PUTTING ALL YOUR TRUST IN TENANTS FOR THE BRRRR METHOD

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PUTTING ALL YOUR TRUST IN TENANTS FOR THE BRRRR METHOD

Asa IfillPro Member
Real Estate Agent · Huntsville, AL · Member since 2019 · 128 posts · 35 votes

Hello BP Team!

I'm a newly REI looking for all the criticism I can get! Please help me change my mind about this.

I have been reading/watching a lot of content on the BRRRR method. I've recently bought the BRRRR book by David and can't seem to put it down!

I've really been considering getting my feet wet using the BRRRR method because it seems like you're getting the best outcome with your investment. (EX: Gaining equity through the deal, cash flow when renting, and also a cash out refinance up to 75-80% to use that money on another investment, if you did the BRRRR method correctly.)

I couldn't seem to find a flaw in the BRRRR method until I reached out to a friend who has been in real estate investing for quite some time.

He has lead me astray from the BRRRR method by saying "tenants trash the place". He then explained that tenants beat the place up before they leave so you'll always have to pay money into the rental property which eventually takes away from your cash flow...

He explained to me that buying a property for less than market value and rehabbing it then selling it would be better than having a tenant live in the property... Then I asked, WHERE’S THE PASSIVE INCOME!?

Can anyone who has completed a successful BRRRR property put me back in the right mindset and tell me how/why to continue with the BRRRR process if I'm putting this amount of trust in my tenants.

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Brent Paul
Rental Property Investor · Shakopee, MN · Member since 2015 · 985 posts · 374 votes
7y

It sounds like your friend doesn't do a good job at screening his tenants.  The excuse because your tenants will trash the place is not a good reason.  I have heard that same comment from friends who are too afraid to have rental properties.  You can't let 1 bad experience turn it into sour grapes.

The main thing is to run those numbers and do some due diligence to see if it makes sense.  I had several homes I thought were great deals until I ran the numbers and saw there was barely any cash flow on it.  You also are going to want to know your market.  Get some comps of houses nearby to see if it really does make sense.  Worse case scenario If the value goes down 20k is it still worth it?

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  • Brent Paul
    Rental Property Investor · Shakopee, MN · Member since 2015 · 985 posts · 374 votes
    7y

    It sounds like your friend doesn't do a good job at screening his tenants.  The excuse because your tenants will trash the place is not a good reason.  I have heard that same comment from friends who are too afraid to have rental properties.  You can't let 1 bad experience turn it into sour grapes.

    The main thing is to run those numbers and do some due diligence to see if it makes sense.  I had several homes I thought were great deals until I ran the numbers and saw there was barely any cash flow on it.  You also are going to want to know your market.  Get some comps of houses nearby to see if it really does make sense.  Worse case scenario If the value goes down 20k is it still worth it?

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  • Asa IfillPro Member
    OP
    Real Estate Agent · Huntsville, AL · Member since 2019 · 128 posts · 35 votes
    7y

    @Brent Paul

    Brent, thanks for the reply!

    I know screening tenants takes a big role in this method so it can actually work and be successful!

    I guess you’re right, my buddy didn’t do a good job at screening his tenants, that’s why he was leading me astray.

    I think it is true that you should have X amount of dollars saved up in case you do get a bad tenant and have to do some repairs - maybe take out more percentage from your cash flow each month for repairs?

    Also, I am letting my friend talk me out of this and I haven’t even had my shot at it yet to see if I can do better.. maybe he is just looking out for me in the long run.

    I'm currently working on strengthening my core 4 and reading BRRRR. I also need to strengthen my deal analysis.

    Thanks for keeping me motivated!

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  • John Warren
    Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
    7y

    @Asa Ifill the expenses your friend are referring to are known as capital expenses. Things like flooring, paint, cabinets, counter tops, appliances, etc do not last forever, and you can generally budget for how long they should last based on a given market. When you get a good tenant in place you will not have a lot of issues with these things. 

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  • Asa IfillPro Member
    OP
    Real Estate Agent · Huntsville, AL · Member since 2019 · 128 posts · 35 votes
    7y

    @John Warren

    Thanks for the reply John!

    The key thing you said was “when”. “When” will I know if the tenant is going to destroy my property or put me in jeopardy of losing money? I guess there is always risk and fear into investments.

    I know I will have to get a great area that is looking good and has good comps around it. So I guess this all just boils down to how much homework are you willing to do on a good enough property for the BRRRR method to be successful.

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  • Carmen Pellegrino
    Investor · Cleveland, OH · Member since 2018 · 26 posts · 18 votes
    7y
    Asa, My wife and I are about to try the method on property number one. Got what I think is a good deal and should be able to increase the value of the property significantly with limited funds in. Run the numbers as described in Brandon's book or on here and see. I am hoping 72000 purchase with 10000 in should yield a value in the 130000 range. I will have about 30000 up front but should be able to pull that back out plus. In the mean time the property will cash flow about $600 a month. The only stumbling block I see is rehabbing the occupied units to get the value up. have not figured that out yet.
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  • Alexander FelicePro Member
    Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
    7y

    his reply "tenants trash the place" implies that ALL tenants are bad. 

    I'm curious, has he ever rented a place before? Did he trash it? Have you ever rented? Did you trash the place?

    Screen tenants well, manage your property manager tight. 

    Tenants are like most other demographics, they follow the 80/20 rule. 10 percent are awful, 80 percent are fine, 10 percent are excellent. So do you want to give up on a profitable investment venture just because your friend picks the lousiest 10 percent of humans to rent to? 

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  • Mike McCarthy
    Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    7y

    Most things in life are about risk mitigation. There’s always a risk that a great tenant on paper will have a downturn and trash your place. But if you’re doing the right things, you can reduce that possibility to close to zero, and catch it early if it does happen. Things like:

    * screen well and don’t make emotional exceptions

    * check prior references

    * periodic inspections (replace filters, etc to see the house)

    * be a good, honest landlord

    * work through problems with your tenants. Whether it’s rent, a broken appliance, etc. let them know that you’ll work with them and it’s not always their fault

    * keep your properties in good condition. If they move into a place with the fridge door hanging off, grass overgrown, etc, how do you think they will treat the rest of it.

    * keep good insurance. Even with all the best intentions, **** happens.

    Good luck!

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  • Asa IfillPro Member
    OP
    Real Estate Agent · Huntsville, AL · Member since 2019 · 128 posts · 35 votes
    7y

    @Carmen Pellegrino

    Carmen, thanks for the reply!

    First of all good luck with your first BRRRR property!

    I have been considering trying the BRRRR method but am having a hard time finding a private lender that won't kill me in interest costs and a financing loan that with pay for the home + rehab.

    How did you start with finding the funds for your first property?

    Do you know any lenders that will give you the loan for the property + rehab?

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  • Asa IfillPro Member
    OP
    Real Estate Agent · Huntsville, AL · Member since 2019 · 128 posts · 35 votes
    7y

    @Alexander Felice

    Alexander, thanks for your reply!

    I’m currently renting an apartment now and do not trash the place and am never late on rent.

    I know screening tenants is a big process in the BRRRR method and tenants play a big role in this process if you want it to be successful.

    I do not want to give up on this investment that could possibly change my life. Thanks for the input!

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  • Asa IfillPro Member
    OP
    Real Estate Agent · Huntsville, AL · Member since 2019 · 128 posts · 35 votes
    7y

    @Mike McCarthy

    Mike, thanks for the reply!

    I'll keep all of these considerations in mind when I get closer to this process in the BRRRR method.

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  • Nate Smoyer
    Specialist · Rapid City, SD · Member since 2016 · 100 posts · 46 votes
    7y

    @Asa Ifill - without repeating too much of what others have said screening is so important. But not just screening tenants, screening where and what you buy can be just as important.

    You can run eviction, background, and credit check all day--but there are some areas that only certain types of tenants are likely to live for many different reasons.


    BRRRR may not be right for everyone, just as flipping isn't right for everyone. I'm definitely not built for running a flipping business.


    I will add on thing. It's always wise to stashing a portion of your rent aside for future damages and repairs. Whether its wear and tear or tenant negligence, you'll want to have a reserve to pull from to cover your damages. This is something that should be factored on the front end when you purchase a property.


    Best of luck!

    0Reply
  • Clifford Paul
    Rental Property Investor · Member since 2018 · 483 posts · 956 votes
    7y

    We just turned over a 4 year tenant and the house required one deck board to be replaced.  Damage not caused by the tenant.  My current property manager is the best at picking new tenants I ever had.  House is in same shape as the day she moved in 4 years ago.  Personally that's why I gave up shelf management 20 years ago. I'm not good at screening and after 35 years as an investor other than getting the deal it's the most important aspect of buy and hold investing.  In my opinion. 

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  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    7y
    There is always a cost associated with a tenant turn over. In addition, the quality of tenants will vary regardless of if you do a great job screening. We recently did not renew a lease on a tenant that passed our background check. The unit smelled worst than most toilets, the carpets were ruined, the bath vanity destroyed, shower door towel bar was missing, shed floor had been thrashed. Fortunately with good screening this type of incident is rare. In addition, the higher the class of property, the better the tenant and typically less damage. My issue with the BRRRR method is not the tenant turn over, maintenance, or cap ex (I factor all those into my projections) but the low LTV of refinance combined with the conservative nature of refinance appraisals. In my opinion an RE should appraise the same whether it is for sale or being appraised for refi but that has not been my experience. I had a refi appraisal fairly recently that I appealed for a $60K upper that in my view was still low compared to the sold RE. In my market, the appraiser will use lowest sold RE and will make ridiculous adjustments. The low appraisal combined with the low LTV typically prevents me from extracting all of my investment. It still works for us. If I can own a $600K non owner occupied RE for $20k or $30K that meets our needs. Be prepared for being able to extract less money than you expect because that has always been our case (because we expect the appraisals to be similar to actual sold comps). Good luck
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