Is the BRRRR method actually viable?

21 Replies

Hi, I am in the middle of reading the BRRRR book, and it is great. I did have some concerns. I went to my father who is the president of a community bank and presented him with the theory. He told me under very few circumstances would he be able to do that refi in our market. That somewhat concerned me. He later told me that the method I presented him with could possibly work with a more risk-averse lender, but our market is very diluted with credit risk.

Still, I was left with the question, how difficult is it to find a lender who will be on board with a BRRRR refi?

It shouldn't be that difficult. There are stories on BP everyday about BRRRRs. Try local lenders like community banks and credit unions and move onto larger, more national lenders if that does not work. 

Credit risk? Assuming the person paid cash for the property & rehab why would a bank not make that loan? You should have 20%+ of equity (if the numbers were right) and in return bank makes interest for X amount of years. 

@Jaron Walling

The area where my father works is ranked among the poorest area in the nation and obviously, that would bring with it mostly people with a history of poor credit trying to refi. (if that deal would come across)  The numbers rarely work out (as you said) for him to make the deal just looking at the depressed market.  Which is understandable considering the number of people who've had a history of bad credit combined with very very bad market.

My question is, will it usually be that tough to refi or is it more than likely a product of the market I am in?

Now go back to your dad and ask him under which circumstances one *could* do that.  And then listen to him and take notes.

The BRRRR strategy works but it requires the most amount of work. From day 1 to 6 months after closing it's NOT passive. There's pitfalls to avoid along the way. In my opinion the REFI is the easiest step (if you have good comps) because desirable places to live have plenty of local banks to pick from.

Only after researching the market, reading books, asking a million questions, and working with a few contractors would I attempt it.

A lot of this turns on how "real" is the ARV number that is being used to support the refi. I think your father's point - and it is a good one - runs something like this: in a depressed market there is a cap on the value of homes, say, for example, $60K, as few have the income to purchase more house. Let's say you buy at $45 and put in $25 of your money on repairs, in such a market you will not necessarily have a $70K house (ARV). You will still have a $50K - $60K house from the lender's perspective with no way to pull your investment out.

Bigger Pockets has a section on the website to locate lenders who are investor friendly and provide products such as cashout refi's. The BRRRR book also mentions to find lenders who specialize in portfolio lending, as they do not sell off the loan and so will be more open to risk within your projects.

I have found that credit unions are better suited for investors and cash out refi's. A lender that I found through Bigger Pockets is Gateway Mortgage Group and they will assist with investors for cash-out refi's. One person with Gateway Mortgage to contact is @Andrew Postell. He is also a member of the website.

@Nathan Killebrew what your pops is telling you is only one of several reality checks BRRR investors with aspirations to truly scale encounter.


Finding a commercial lender that is willing to allow you no skin in the game (i.e. get all your money back and have a free property) is very tough if you try to refi within 3 or 6 months. Most commercial lenders want to see a few years of stability and performance before refinancing at a market value that is notably higher than your basis.

Then there's the question of cash flow. If it's such a good equity property... wouldn't your equity position be better liquidated and applied towards another project? 

Think about this: You buy a property for 45 grand, improve it for 30k more. 75k all in, 100k market value. After refinancing, you get a free property and cash flow minimally. Most BRRR investors that do 100k SFR's walk with $50-$200/mo after all of the efforts that they put in & a 6 month wait time. Tack on nominal appreciation and debt pay down and you might feel a little bit better? I sure didn't.

The alternative is selling the property, and using your 25k equity towards another project that you can turn in half the time. 4 projects a year make you 100k in profits year one. By year two you're doing 2-3 at a time. That's 200k-300k in profits.

I started using the exact same model mentioned above. 2016 I did 1 project and decided to sell instead of refi after seeing how negligible the rewards were with respect to time and effort. In 2017 I did 12 of these, sold them all, and quit my job in september. In 2018 I did 37 of these and hired employees. By the end of 2019 I've moved to bigger projects with significantly higher profit per deal and will do 60. I rarely keep a property, and when I do it's short term. One day, when I'm done growing a business, have more money than I care to have, less energy, and perhaps a family... sure, I'll keep more than I sell, but I'm not going to buy projects then. I'm going to buy stable or near stable properties with substantial income and proper leverage out of the gates.

Flipping & BRRR'ing a property are the exact same methodology with different financial outcomes. You tell me which one is a more viable business model.

@Elliott Elkhoury Well said man. I've been debating the topic of property maintenance as a rental. All the work (DIY or contractor) to get that ARV could be ruined by the wrong tenant. I'm working on deal now and I want to BRRRR. With conservative numbers (rehab budget, ARV, rental income, etc) my cash flow is $65 per month... my Dad thinks it's crazy to not flip it and find the next one.

"Most BRRRR investors that do 100k SFR's walk with $50-$200/mo" - Was that the only motivation to flip property instead of hold?

@Jaron Walling

BRRRR works but it's like a math problem and there are lots of variables.

  • Can you get the money to acquire the property and do the rehab
  • Are you buying it right (generally at 50% of the ARV)
  • Will the work required to get it to pristine condition throw it over the max loan to cost (usually 70-75%)
  • BIG ONE FOR YOU. Will the loan amount be large enough for portfolio lenders to care. Most portfolio lenders have a minimum loan amount of 75K. If you're below that, it doesn't matter how beautiful your renovation was, you've got to sell because you aren't getting the refinance piece of BRRRR

Just some quick thoughts

Stephanie

PS  Listen to your Dad :)

@Jaron Walling if you want to make $65 a month put your savings in an ally bank high interest online savings account! 

BRRR is the bargain investors method, and you get what you pay for. If you can't afford to keep your money tied up in a strong cash flow property, no problem! Sell some stuff to get that money. It's a lot of work and thought for such inconsequential cash flow. $65 over 100 SFR's is cool passive cash... but what kind of buy and hold investor in their right mind owns 100 sfr's????

The BRRRR method is good in theory and works in some type of markets and market conditions. Anyone could have made it work during a purchase of 2010-2014. You have low prices and an accelerating market in appreciation and rents, of course, it worked.

Now the market conditions are different, the deals and meat on the bone slimmer, and rents and prices are not accelerating to cover peoples mistakes. Could it work still?  Yes, it's just very difficult to find deals today and won't work in every market. 

My issue with BRRRR is that at some point you need to bring fresh money into a new purchase. You can't just continue to refi cash out buy more, refi cash out and buy more. Your risk and debt load will be too much. I guess the idea of getting rich with little money makes it very appealing. What happened to the days of just buy an investment work your tail off and save and buy another one. Slow and steady wins the race.

@Frank Wong

Millennials dont have the work ethic or street sense to make it happen the old school way (hard work) ...that's why the BRRRR method is so appealing...and that's why BP crushes it with Pro Memberships...pushing the BRRRR method...it lines right up with their main client base...

Originally posted by @Mark Fries :

@Frank Wong

Millennials dont have the work ethic or street sense to make it happen the old school way (hard work) ...that's why the BRRRR method is so appealing...and that's why BP crushes it with Pro Memberships...pushing the BRRRR method...it lines right up with their main client base...

Its no different than any other guru message.. NONE Of your own money  IE refi out and own a rental without a dime of your own money into it although our leveraged to the max.. people forget that little nugget..  also doing rehab on lower value rentals from afar is about as dangerous or risky proposition one can take on.. If your local in a market experienced rehabber and landlord sure this works just fine and has for a hundred years.. you bundle it all up and sell the theory.. its just another RE theory that newbies get all excited about and don't know what they don't know..  

Originally posted by @Mark Fries :

@Frank Wong

Millennials dont have the work ethic or street sense to make it happen the old school way (hard work) ...that's why the BRRRR method is so appealing...and that's why BP crushes it with Pro Memberships...pushing the BRRRR method...it lines right up with their main client base...

I'm 1981, guess I'm a millennial?  =) lol. An exception to the norm. 

Always be prepared to leave money in the deal. If the numbers still work for you then go ahead and see how it goes...

have multiple exit strategies.

Everyone mentioning your small/non existent cash flow is correct. But most people utilizing the BRRRR method are using it for long term gain/wealth building. Not the monthly income.

@Elliott Elkhoury I realized I have two exit strategies. Rent or flip. Given the timing of the market I feel like the flip is the better option. The cash flow sucks. Speculating on long term appreciation is risky.