5%, 30-year amortization
• Stabilized rent: $2,700 per month
• Monthly operating assumptions:
• Vacancy: 6% ($162)
• Management: 8% ($216)
• Taxes + insurance: $420
• Repairs/capex reserve: $220

Cash flow math:

• Net before debt service: $2,700 - $162 - $216 - $420 - $220 = $1,682
• Estimated mortgage payment: about $1,573
• Monthly cash flow: about $109
• Annual cash flow: about $1,308

Capital outcome:

• Cash left in deal after refi: $240,000 - $225,000 = $15,000
• Equity at stabilization: $300,000 - $225,000 = $75,000
• Forced equity created from execution: about $60,000

Tradeoff:

• Excellent equity creation if ARV and rehab hold.
• Thin cash flow if rents soften or rates rise.

Case B: Notes portfolio with the same starting capital

Assumptions:

• Deployable capital: $60,000
• Mix of performing first-lien notes
• Blended gross coupon yield: 10.5%
• Servicing/admin cost: 1.0%
• Expected credit loss reserve: 1.5%
• Legal/workout reserve: 0.5%

Net yield math:

• Gross annual interest: $60,000 x 10.5% = $6,300
• Total costs and reserves: $60,000 x 3.0% = $1,800
• Estimated net annual cash yield: $4,500
• Monthly average: about $375

Tradeoff:

• Better initial cash flow consistency than this BRRRR example.
• Less upside from forced appreciation and depreciation shelter.

Sensitivity test: what breaks first

Interpretation: BRRRR has larger upside dispersion. Notes usually have tighter return bands but more credit/legal dependency.

Step-by-step implementation plan (first 12 months)

1. Define your strategy mandate in writing. Set target net return, max drawdown, minimum liquidity, and max weekly hours.

2. Build your underwriting templates. Create one BRRRR template and one notes template with stress scenarios and conservative assumptions.

3. Set guardrails before deal hunting. Use rules such as maximum 75% ARV refinance assumption, 10%-15% rehab contingency, and minimum debt service coverage buffers.

4. Source and screen opportunities. Underwrite at least 20 BRRRR candidates or at least 15 note tapes before selecting one path.

5. Build your execution team. BRRRR: agent, contractor, property manager, lender. Notes: servicer, collateral reviewer, local counsel, note broker relationship.

6. Run a pre-mortem. List top 10 failure points and define trigger-based responses. This step alone saves many avoidable losses.

7. Launch one pilot deal only. Do one BRRRR project or one small notes basket first. Do not scale before post-mortem data exists.

8. Track live KPIs monthly. BRRRR: rehab variance, days-to-lease, DSCR, cash flow. Notes: payment compliance, delinquency roll rate, net yield after reserves.

9. Reassess after 6 months. If your real numbers miss underwriting by over 20%, pause scaling and fix process errors.

10. Scale deliberately in months 7-12. Only add exposure if your first cycle met both return and risk thresholds.

30-day checklist to pick and launch your path

Use this as a practical sprint.

Days 1-7: Define constraints and underwriting

• [ ] Write your 12-month income goal and risk limit.
• [ ] Set minimum cash reserve target (example: 6 months personal plus property/portfolio reserve).
• [ ] Build a downside case for each strategy.
• [ ] Confirm financing assumptions with at least two lenders and one note source.

Days 8-14: Market validation

• [ ] Underwrite 10 BRRRR opportunities with realistic rehab and rent comps.
• [ ] Review 8-10 notes with collateral and payment history.
• [ ] Verify foreclosure timelines and legal costs in your target states.
• [ ] Build a simple tax projection with your current income profile.

Days 15-21: Team and process

• [ ] Interview two contractors and one property manager if BRRRR is likely.
• [ ] Interview two loan servicers and one note attorney if notes are likely.
• [ ] Standardize your deal memo format.
• [ ] Set red-line rules that automatically kill bad deals.

Days 22-30: Commit and execute

• [ ] Choose one pilot deal.
• [ ] Set weekly reporting cadence.
• [ ] Fund reserves on day one.
• [ ] Schedule day-45 and day-90 review checkpoints.

Common mistakes that kill returns

BRRRR mistakes

• Buying based on optimistic ARV instead of conservative sold comps.
• Underestimating rehab scope and permitting delays.
• Ignoring refinance lender seasoning requirements.
• Assuming rent at top-of-market without proof from signed comps.
• Treating thin cash flow as acceptable because of appreciation hopes.

Notes investing mistakes

• Buying notes without full collateral file review.
• Underwriting to headline yield while ignoring servicing drag and defaults.
• Concentrating in one geography or borrower profile.
• Using no legal reserve for workouts or foreclosure timelines.
• Failing to model taxes on interest-heavy income.

Portfolio construction mistakes in both

• Scaling before one full cycle is measured.
• No written stop-loss policy.
• No monthly KPI review.
• No CPA review of tax impact before year-end.

How This Compares to Alternatives

If your objective is maximum upside and you can actively execute, BRRRR often has better asymmetry. If your objective is smoother income with fewer operational headaches, notes can be a cleaner fit.

When Not to Use This Strategy

Do not use BRRRR when:

• You cannot absorb rehab overruns or vacancy periods.
• You are relying on aggressive refinance terms to make numbers work.
• You do not have trusted contractor and property management capacity.

Do not use notes investing when:

• You are unwilling to study collateral, servicing, and legal process.
• You cannot tolerate delayed cash flow during workouts.
• You are over-concentrated in one state or one asset type.

Do not use either strategy when:

• High-interest consumer debt is unresolved.
• Emergency reserves are weak.
• Your household cash flow is already fragile.

Questions to Ask Your CPA/Advisor

Use these before funding your first deal:

1. How will BRRRR depreciation, passive activity limits, and potential recapture affect my after-tax return under my current income?
2. If I invest in notes, how will ordinary interest income impact my marginal tax bracket?
3. Should I hold this in my personal name, LLC, or another entity structure based on liability and tax reality?
4. What reserve policy should I maintain for repairs, vacancies, defaults, and legal costs?
5. Are there state-specific filing or compliance issues for my target markets?
6. How should I document business purpose, expenses, and decision logs for cleaner audit defense?
7. What changes if I materially participate versus remain passive?
8. How should I plan estimated taxes if note income arrives steadily?
9. What are the implications if I later sell the asset or note at a gain?
10. Which KPIs should trigger a hold, sell, or restructure decision from a tax-aware perspective?

Mention your expected deal cadence and personal income profile. Generic advice is less useful than scenario-specific guidance.

Final decision rules for 2026

For most households, this is not an identity choice. It is a sequencing choice. Start with the strategy that matches your current bottleneck.

• If your bottleneck is capital growth through forced equity and you can execute projects, start BRRRR.
• If your bottleneck is time and your goal is steadier monthly income, start notes.
• If uncertain, run a barbell: one tightly underwritten BRRRR pilot plus a small notes allocation, then compare real net results after 6-12 months.

In the brrrr method vs notes investing decision, the winner is the strategy you can execute consistently under conservative assumptions, not the one with the most attractive headline return.