Is BRRRR the only way?

Question

With so much emphasis on BRRRR on the forums, I feel like I'm investing the wrong way. I have a handful of properties that I've acquired the traditional way with 20-30% down. They are nice homes that need just a little updating after purchase. I understand the value of BRRR and how it can super-charge your growth and intend on doing it if the right property comes my way. All my properties cash-flow nicely, I guess I just feel like if I'm not BRRRRing, I'm doing it wrong. Thoughts? Different points of view?

Frank Wong · Answer

Hi Matt,

Keep doing what you are doing if it's working. You don't need to BRRRR to get rich you need to manage risk and continue to buy properly.  I am with @Caleb Heimsoth it's way overhyped. Great in theory bc it makes people believe that you can get rich with little money.  All you gotta do is buy one refi keep repeating and stacking. Seriously?  The debt load and risk will blow you up eventually.

I never understood why you would keep refinancing out killing your cash flow to buy more to take on more debt. As some point, you need fresh money into a deal.  Keep it simple. Buy 25-30% down. Work hard to save your money and buy again when you have savings and ready to pull the trigger.

Yes, BRRR does allow you to get to a lower price point and higher returns if you are willing to put in the work and find the deals.  The cash out and max leverage is the part I have an issue with.  It works for some but just not my cup of tea.  I rather keep the equity in the property get a high net and focus on making more money and buying my next deal. For me its all about time and risk management.

Caleb Heimsoth · Answer

@Matt Hazlett. I don’t think BRrR is all that great honestly. It’s way overhyped. My biggest problem with it is you always have max debt. I understand the appeal, but you are constantly adding debt.

I am of the belief that debt is a tool, one that helps you reach your goals but also one that has to be managed.

Jay Hinrichs · Answer

its only a shinny new version .. this is a very very old model.. just regurgitated.. nothing new nothing earth shattering.. and the back bone of most investing.. mean every builder in America does BRRR instead of refi they sell for a profit hopefully..

what gets glossed over here.. Is as Steve states the new refi rules are much tougher than in years past.. so many times you end up leaving money in the deal anyway and just spent a ton of time and RISK especially if your trying to do what the book says and do it remotely half way across the country.. this is SUPER high risk investing.. the most riskiest of all..

the only thing different is your refi  ing instead of selling.. IE being a flipper..  compared to buy and hold..

in todays market to find deals that make all these numbers work usually puts you in C class rough areas that for whatever reasons the banks have come back to the same cash out model that got them in trouble in 07..  when investors have no cash in the deal.. things can get squirrely for the bank real quick.

Steve Vaughan · Answer

Yep. Take the oldest and truest system that's been around since Europe. Give it a cute acronym that misses some important components. Repackage it with an out of state in a new market you know nothing about component (because the 70% deals talked about from 2010 aren't around anymore) hype it up and bam.  Guys like Matt are questioning their own strategy.

Here's what's worked for me.  Farm and feed a stable of tired landlords in your own backyard.  Add value to them and get to know them. When they are ready to tap out, you will be their first call.

Learn proper seller-financing. Make a win-win, stabilize then refi as opportunities for low fixed rates arise or to mitigate risk. Or keep them long-term. 11 Ive paid off completely and I'm 14 years in to 8 more, but I own them. No LCs or CFDs.

It's ok to invest capital into your portfolio and leave it. It may take 10 years, but it will come back eventually.  That's what an investment is.

Steve Vaughan · Answer

Sounds to me like you have a solid plan and great portfolio so far.  Shiny new versions of something you already have should not be allowed to distract you.

What bothers me about BRRR is all is not said.  No real mention of seasoning requirements or risky initial funding and refi costs and hassle.

It's also ok to leave a few bucks in a property.  I just BRR without the refi and over time have received every invested dollar back anyway.  Buy, reposition and rent.  Wealth-building of champions. You're doing awesome.

Account Closed · Answer

@Matt Hazlett

BRRRR with maximum leverage only works when the market is expanding and accelerating.  It would be a nightmare in a declining market.

In a declining market, I would not BRRRR any properties at all because money will be lost in a much faster way.

For an example, say John had $250k cash and bought a duplex for $250k in year 2006.  Say the duplex dropped to $120k in 2011.  Since John paid cash and don’t have loan, he was able to ride it out the last recession.

Say Peter had $250k cash, and used it as 25% down payment ($62,500) to purchase 4 duplex at $250k each, with total loan of $750k.  All 4 duplex dropped to $120k each in 2011.  All 4 duplex were worth $1 million in 2006, but all 4 duplex together were worth only $480k in 2011, and Peter still has a loan balance of $740k, which made him under water and filed bankruptcy in year 2011...

Matt Hazlett · Answer

@Caleb Heimsoth this is the way I look at it as well.

Randall Weatherall · Answer

I agree that if you're already doing it, then no reason to get distracted by something like the BRRRR strategy.  It can absolutely work but it's a risky game and the deals that make it work are getting harder and harder to find every day because everyone on the block is trying to do it.

You keep doing you and you'll have solid deals land in your lap all day long where people married to the idea of a BRRRR deal won't move on their numbers in the slightest and would rather just sit on the cash dreaming about the 100k ARV they're gonna find tomorrow for 20 grand with a gleam in their eye...

Steve K. · Answer

@Matt Hazlett,

Matt,

I've changed my thinking on debt over the last 38 yrs of marriage. My first home had a 12.25% APR loan and it was easy to see that a goal of paying off the mortgage early was similar to expected mutual fund yields.

Today, as a REI, I look at it differently. My investments are making 20% cash on cash return with leverage. I have one mortgage at 2.625% APR.....why would I pay that off, when my capital could earn 20% elsewhere? Admittedly, I'm spoiled in Denver, where we've been getting 8 to 10% annual appreciation. (i.e. if 8% appreciation, and 25% down payment, my down payment is earning 32% annual yield in the short term. Leverage is helping me grow wealth faster).

I'd encourage you to see that if a rental with minimum down payment can earn 15 to 20% yield, and if the mortgage is 4.5% APR on that rental, then any extra equity that reduces the loan is earning you exactly 4.5% yield. If you've held your rentals for several years, is there a way to extract some of your equity, and grow your rental fleet?

I know a widow in Denver that 7 years ago paid $250k cash for a duplex. She loves the cashflow (no mortgage payment), and she's debt-averse. She's made good appreciation. Likely doubled value in 7 years. Her duplex is now worth $500k. But think about what she could have done putting $62,500 down payment on 4 similar duplexes. She could have had $250k down payment on $1million in real estate. When it doubled in 7 years, she could have gained $1M instead of 25% of that (with the 75% LTV leverage.BRRRR is a clever way to grow wealth quickly, using max leverage. Decide for yourself what level of debt you're comfortable with.

Bob Okenwa · Answer

BRRRR is simply a tool in an investor's tool belt. All tools do not fit all strategies or investors. If what you are doing works for you and your investment model, don't pay attention to what others are doing and focus on growing your business in a manner that fits you.

If you feel like you're missing an opportunity to accelerate your growth, then spend the time to learn the process and give it a try to see if it is truly something you feel can help you reach your goals.

Is BRRRR the only way?

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