Trying to grow portfolio (BRRRR), but in today's market...

23 Replies

I'm currently in my growth phase of my portfolio. However, I do not see any value in today's market. I started a year ago and have 4 units (3 SFH, Duplex House Hack). In today's market I am considering selling two of my SFH rentals that are low performers and using the cash to refinance out of my FHA loan for the duplex. Since I started, my education/team have progressed and I have narrowed my strategy down. My next steps are completing BRRRRs in my target area, but the numbers do not work like they did two years ago. Prices have gone up 20%, but rent only 10% or so. The value is simply not there. Example Below:

Purchase Price = $105k

ARV = $160-170k

Rehab = $35k

Rent = $1,450-$1,650 depending on size

In this scenario it would take some out of pocket cash, and there wouldn't be much cash flow per month...

I'm unsure where to go from here. I want to grow to five SFH rentals using BRRRR, then snowball the debt, but in today's market I'm not sure if this strategy works anymore.

Thoughts?

Howdy @William S.

You are correct in your conclusion based on the numbers presented. With an ARV of $160K and $35K Rehab the purchase price should be in the $60K to $70K range. With your All-in cost around $112K including Holding and Closing costs (70% LTV). It takes a lot of looking and a lot of offer rejections to get these type deals. Unless you find vacant distressed properties with highly motivated sellers. Cash flow is sacrificed somewhat using BRRRR. Or at least lower than your normal expectations. However, the CCR goes through the roof. You can adjust the amount of equity you take out to make the cash flow more acceptable.

The three primary ways I am finding these properties is;

1.  Driving for Dollars -  drive the neighborhoods you want to invest in and find em yourself.

2.  Realtor -  I don’t have a lot of free time so I rely on a Realtor to help find potential deals.

3.  Property Managers - they are very familiar with the neighborhoods they like managing.  They know which ones to stay away from.  They also have other investors who may be wanting to unload properties.

I also search all the usual online sites when I have time.

Hope this helps.

I hear you about it being tough to find value today @William S.   Surprised it's that hard in a market like Milwaukee, but you are smart to stay out of war zones.

I probably won't be much help since I was salivating over the numbers in your example. Examples here are pathetic .5%ers so I'm selling into the froth as houses turn. A FSBO duplex that rents for $1700 is asking $325k. Gag me, right?

If I had to buy at 70%, I'd have a total of like 2 houses lol.  I wouldn't apply a flipping/wholesalers rule of thumb to buy and hold.  Some of my best purchases have had no cash-flow, but were in the path of appreciation.  Going to another closing on 1 today matter of fact.  Bought for $168k with rents of around $1300.  Broke even during the hold but selling for $236 by owner.  Have to extend my 3rd sale out to Jan to avoid medicare tax on my wonderful 15% cap gain rate.  

Some houses are value plays, some are for cash-flow.  The value plays will be ripe for brrrr or profitable sale in a few years hopefully.

Will your property example have a good chance to appreciate? IRR is the number that matters when the dust settles. Evaluate with all variables in mind, of course. Good luck and congrats on your success so far!

@Steve Vaughan

No war zones for me!

The area I buy in has a mix of cash flow and appreciation (suburbs). My rental that I bought last Spring appreciated $22k, but I bought below market value and spent a few grand fixing it up.

Perhaps I need to look elsewhere. I think this area is good for buying under value with 25% down and $10k of rehab, not so much Brrrrrr anymore.

My goal is to keep as much as possible on Brrrrs.

@William S. If you bought a rental, dumped a few grand into it and added 22k in value, what’s wrong with that?

I’d do that deal all day long. Are you making money currently and it’s just not fast enough for you or are you losing money?

If you’re making money I wouldn’t simply change your whole strategy right away

William, congrats on your success so far. I think you are on the right track and are smart to evaluate the market's conditions. Right now we all have to be extremely selective and careful to buy right. Keep looking and you will find your deals.

@Caleb Heimsoth

Yes, my rental makes good money. In order to scale I need to recycle the money. Buying another rental the same way takes $40k each time, and then it's gone.

This post has been removed.

I’d focus on getting more rentals not changing your whole strategy once you’re already in.  I started this year and I found the same thing that works, so I’ll keep going next year.

Why change something that isn’t broken?

My plan is to have a few that are paid off. To be efficiently with my limited funds I have to brrrr so I can scale and use all the cash flow and attack one property at a time.

@Account Closed

I agree with you about the "stories" on here. Reality is different, especially for those who have busy careers. However I am not young and saving up that cash takes a very long time.

@William S. I think you're facing the same problem that 99% of the real estatement investment work is having.  Deals have gotten progressively "worse" over the past 7 years during the appreciation cycle.  What's a little vexing is that it appears that 50% of your properties (selling 2 out of 4 properties) are "low performers".  Are they "low" based on the BP stories that other allude to?  Or are they really just, plain, boring, low performers?  If prices have gone up 20% you should have some solid equity in the properties and with rents increasing the "low performers" should at least be "solid performers" due to just the swing in the market.

That said, taking a step back, in order to scale you really just need to buy for less. I'm not saying that's "easy" or even a reasonable expectation but that's the issue. You aren't BRRRRRRRRRing enough equity in order to pull the $40K back out. Just simple math say that for the $160K ARV you'll need $40K down so you have to be "all in" at $120K and with the $35K rehab budget you need to buy at $85K. Since you're buying at $105K you would be able to fully recycle your money.

All of that simple math aside, it feels like you're trying to run a little too quickly.  My (limited) experience is that real estate becomes easier and easier (and riskier) the more units that you have.  Cash-flow increases and it takes less and less time to "reload" for the subsequent purchase.  That assumes you don't blow the cash-flow on a 55 Chevy.  Right now you have what you have, it's making you money, you don't have to incur costs to sell properties that aren't performing well, etc.  

So what would I do in your shoes?  Keep what you have and start making offers at the $85K number (or less) so that you can theoretically extract your capital post-renovation and stabilization.  And be prepared for 45,000 rejected offers, tons of frustration, etc.

@Andrew Johnson

My two low performers SFH's were not bought with very much equity, and do not cash flow very well. It's best to sell, and use those funds to refinance out of my FHA on my primary residence (duplex A-class) into a 30-year fixed while rates are still reasonable.

I am keeping my best SFH because it's gone up $22k and cash flows the best.

So for the moment I am scaling back and becoming defensive due to my situation / market conditions.

However, going forward I think brrrrr investing would be the best approach to grow to 5 or so properties, then snowball the mortgages with all of the cash flow. Problem is, as everyone knows, its that the market has changed so much. To get a brrrr in B+ neighborhood I am not sure is possible in 2017...

As others on here have already pointed out, don't fall for the over the top success stories you hear on the podcasts. Not saying they aren't real, but they are SO far from normal. These are people who had financial help getting into this perhaps, or they forming at exactly the right time in the market crash. This is the reason I have not spent much time on the BP podcast. The majority of the stories and advice just do not apply to probably 90% of us.  They are talking about million dollar deals and stuff like that. Not realistic. 

Also, you have landed four properties in just one year and have them all rented? Dude, breathe. You are doing fine. Don't fall for the get rich quick ideas thrown around on here and in the podcast. Sure, it happens. But man, it's more commonly a slow growth. That's ok! I'm not talking creeping slow, but not explosively fast like we all keep hearing. 

You can find a lot of more realistic stories here in the forums and some very great advice.  Hop over to the landlording subforum. Ask questions, read. 

You have done great for your first year. Don't get too worked up if you are making money! 

@William S. when you talk about today’s market you speak of it as though it is one market, the market of 2017.  But it is not one market. Every state has its own market and probably several sub-markets where certain investment strategies work better than others. 

It is funny that you are out of Milwaukee. A month or so back I had lunch with @Marty Boardman who lives in Arizona but invests mostly in Milwaukee right now. So he is leaving Arizona to invest in your state where he finds better numbers and opportunities while my partner and I this year have worked hard at acquiring some buy and holds in Arizona. Of the 16 that we have acquired this year about half we have gotten all of our money back out of so far and the other half have about 180k of our money still in them. The 180k came from different loan products that I have such as business lines, HELOC, etc. the cash flow covers all of the debt costs of the 180k plus leaves my business partner and I with around 2k each in cash flow every month. The reason that I share this is to debunk the idea that the BRRRR model can't be done in 2017 rather it depends on the investor and the strategy.

Our strategy this year has been to get SFRs that we could sell on 5-year lease options. This strategy has worked for us in our market to get a lot of our cash out of our deals. The 5-year option lessens our need to budget for cap-ex and vacancy because we fix most all major things that we find before we put in an end buyer into one of our properties. Also the end buyer tends to take better care of the property because they consider it their home while they are working towards getting a bank loan to purchase the property. 

We are working on getting the rest of our money (180k) back out of the properties by creating promissory notes secured by some of the equity in our properties that yeilds 11-12% yearly returns for a passive investor. So far this strategy has worked really well for us this year in creating both cash flow plus instant equity in our properties. So it is possible even in 2017 to do the BRRRR model. You just need to find a strategy that works.

Originally posted by @Shiloh Lundahl :

@William S. when you talk about today’s market you speak of it as though it is one market, the market of 2017.  But it is not one market. Every state has its own market and probably several sub-markets where certain investment strategies work better than others. 

It is funny that you are out of Milwaukee. A month or so back I had lunch with @Marty Boardman who lives in Arizona but invests mostly in Milwaukee right now. So he is leaving Arizona to invest in your state where he finds better numbers and opportunities while my partner and I this year have worked hard at acquiring some buy and holds in Arizona. Of the 16 that we have acquired this year about half we have gotten all of our money back out of so far and the other half have about 180k of our money still in them. The 180k came from different loan products that I have such as business lines, HELOC, etc. the cash flow covers all of the debt costs of the 180k plus leaves my business partner and I with around 2k each in cash flow every month. The reason that I share this is to debunk the idea that the BRRRR model can't be done in 2017 rather it depends on the investor and the strategy.

Our strategy this year has been to get SFRs that we could sell on 5-year lease options. This strategy has worked for us in our market to get a lot of our cash out of our deals. The 5-year option lessens our need to budget for cap-ex and vacancy because we fix most all major things that we find before we put in an end buyer into one of our properties. Also the end buyer tends to take better care of the property because they consider it their home while they are working towards getting a bank loan to purchase the property. 

We are working on getting the rest of our money (180k) back out of the properties by creating promissory notes secured by some of the equity in our properties that yeilds 11-12% yearly returns for a passive investor. So far this strategy has worked really well for us this year in creating both cash flow plus instant equity in our properties. So it is possible even in 2017 to do the BRRRR model. You just need to find a strategy that works.


And this is why it's going to continue to get harder. Investors from other markets are flocking to Milwaukee. I know many Chicago investors who started investing up there, not to mention coastal investors. You can't operate based on what the market was 2 years ago or back in 2012.

Buy deals that make sense. If nothing makes sense, switch up your strategy. Look into subject to deals. Push for owner financing. Start a direct mail or digital marketing campaign, Point is, it's going to take a little more effort than it did a couple years ago so you'll need to adjust with it to keep up.

@William S. So I think I might have a theory on why the deals are hard for you to come by and why they might not match up with some of the stories around BP, namely it's this: "brrrr in B+ neighborhood".  It a real B+ neighborhood you're going to compete with owner occupants that want a place to live and aren't looking to for a material return.  That family with care more about a great school district than they will about projected cash-on-cash returns of 2% vs 5% vs 10%.  At least with kids in school you'd hope they would...

Anyway, you might be looking to buy it true B+ areas.  One of the falsehoods that I *think* I see around BP is that people think they are buying an $85K home in a B+ area.  My gut says those people are just telling themselves that it's B+ instead of C+ (well, maybe B-, who knows).  The net result is that I don't think there are a ton of areas (no matter the prevailing home price) where low(er) dollar properties land you in a "borderline A" neighborhood. 

Then again, I'm don't know too many "A" areas where there are duplexes :-)  So that's a passive aggressive "jerk" statement for Wednesday.  I do think that too many people get caught up in C vs. C+ or B vs. B-, etc.  Those distinctions really are based on more opinion that fact.  And most people that buy a property tend to hedge a little on the higher-level...it's just human nature. 

Anyway, if I were in your shoes and trying for a more defensive play I'd probably stick with whatever the highest quality properties are that you have.  Even if demand shifts you'll still be able to rent out the "best" in an economic correction.  There's always a demand for the best school district, the best neighborhoods, the safest areas, etc.  Even if they cash-flow worse *today* I'd imagine they're a better hedge against future risk.  But that's just my two cents...   

@Andrew Johnson

Everything you said is correct.

  1. The SFH brrrr area is a B+ neighborhood with very few rentals and in a good school district (suburb). This is where my best SFH rental is that I mentioned.
  2. My A-class duplex (house hack) is in a good school district that is more of an historic area/downtown scene.

When it comes to A/B+ neighborhoods I wonder how accurate the returns are on paper vs reality (same for lower end investments).

My guess is that returns on C-class look great on paper, but actually cost money in the end.

I'd be interested to see a post on here of someone comparing the two (on paper vs reality).

@William S. I've never gone the "C" route.  I think my apartments are in an area that's a solid B.  The buildings are great but I'm under no illusions that it's "A" or "A-" or even "B+".  When I have looked into "C" properties I run into issues with the low(er) rents.  No matter how much the rent is, it still costs the same amount to fix a dishwasher, repaint a bedroom, replace the coil on an HVAC unit, pay for quarterly pest control, rekey a lock, etc.  The "real dollar" costs are fixed for a lot of the maintenance issues.  So it doesn't cost more to operate my $700/month unit or $950/month (with the exception of property management since it's a % of gross rents) than it would to operate a $500/month unit.  That doesn't mean I wouldn't go the "C" route if the price was right.  I've put in offers on C-ish properties but they were admittedly low, didn't get accepted, and I didn't lose any sleep over it.

Just stick with it. Keep looking at houses and keep putting in offers. Its winter time and here in the midwest (I'm about 60 miles south of chicago and 60 miles north of champaign), winter is the best time of year to get discounts.

One thing I would add if you really want to continue to grow your portfolio - go further out!

I'm in the same boat as you in terms of not being able to leave a bunch of cash in my deals. I'd be done after 1 or 2 houses and it would take me a year or two to do another one. My goal when I started was to grow a portfolio. I was buying 3 a year for 5 or 6 years and then boomed. I now have 66 houses.  From 2014 thru 2016, I was able to pick up 39 houses. This year I only got 4.

But the key is that I'm just outside of the highly populated areas so I wasn't competing with the deep pocket investors (i.e. hedge funds or national rental companies) in most of my areas. And I also was willing to expand my area. I've got a handful of towns I'll buy in - up to about 30 minutes out.

At your age, I would even say to do an hour out if you have to. Stay in the nicer areas with good schools. And stay in that price range you're in too. Thats where I'm at. Houses that will appraise out between 140k to 160k that I can be all in (purchase plus rehab) at 70% ARV or better.

That still means coming out of pocket some to take down the deal but its worth it to me. 6 to 8k apiece is tough when you're doing one a month. But at 3 or 4 a year, its not as bad.

Keep in mind, if you can buy a house at "investor" numbers no matter how far away it is, eventually, you'll have the option to "move" that money back into properties closer to where you live. So its better to buy further out if it means you can have less competition and continue to grow.

Lets say you buy 10 houses in some smaller town thats 45 mins away. But the numbers are roughly the same. 160k houses that you're all in at 115k so you don't have to come out of pocket much. Wait 5 years until that house is worth 180k and your loan is down to 108k. Then Sell it and take the profit and buy a house somewhere near where you live.

You'll end up getting hit with closing costs and some taxes (unless you can pull off a 1031). But if you can come away with 40k, thats 40k more you can put down on a house near where you live. Then if you are only seeing deals at 80% of the ARV, your 40k will buy those down to 60% and your portfolio will be expanded.

If you dont' do anything though, you won't gain that 40k from the other areas to use to buydown a deal in the area you want.

So, if your goal is really to grow, thats what I would suggest:
1) Keep looking and keep putting in offers. 
2) Expand your area and don't be afraid to drive further out to get a deal. 

I'm in a similar boat to you, and I want to add an extra thought to paring down your holdings: don't forget about vacancy risk. The smaller you are, the more critical that calculation is. You currently have 5 units (3SFR's and 2 units in a duplex). If you lose one renter you're at 20% (40% counting your home) vacancy. Expenses add up fast at that vacancy level (I know - I lost a tenant this year and holding killed me for a while). If you sell as you're considering you'll drop to 3 units at an baseline 33% vacancy. Lose a tenant at those numbers and you're at 66% vacancy. Economic vacancy calculations are even worse (if you weight rents against expenses across the whole of the portfolio and calculate that way). 

Monthly income and equity paydown are great wealth drivers, but they need time to work. In my opinion you'd be increasing your risk incredibly for a negligible long term gain. By all means do a HEL or HELOC to pull out some equity if the numbers make sense, but try to keep as many different income streams as possible.

@Shawn Q.

Haha. I've heard this point, I somewhat understand it. However, I recently had all 4 of my units vacant for two months at the same time! All of these properties are leveraged as well. So, while I do understand the concept of scale to help with this I wouldn't recommend doing 100% leveraged. Going forward I think a mix of leverage and not is best.

@William S. you have found a property class that you are comfortable dealing with. You've also learned first hand what kind of cash flow that type of property provides (or doesn't provide!). Cheaper houses in Milwaukee provide better ROI, but you are pretty much giving up on appreciation, at least with current prices. I started with a couple duplexes in Shorewood, young and optimistic about appreciation. What a mistake... I'm glad to no longer own them, and I like the cash flow my small SFR's produce. They aren't in great neighborhoods, but they make money every month. I'd like to own some SFR's in Tosa too--but they just don't make money. I could see doing a 1031 exchange to get out of the cheapies and into fewer units while putting off a tax hit, but that move is many years down the road for me.

Our market is expensive now compared to a couple years ago.  Finding something that makes sense is more difficult no matter what neighborhood you are looking in, but where you are, I just don't see any reason to add any more properties to the portfolio unless you work your way into a screaming deal.

Originally posted by @William S. :

I'm currently in my growth phase of my portfolio. However, I do not see any value in today's market. I started a year ago and have 4 units (3 SFH, Duplex House Hack). In today's market I am considering selling two of my SFH rentals that are low performers and using the cash to refinance out of my FHA loan for the duplex. Since I started, my education/team have progressed and I have narrowed my strategy down. My next steps are completing BRRRRs in my target area, but the numbers do not work like they did two years ago. Prices have gone up 20%, but rent only 10% or so. The value is simply not there. Example Below:

Purchase Price = $105k

ARV = $160-170k

Rehab = $35k

Rent = $1,450-$1,650 depending on size

In this scenario it would take some out of pocket cash, and there wouldn't be much cash flow per month...

I'm unsure where to go from here. I want to grow to five SFH rentals using BRRRR, then snowball the debt, but in today's market I'm not sure if this strategy works anymore.

Thoughts?

 The strategy still works just harder to implement. If you want to buy properties more consistently you have to come up with a new strategy altogether. 

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here