Is the brrrr method worth the risk?
Member since 2022 · 19 posts · 6 votes
Is the brrrr method worth the risk?
Most Popular Reply
Randall AlanPro Member
Investor · Lakeland, FL · Member since 2017 · 1k+ posts · 1k+ votesQuote from @Alyssa Patterson:
How do I go about doing this with 20k in my pocket?
BRRRR properties are a special breed… meaning they are hard to find right now. The challenge is that when you go to refi, you have to leave 25% of the value in the property.
When you start doing the math it can get tough:
You have $20,000. On a traditional lender you have to put 20% down. With the amount of money you have to work with you are almost forced into a hard money lender because you wouldn’t be able to buy the house and fix it up traditionally. But disregarding that fact for the moment, let’s run a hypothetical purchase:
Let’s say you found a house for $80,000, that for $15,000 in renovations you think could refi for $125,000. So a $45,000 increase through rehab / forced appreciation.
A hard money lender usually takes 2% off the top (ie only gives you 98% of the money you borrow), then charges a higher interest rate. Let’s say 12% to keep it easy (1% a month).
If we work backwards for a moment, if the house appraises at $125,000, the bank is going to require you to leave $31,250 in equity in the property (25%) on the new value. $125,000 minus $ 31,250 equals $93,750 that they would give you on a refi loan.
So real quickly you will see that the $80,000 you borrowed, plus say $5,000 to close to buy the property, plus the $4,000 in closing costs to refi the property, plus the $15,000 to rehab the property, plus say 5 months interest ($4,000) exceeds the $93,750 the bank will loan you… so that spread between purchase and ARV isn't good enough to be able to get any cash out of the property.
If you bump the ARV to $150,000 (has to appraise for that - and you won't know if it will until AFTER you have bought it and done the work), the lender will lend $112,500. Your expenses from above equal $109,600 factoring in the 2% the hard money lender took off the top… so you would have a new loan and get $2,900 in cash back at closing.
Finding an $80,000 house that will ARV for $150,000 with only $15,000 in improvements is a TALL order in today's market. It is possible… we have done it a couple of times on phenomenal buys in the past 4 years, but they are very few and far between.
Then there is the risk of it not appraising, cost overruns on rehab, permit issues, vendor delays, supplier delays, time delays that run up the interest bill and carrying costs like insurance, electricity, not to mention the downward pressure on the market right now due to high interest rates, which will likely bring housing prices down, etc.
If flipping, instead of holding, our rule of thumb on any flip is that we have to expect to at least clear $50,000 when we sell the property, because keep in mind you also have capital gains taxes you will have to pay which short term are your actual income tax rate, or 15% if held for over a year (with an income under ~$400,000).
If your question is, “Should I do this?“ I would say the answer is no, not with the amount of money that you have to work with. it is highly unlikely that you can find a property at the price points mentioned, and you do not have enough in reserve to handle any mess ups. If you could partner with someone that has additional financial resources, it might be a possibility, but on your own it would be a real risky move.
All the best!
Randy
46 Replies
- Member since 2019 · 7k+ posts · 4k+ votes4y
BRRR is extremely good in three conditions:
- in appreciating market
- when you have access to the contractor
- it's located in a strong appreciation state, especially if you buy in good school district city.
As they said, you already make money during the purchase. If you buy/rehab the most ugly/dirty/trashed house in Mountain View,CA for sure you will make a lot of money after the rehabs compare to some random town in middle of New Mexico. - 4yBruce WoodruffPro MemberContractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
@Alyssa Patterson Forgive me for being blunt, but you are not ready for this. Your questions (and lack thereof) show this. This is not risky if you know what you're doing but if you don't, any Real Estate can be risky....you can lose all of your $20k savings in a heartbeat.
- Member since 2022 · 19 posts · 6 votes4y
I’m not worried about losing the 20k, as I said I’m new, I’m trying to get the information before go forward with the decision. This isn’t my life savings, it’s not all the money to my name, I’m not seeing why I shouldn’t try if I have tho opportunity, I can make the money back in 3 months if I lose it. Should I learn more about the process before I go into it? Is that what your saying? If your saying I don’t know enough. instead of giving up on the idea entirely, wouldn’t you agree saving up more money and getting a mentor before starting would be a more useful suggestion?
- Member since 2022 · 19 posts · 6 votes4y
How will I know if I’m ready for this? Because I feel ready, I have a loaner for the property and renovation, for 15k down, he said if have any questions along the process he can help me, if we end up doing business together. I’m using all the recourses at my disposal to learn the process. I feel like I asked a lot of questions for being on here for two days. I feel like I’m being rather proactive, forgive me if I’m wrong.
- 4yBruce WoodruffPro MemberContractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
Quote from @Alyssa Patterson:
I’m not worried about losing the 20k, as I said I’m new, I’m trying to get the information before go forward with the decision. This isn’t my life savings, it’s not all the money to my name, I’m not seeing why I shouldn’t try if I have tho opportunity, I can make the money back in 3 months if I lose it. Should I learn more about the process before I go into it? Is that what your saying? If your saying I don’t know enough. instead of giving up on the idea entirely, wouldn’t you agree saving up more money and getting a mentor before starting would be a more useful suggestion?
Of course! If you're not familiar enough with the BRRR concept, try another way. Or wait....this is a rough time for anyone right now especially the uninitiated like yourself. Don't rush in and lose your money, we know you can make more but why throw it away? $20k is a lot of money, even in todays crazy world. There is no hurry.....
Or yes find a mentor (Easier said than done) Or just lurk around this forum for a while and you'll pick up a ton of knowledge....
[PS - My wife was a massage therapist for years so I can relate :-) ]
- 4yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
What's the purchase price + rehab, and
What's the projected ARV for when you're done?
Those numbers are the essence of a BRRRR.
It's not about "losing" the money. If you buy the house, you'll have the house. But if it appraises low you might not be able to pay back the loan.
- 4yBruce WoodruffPro MemberContractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
@Nicholas L. Yes those are the questions she needs to answer. Without the numbers we know nothing.....
- 4yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
U asked about risk.
BRRR risks:
1. you underestimate rehab
2. you pay too much for a fixer
3. contractor steals your money ( far more common than you can imagine) it happens to most of us at some point.
4. property does not appraise and you cant get out of the HM loaner loan and you get killed with carrying costs.
5. Contractor does crappy job and your stuck with it or have to redo .
those are a few of the risks that you will need to know about and mitigate to be successful plus all the other sage advice your getting.
- 4yBruce WoodruffPro MemberContractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
Listen to Jay....
- Property Manager · Los Angeles, CA · Member since 2010 · 71 posts · 35 votes4y
Quote from @Alyssa Patterson:
I’ll keep trying to justify doing this, until I see there is bigger reason for me not to. If that makes sense. Lol I have a lender willing to work with me, I have a cash flowing business if I need to come out of pocket. I’m using this method to build wealth over time, into my retirement potentially. Don’t you think that reward out weighs the risk of not profiting right away or having to put some more money in out of pocket. Like those are petty risks to me when I’m looking at the bigger picture. Do I sound crazy? Am I too optimistic?
It will totally make sense - depending on how you structure things and work out your potential deals. Think Long Term rather than short term as RE Investing is usually a longer-term deal to profit from. I would highly recommend that you talk to your lender and ask about a 203K loan which includes Money for renovations, WITHOUT having to go the hard money route. You can do this loan with a 4- unit property too, which is good because you need to live in one unit for 2 years. BUT - if the tenants are paying your mortgage - or MORE - and the cost of the renovations is in your 30-yr. loan - you will do well with the property and likely the equity in it within 1 year, definitely 2. The main thing is that you have a property which is gaining equity and appreciation, ideally, PLUS giving you some cash flow, AND you get to live for free while you look for other deals and places where you can put your money
- Member since 2022 · 19 posts · 6 votes4y
Thank you jay for the clear response
- Member since 2022 · 19 posts · 6 votes4y
Even if I ran you the numbers, don’t the risks still exist. I have a contractor who renovated my friends condo in boulder who we trust, and I have already seen his work. I think I have all the info I need for now thanks everyone.
- Member since 2022 · 19 posts · 6 votes4y
Quote from @Julie Falen:
Quote from @Alyssa Patterson:
I’ll keep trying to justify doing this, until I see there is bigger reason for me not to. If that makes sense. Lol I have a lender willing to work with me, I have a cash flowing business if I need to come out of pocket. I’m using this method to build wealth over time, into my retirement potentially. Don’t you think that reward out weighs the risk of not profiting right away or having to put some more money in out of pocket. Like those are petty risks to me when I’m looking at the bigger picture. Do I sound crazy? Am I too optimistic?
It will totally make sense - depending on how you structure things and work out your potential deals. Think Long Term rather than short term as RE Investing is usually a longer-term deal to profit from. I would highly recommend that you talk to your lender and ask about a 203K loan which includes Money for renovations, WITHOUT having to go the hard money route. You can do this loan with a 4- unit property too, which is good because you need to live in one unit for 2 years. BUT - if the tenants are paying your mortgage - or MORE - and the cost of the renovations is in your 30-yr. loan - you will do well with the property and likely the equity in it within 1 year, definitely 2. The main thing is that you have a property which is gaining equity and appreciation, ideally, PLUS giving you some cash flow, AND you get to live for free while you look for other deals and places where you can put your money
I like that idea, thank you Julie
- Rental Property Investor · Columbus, OH · Member since 2017 · 3k+ posts · 3k+ votes4y
Quote from @Alyssa Patterson:
How do I go about doing this with 20k in my pocket?
See if you can get people to invest with you. When I got started investing my sophomore year of college, I had $500 to my name, My grandmother lent me $12k for the downpayment on a duplex on OSU campus in Columbus. Over the course of a year my wife and I fixed it up, rented to friends, ate peanut butter and jelly, did everything we could. We then refinanced the property and it has given us $140k in cash back and continually produces $1,800/month in cash flow.
- 4yBruce WoodruffPro MemberContractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
Quote from @Alyssa Patterson:
Even if I ran you the numbers, don’t the risks still exist. I have a contractor who renovated my friends condo in boulder who we trust, and I have already seen his work. I think I have all the info I need for now thanks everyone.
Ok, I get it if you don't want to share, I just hope you have run a spreadsheet on this for yourself at least. Just because you 'trust' your friend's Contractor doesn't mean the numbers will work. Once again you sound awfully green to be doing this..... Just my .02
- Boston, MA · Member since 2017 · 209 posts · 126 votes4y
Quote from @Alyssa Patterson:
I have been self employed for 10 years have proof of income and pay I’m up taxes. I am trying to buy a house with a hard money loan I already got an offer with 15k down for single family property for going less than 30% market value. I have the offer for a loan to buy the house and for renovations, he said if I found the property he will wire me the money immediately. Should I do this? It was the first person I inquired about the loan. Should I wait for more options?
This throws up some red flags....do you know this person??? There is a lot of wire fraud in the world. Please be careful.
- Boston, MA · Member since 2017 · 209 posts · 126 votes4y
Quote from @Jay Hinrichs:
U asked about risk.
BRRR risks:
1. you underestimate rehab
2. you pay too much for a fixer
3. contractor steals your money ( far more common than you can imagine) it happens to most of us at some point.
4. property does not appraise and you cant get out of the HM loaner loan and you get killed with carrying costs.
5. Contractor does crappy job and your stuck with it or have to redo .
those are a few of the risks that you will need to know about and mitigate to be successful plus all the other sage advice your getting.
Yeah even the "honest ones" I have had steal from me. Nice enough guy, but Terrible at tracking expenses. For the most part his "stealing" was just not tracking all his stuff and not doing a great job keeping jobs separate. The occasional new tool I bought him too when he finally showed some receipts was a nightmare. So yeah, even if you like the guy and have good reviews on them, try to hold them accountable and make sure to properly track expenses and have them send any invoices to you the day they buy the stuff.
- 4yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
BRRRR with only $20,000 is hard if you are factoring in the down payment + rehab budget.
$20,000 can potentially get you a $200,000 house at $12,000 with the downpayment + some closing costs.
That leaves you with $8,000 for the rehab...which goes quickly when you talk about flooring, HVAC, roofing, paint, etc.
Basit Siddiqi CPA4.979 Reviews - Investor · Member since 2021 · 203 posts · 124 votes4y
This is a place where just about everyone here has your best interest at heart. A continued stream of comments all saying the same thing does not mean we don't understand what your goals are. It just means we are all concerned for someone about to take on a very challenging task. We all wish you the best, and hope things work out in your favor, but we owe it to you to be honest. That's all. BRRRR has a lot of risks and variables, it sounds like you have the right mindset to succeed, that's important. Just a little experience goes a long way.
Wishing you the best of luck
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