Be Careful If You Are Overleveraged
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
District Invest Group545 Reviews
Be Careful If You Are Overleveraged
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votesProper capitalization and reserves is the corner stone of real estate investing.
the refi till you die while a good strategy to scale needs to be tempered with fiscal realities if you do hit a bump in the road or like Russ is talking about a brick wall at 100 mph.. this is not about those that will get the Virus this is about those that work in industries that are being shut down.. some will get paid regardless others will get help from various sources but others will have no choice but to either buy food and medicine or pay rent.
Or they may just move in with relatives and leave properties vacant and in C/D areas vacant properties are sometimes worse than having non paying tenants who at least are keeping an eye on the house.
Tough times don't last but tough people do.. be tough be smart and be caring of others IE your tenants.
And for sure having owned hundreds of C/D class rentals myself I know once the word gets out in that tenant base there are going to be lots of them playing games with you.. But hopefully you know the good ones from the characters that are just out to take every advantage they can get as its their way of life
140 Replies
- 6yPeter TverdovBusiness MemberDeveloper · New Brunswick, NJ · Member since 2015 · 1k+ posts · 2k+ votes
Originally posted by @Scott Trench:
Originally posted by @Peter Tverdov:
I've been saying this on here for 2 years. I have started threads on here asking people about reserves and got crickets.
I hope I don't get banned for tagging them but at what point do higher ups like @Josh Dorkin and @Brandon Turner share blame? You can't go one Instagram post, one podcast, one forum on anything Biggerpockets: BRRR! BRRR! BRRRR! Just BRRRR!
I submitted a video to be on their podcast and didn't get picked. Not really sour grapes but part of it (maybe?) was because I didn't brag about BRRRing to 100 doors. I own 10, boring but they cash flow (for right now) and I have reserves.
I see all these clowns on Instagram with houses the size of my car bragging about BRRRR and just take their online class and you can be successful too! These people are going to get absolutely annihilated in a few months. Majorleague bullcrap artists are all over the internet and suckers everywhere just handing them money. Blows my mind.
Biggerpockets created morale hazard promoting BRRRR so hard and I say it as someone who has done it to an extent, has reserves and I am still uneasy about it all. I cannot imagine the people who own a 105k SFH rental in a low income area and their credit card is the reserve.
Peter - You can't go on one instagram post, one podcast, one forum, one blog post without seeing "reserves" "cash flow" "CASH FLOW" "CASH FLOW".
I'm extremely concerned by this post here. I wonder how loud Josh, Brandon, and I can possibly scream about the importance of investing with appropriate numbers, about the importance of reserves. And how frequently. About the importance of analyzing deals. Josh Dorkin founded this platform and has literally been predicting a bubble since 2013! Brandon has championed our calculators and the importance of analyzing deals for the past 8 years that he has been a part of the community.
I'm so passionate about reserves that I have written literally dozens of blog posts on the subject, written it thousands of times on the forums, answered hundreds of PMs about it, and talk about it for an hour every week on the BiggerPockets Money Show Podcast. that show's entire purpose is to help people who are not financially prepared to invest in real estate and help them build a financial foundation capable of supporting responsible long-term investing. You can link to many of my posts talking about responsible long-term investing in the post found here.
Every month (if not every week) for the past five years, a blog post has talked about a possible recession. Nearly every week we've had trending forum discussions. We've released books on how to BRRRR, yes, and we've also more recently (in mid 2019) released books on "Recession Proof Real estate Investing" and my book, which talks about nothing but building a strong financial foundation capable of sustaining investments.
I think that many investors here on BP are prepared, a few may not be. There's only so many times you can scream from the rooftops about good financial habits, and investing from a position of strength. NO ONE has advocated buying property when one has no job, no income, no credit, and bad debt. I have never seen someone advocating buying without reserves.
It is truly sad to see this type of accusation. I have worked tirelessly for several years, continuing the work of Josh Dorkin, to help our community prepare for both long-term wealth creation and precisely for a recession, which always looms on the horizon.
And frankly, I think that most of our users are reasonably well-capitalized, have long-term debt locked in, have adequate reserves, did invest for cash flow, and will be able to weather the storm and thrive. Most of them have listened to hundreds of hours of podcasts, read books, networked, learned from the last recession.
I'll repeat - calling the investors who feel that they are NOT well capitalized and overleveraged! Where are you? Tell me your story.
If there is a sizable minority of BP investors who are overleveraged and in over their skis, not invested for cash flow, and without reserves, then I have failed, and BP has failed. I don't know what more we could have done. But, I bet that's not true, in the slightest. I bet our community is as well prepared as a group as is possible to be. I know I am. I know that the other folks on this thread largely are.
Please, show me the masses who are unprepared, and I'll relent.
I understand why you're writing this response but you're joking only yourself if you don't think Biggerpockets has encouraged that for years. Hell, people think you guys created it and that it wasn't called pyramiding 10+ years ago. Every single podcast I have listened to its on there. Telling everyone how great it is and how much you can scale and blah blah blah and then throwing a little disclaimer at the end? C'mon. This is a great site but let's top pretending we're encouraging rationale behavior. I get enough phone calls, DMs or emails from people telling me they want to buy a house for .70 on the dollar and BRRRR. Total newbies who haven't a clue. Go look at the success stories of people declaring themselves retired at 23 years old. If there were articles on being properly capitalized they get buried because I've never seen them. Hoping we all get through this but going forward I would hope you guys take away a sense of balance in all of this and learn fro mit because far too many people think you can just BRRRR your way to financial freedom. This platform has encouraged it.
- Rental Property Investor · Columbus, OH · Member since 2014 · 148 posts · 177 votes6y
Originally posted by @Edward Seid:
Has anyone thought about how inflation will play into this? If the gov't hands out $1 trillion, that money is being printed and injected into the economy. Devaluation of the dollar - Your purchase power will drop. Interest rates on 30 year loans will begin to creep up as banks try to adjust for inflation.
If you refi today with 30 year loan product, devaluation will erode away at the value of your debt (good thing). Best to refi today and maybe even cash out some if you have W2 income to leverage?
Any mortgage industry professionals have insight on the state of future interest rates?
The risk right now is from deflation, not inflation. Velocity of money is the primary factor, and that might be coming to a hard stop.
- Investor · The Woodlands, TX · Member since 2020 · 45 posts · 23 votes6y
Spicy Thread lol
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes6y
Originally posted by @Russell Brazil:
Originally posted by @Scott Trench:
Originally posted by @Peter Tverdov:
I've been saying this on here for 2 years. I have started threads on here asking people about reserves and got crickets.
I hope I don't get banned for tagging them but at what point do higher ups like @Josh Dorkin and @Brandon Turner share blame? You can't go one Instagram post, one podcast, one forum on anything Biggerpockets: BRRR! BRRR! BRRRR! Just BRRRR!
I submitted a video to be on their podcast and didn't get picked. Not really sour grapes but part of it (maybe?) was because I didn't brag about BRRRing to 100 doors. I own 10, boring but they cash flow (for right now) and I have reserves.
I see all these clowns on Instagram with houses the size of my car bragging about BRRRR and just take their online class and you can be successful too! These people are going to get absolutely annihilated in a few months. Majorleague bullcrap artists are all over the internet and suckers everywhere just handing them money. Blows my mind.
Biggerpockets created morale hazard promoting BRRRR so hard and I say it as someone who has done it to an extent, has reserves and I am still uneasy about it all. I cannot imagine the people who own a 105k SFH rental in a low income area and their credit card is the reserve.
Peter - You can't go on one instagram post, one podcast, one forum, one blog post without seeing "reserves" "cash flow" "CASH FLOW" "CASH FLOW".
I'm extremely concerned by this post here. I wonder how loud Josh, Brandon, and I can possibly scream about the importance of investing with appropriate numbers, about the importance of reserves. And how frequently. About the importance of analyzing deals. Josh Dorkin founded this platform and has literally been predicting a bubble since 2013! Brandon has championed our calculators and the importance of analyzing deals for the past 8 years that he has been a part of the community.
I'm so passionate about reserves that I have written literally dozens of blog posts on the subject, written it thousands of times on the forums, answered hundreds of PMs about it, and talk about it for an hour every week on the BiggerPockets Money Show Podcast. that show's entire purpose is to help people who are not financially prepared to invest in real estate and help them build a financial foundation capable of supporting responsible long-term investing. You can link to many of my posts talking about responsible long-term investing in the post found here.
Every month (if not every week) for the past five years, a blog post has talked about a possible recession. Nearly every week we've had trending forum discussions. We've released books on how to BRRRR, yes, and we've also more recently (in mid 2019) released books on "Recession Proof Real estate Investing" and my book, which talks about nothing but building a strong financial foundation capable of sustaining investments.
I think that many investors here on BP are prepared, a few may not be. There's only so many times you can scream from the rooftops about good financial habits, and investing from a position of strength. NO ONE has advocated buying property when one has no job, no income, no credit, and bad debt. I have never seen someone advocating buying without reserves.
It is truly sad to see this type of accusation. I have worked tirelessly for several years, continuing the work of Josh Dorkin, to help our community prepare for both long-term wealth creation and precisely for a recession, which always looms on the horizon.
And frankly, I think that most of our users are reasonably well-capitalized, have long-term debt locked in, have adequate reserves, did invest for cash flow, and will be able to weather the storm and thrive. Most of them have listened to hundreds of hours of podcasts, read books, networked, learned from the last recession.
I'll repeat - calling the investors who feel that they are NOT well capitalized and overleveraged! Where are you? Tell me your story.
If there is a sizable minority of BP investors who are overleveraged and in over their skis, not invested for cash flow, and without reserves, then I have failed, and BP has failed. I don't know what more we could have done. But, I bet that's not true, in the slightest. I bet our community is as well prepared as a group as is possible to be. I know I am. I know that the other folks on this thread largely are.
Please, show me the masses who are unprepared, and I'll relent.
Scott, I definitely applaud you and The @Mindy Jensen for your constant emphasizing, both on the site and on the podcast of the need for reserves and your conservative investing approach. In fact, I think you and Mindy are even more conservative than me and @Jay Hinrichs.
I love leverage, and I think leverage is exactly what makes real estate the great investment that it is. It was either @Joe Splitrock or @JD Martin earlier in the thread though that pointed out the cash out refinances on the BRRRRs is just equity stripping, and that equity stripping is what ups peoples leverage, and by definition, ups their risk.
#1 reason small businesses fail is not being properly capitalized. 90% failure rate. 87% failure rate for real estate agents, and I believe thats due to not being properly capitalized. #1 reason we will see a thinning of investors over the next few months, is not being properly capitalized.
Yes, that is what I had commented. By nature BRRRR is equity stripping. Equity stripping ALWAYS reduces cash flow and increases risk. We all know leverage is a powerful tool. By definition leverage literally means "to give you an advantage". It is understanding how to use leverage that is important. When the economic winds are behind you, pushing you forward, leverage is low risk. Pretty much anyone could have succeeded in real estate if they purchased in 2010 through now. When things shift and the winds are blowing against you, that is when under capitalized businesses fail. It happens in every recession. The trouble is many investors thought they had planned for the worst, but underestimated the worst. As I have been saying the last few days, comments like "people always need a place to live" can give you false security. There are many options of where to live. You can move in with family, move in with friends, move to a city with jobs, downsize, or even live out of your car. The point is, although people need a place to live, they don't need to live in your place.
- Investor · Philadelphia, PA · Member since 2017 · 64 posts · 22 votes6y
Its important to have CD account when doing rental, anyone agrees?
- Member since 2018 · 70 posts · 89 votes6y
I think we are living in very unique times right now. I don't believe anyone really knows when this will end and move back to normalcy. I haven't seen any landlord assistance come into play yet but I assume something will be done within the next few months either through cash assistance or mortgage payment holds. If you find yourself tight right now you should be actively looking into resources to tide yourself over for a while and not wait too long as we all know the government often moves slow and if a relief plan comes our way the lines may be long.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes6y
Originally posted by @Peter Tverdov:
Originally posted by @Scott Trench:
Originally posted by @Peter Tverdov:
I've been saying this on here for 2 years. I have started threads on here asking people about reserves and got crickets.
I hope I don't get banned for tagging them but at what point do higher ups like @Josh Dorkin and @Brandon Turner share blame? You can't go one Instagram post, one podcast, one forum on anything Biggerpockets: BRRR! BRRR! BRRRR! Just BRRRR!
I submitted a video to be on their podcast and didn't get picked. Not really sour grapes but part of it (maybe?) was because I didn't brag about BRRRing to 100 doors. I own 10, boring but they cash flow (for right now) and I have reserves.
I see all these clowns on Instagram with houses the size of my car bragging about BRRRR and just take their online class and you can be successful too! These people are going to get absolutely annihilated in a few months. Majorleague bullcrap artists are all over the internet and suckers everywhere just handing them money. Blows my mind.
Biggerpockets created morale hazard promoting BRRRR so hard and I say it as someone who has done it to an extent, has reserves and I am still uneasy about it all. I cannot imagine the people who own a 105k SFH rental in a low income area and their credit card is the reserve.
Peter - You can't go on one instagram post, one podcast, one forum, one blog post without seeing "reserves" "cash flow" "CASH FLOW" "CASH FLOW".
I'm extremely concerned by this post here. I wonder how loud Josh, Brandon, and I can possibly scream about the importance of investing with appropriate numbers, about the importance of reserves. And how frequently. About the importance of analyzing deals. Josh Dorkin founded this platform and has literally been predicting a bubble since 2013! Brandon has championed our calculators and the importance of analyzing deals for the past 8 years that he has been a part of the community.
I'm so passionate about reserves that I have written literally dozens of blog posts on the subject, written it thousands of times on the forums, answered hundreds of PMs about it, and talk about it for an hour every week on the BiggerPockets Money Show Podcast. that show's entire purpose is to help people who are not financially prepared to invest in real estate and help them build a financial foundation capable of supporting responsible long-term investing. You can link to many of my posts talking about responsible long-term investing in the post found here.
Every month (if not every week) for the past five years, a blog post has talked about a possible recession. Nearly every week we've had trending forum discussions. We've released books on how to BRRRR, yes, and we've also more recently (in mid 2019) released books on "Recession Proof Real estate Investing" and my book, which talks about nothing but building a strong financial foundation capable of sustaining investments.
I think that many investors here on BP are prepared, a few may not be. There's only so many times you can scream from the rooftops about good financial habits, and investing from a position of strength. NO ONE has advocated buying property when one has no job, no income, no credit, and bad debt. I have never seen someone advocating buying without reserves.
It is truly sad to see this type of accusation. I have worked tirelessly for several years, continuing the work of Josh Dorkin, to help our community prepare for both long-term wealth creation and precisely for a recession, which always looms on the horizon.
And frankly, I think that most of our users are reasonably well-capitalized, have long-term debt locked in, have adequate reserves, did invest for cash flow, and will be able to weather the storm and thrive. Most of them have listened to hundreds of hours of podcasts, read books, networked, learned from the last recession.
I'll repeat - calling the investors who feel that they are NOT well capitalized and overleveraged! Where are you? Tell me your story.
If there is a sizable minority of BP investors who are overleveraged and in over their skis, not invested for cash flow, and without reserves, then I have failed, and BP has failed. I don't know what more we could have done. But, I bet that's not true, in the slightest. I bet our community is as well prepared as a group as is possible to be. I know I am. I know that the other folks on this thread largely are.
Please, show me the masses who are unprepared, and I'll relent.
I understand why you're writing this response but you're joking only yourself if you don't think Biggerpockets has encouraged that for years. Hell, people think you guys created it and that it wasn't called pyramiding 10+ years ago. Every single podcast I have listened to its on there. Telling everyone how great it is and how much you can scale and blah blah blah and then throwing a little disclaimer at the end? C'mon. This is a great site but let's top pretending we're encouraging rationale behavior. I get enough phone calls, DMs or emails from people telling me they want to buy a house for .70 on the dollar and BRRRR. Total newbies who haven't a clue. Go look at the success stories of people declaring themselves retired at 23 years old. If there were articles on being properly capitalized they get buried because I've never seen them. Hoping we all get through this but going forward I would hope you guys take away a sense of balance in all of this and learn fro mit because far too many people think you can just BRRRR your way to financial freedom. This platform has encouraged it.
Of course this platform encouraged buying rental property. Of course it encouraged leverage. It is not named SmallerPockets. Sorry to joke, but seriously if you go to Bogleheads they will encourage stock market investing. If you go to Dave Ramsey, he will tell you to pay cash for everything.
That being said, I think it is unfair to name individuals at BP and imply some type of fault. In my opinion all the voices of BP have been careful to outline risks and issue cautions. Of course the most impressive success stories (as far as speed and dollars) are the result of using leverage. The "get rich slow story", which is my story too by the way, is boring. Nobody wants to hear about how I purchased one house a year while working a W2. I was never invited on the podcast either. Who cares? People wanted to hear about the house hack millennial who quit their day job, so the platform gives the people what they want.
These forums, on the other hand, are an open exchange of ideas. On a daily basis, I told people they were risky or making bad money choices. Often my "negative" comments were met with backlash that I was being mean to too conservative. I was even once called a bully for telling someone they shouldn't invest in real estate before getting out of debt! People were warned but chose to ignore.
People want to believe in the dream. They want to take shortcuts (hacks) to success. You hear people say, "worst case I just go back to my W2 job", but they never imagined a situation where there would be nobody hiring. People took risks and they will get burned. I will just caution everyone that this story is not yet told. BiggerPockets can be used to help guide people through these difficult times. Turning on each other or blaming the leadership at BP is counterproductive. I agree with much of what you said Peter. I am just saying lets find a more constructive way to move forward.
- Contractor · San Diego, CA · Member since 2018 · 432 posts · 221 votes6y
@Russell Brazil agreed on not over leveraging. In a TRUMP era, a dip looks a lot more drastic. I believe this is a more extreme version of a heavy market dip. As people work through things, I believe the market will roar back, unlike a recession. Either way, I’m not heavily leveraged and flips can become rentals like the previous recession, but I don’t think this is the biggie. It looks like it, but I don’t think it’s here to stay.
Originally posted by @Joe Splitrock:
Unfortunately there has been too much rationalization of poor decisions with statements like, "everyone needs a place to live". Although people need a place to live, it is not necessarily your property. During tough times people move in with friends or family to save money. They move to a different city to find work. Some people live in their car!
BRRRR is nothing more than equity stripping. Equity stripping always decreases cash flow. There is an argument that removing all equity reduces risk. The idea is you just walk away from the property and let the bank foreclose. In most cases this is a catastrophic financial situation.
Not much to do now besides working hard to keep tenants in your properties and paying. And for the record Russell was right as always...
>BRRRR is nothing more than equity stripping. Equity stripping always decreases cash flow.
This has not been my experience having done quite a few BRRRR since before I ever heard the term BRRRR. What I see is that the BRRRR in my market has virtually zero effect on the cash flow. To word it differently, the percentage rent increase approximately matches the percentage loan increase. Our last BRRRR, the initial cash flow projection and the actual after BRRRR cash flow, using my hopefully conservative expense estimates, was almost exactly the same (on that particular property cash flow neutral before and initially after the refi - now it is cash flowing ~$600/month using my hopefully conservative expense estiamates).
I think some newbies expect the cash flow will increase with the BRRRR because of rent increase but they fail to take into account the loan has increased similarly percentage wise.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes6y
Originally posted by @Dan H.:
Originally posted by @Joe Splitrock:
Unfortunately there has been too much rationalization of poor decisions with statements like, "everyone needs a place to live". Although people need a place to live, it is not necessarily your property. During tough times people move in with friends or family to save money. They move to a different city to find work. Some people live in their car!
BRRRR is nothing more than equity stripping. Equity stripping always decreases cash flow. There is an argument that removing all equity reduces risk. The idea is you just walk away from the property and let the bank foreclose. In most cases this is a catastrophic financial situation.
Not much to do now besides working hard to keep tenants in your properties and paying. And for the record Russell was right as always...
>BRRRR is nothing more than equity stripping. Equity stripping always decreases cash flow.
This has not been my experience having done quite a few BRRRR since before I ever heard the term BRRRR. What I see is that the BRRRR in my market has virtually zero effect on the cash flow. To word it differently, the percentage rent increase approximately matches the percentage loan increase. Our last BRRRR, the initial cash flow projection and the actual after BRRRR cash flow, using my hopefully conservative expense estimates, was almost exactly the same (on that particular property cash flow neutral before and initially after the refi - now it is cash flowing ~$600/month using my hopefully conservative expense estiamates).
I think some newbies expect the cash flow will increase with the BRRRR because of rent increase but they fail to take into account the loan has increased similarly percentage wise.
My point was that when you pull cash out of a deal, you increase the financed amount and therefore increase your payment. It is simple math. Your payment goes up when you finance more and down when you finance less. In your example, if you didn't refinance, your loan would not go up, but your rents would go up. That would result in more cash flow. You would have more equity trapped in the property, but it would put more money in your pocket every month. I should have mentioned the other variables are interest rate and term of the loan. Lower interest rate and longer term also increase cash flow. If you shifted these variables there could be a situation where your cash flow does decrease, even though you financed more money.
I have had people argue that when leave equity in a property that you are "buying cash flow" and the trapped equity is "dead equity". These are fair arguments in favor of equity stripping. The point is regardless of whether you choose to pull equity out or leave it in for higher cash flow, just be aware what you are doing.
Originally posted by @Theresa Harris:
In Canada, the 6 big banks announced that they have options for mortgage payment deferrals for up to 6 months for people affected by the coronavirus.
My friend switched from Scotia to B lender and asked me if he was covered.. I told him he probably is not but should inquire. I think any kind of disaster like a foreclosure etc.. as a result of Covid -19 the government will step in and protect you
Originally posted by @Joe Splitrock:
Originally posted by @Dan H.:
Originally posted by @Joe Splitrock:
Unfortunately there has been too much rationalization of poor decisions with statements like, "everyone needs a place to live". Although people need a place to live, it is not necessarily your property. During tough times people move in with friends or family to save money. They move to a different city to find work. Some people live in their car!
BRRRR is nothing more than equity stripping. Equity stripping always decreases cash flow. There is an argument that removing all equity reduces risk. The idea is you just walk away from the property and let the bank foreclose. In most cases this is a catastrophic financial situation.
Not much to do now besides working hard to keep tenants in your properties and paying. And for the record Russell was right as always...
>BRRRR is nothing more than equity stripping. Equity stripping always decreases cash flow.
This has not been my experience having done quite a few BRRRR since before I ever heard the term BRRRR. What I see is that the BRRRR in my market has virtually zero effect on the cash flow. To word it differently, the percentage rent increase approximately matches the percentage loan increase. Our last BRRRR, the initial cash flow projection and the actual after BRRRR cash flow, using my hopefully conservative expense estimates, was almost exactly the same (on that particular property cash flow neutral before and initially after the refi - now it is cash flowing ~$600/month using my hopefully conservative expense estiamates).
I think some newbies expect the cash flow will increase with the BRRRR because of rent increase but they fail to take into account the loan has increased similarly percentage wise.
My point was that when you pull cash out of a deal, you increase the financed amount and therefore increase your payment. It is simple math. Your payment goes up when you finance more and down when you finance less. In your example, if you didn't refinance, your loan would not go up, but your rents would go up. That would result in more cash flow. You would have more equity trapped in the property, but it would put more money in your pocket every month. I should have mentioned the other variables are interest rate and term of the loan. Lower interest rate and longer term also increase cash flow. If you shifted these variables there could be a situation where your cash flow does decrease, even though you financed more money.
I have had people argue that when leave equity in a property that you are "buying cash flow" and the trapped equity is "dead equity". These are fair arguments in favor of equity stripping. The point is regardless of whether you choose to pull equity out or leave it in for higher cash flow, just be aware what you are doing.
If you performed the rehab and did not refinance your cash flow would be greater but the amount you have invested would also have increased. You basically have changed your LTV by increasing the value but keeping the loan amount fixed. This would be little different than instead of purchasing at 80% LTV, you purchase at 70% LTV. The 70% LTV will have more cash flow because it has more invested.
In addition, if you skip the second to last R (refinance) you will may have difficulty with the last R (repeat). If you do the BRRRR, my experience is the cash flow is about the same as prior to the rehab (i.e. about the same as at purchase) and that the BRRRR does not hurt the cash flow when compared to just buy and rent (BR). This all is assuming that you purchased a good BRRRR RE (the more dated and thrashed the better). If you try to do a BRRRR on a property that is not appropriate, then the BRRRR is unlikely to work out well.
Typically higher LTV equates to less cash flow, lower LTV equates to better cash flow. However, often the return (COC) is the opposite, Higher LTV usually results in better return.
- Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes6y
A very good discussion . And in 6 months and then again in 6 months it will be interesting to see how this has effected people on both sides , leverage vs no leverage . I think the whole country is in for a wild ride for sometime . Where it stops ....................nobody knows
- Rental Property Investor · Denver, CO · Member since 2019 · 24 posts · 15 votes6y
@Scott Trench @Brandon Turner the online community yall have built is extremely impressive and has a positive impact for many and most, including myself. Yall have provided invaluable resources along with an open code format for real estate investors - of whatever experience - to come together and support each other like no other platform I know. Thank you. One thought, how do we get more community within the community? How do we replace the common problem & solution (or cause and effect as above) with a conversation about POSSIBILITIES and GIFTS.
I believe in hacking (Urban Dictionary def: a clever solution to a tricky problem) the real estate market with community and creativity. There is an interesting quote from the Chief of Police up in Longmont (I live in Denver too),
"For 80% of the calls we receive, people do not need a uniformed officer, they need a neighbor."Now more then ever, we need our roommates, occupants, mentors, leaders, coaches, friends, family, and neighbors for support. To keep our local economies afloat, starting with our own, no matter what previous advice we took, or how cold it gets, BRRRR.
I'd love to help start a movement - by creating positive human connections, building community, and helping local economies prosper with and within rental properties - where we as investors focused on the future possibilities of this glorious industry, instead of passing blame to occupants or hindsight problems from our mistakes. Let's keep learning / deviating our perceptions, and give our experience, good and bad, as knowledge to the next folks with the right mindset. Would BP be on board to help?
- Rental Property Investor · Marysville, WA · Member since 2019 · 1 post · 0 votes6y
First time poster! I read through the entire thing, just like I absorb so many others. I have seen some people that are angry with bp, Brandon turner, josh dork in, etc. apparently I missed the boat on this stuff. Every podcast I listen to seems to promote house hacking more often than brrrr (which is what I am doing currently in a split level).
I’m hey have always touted brrr as a way to get your money back out to reinvest, which means automatically higher leverage. I can’t tell you how many times I have heard Brandon turner and David green talk about how to be responsible investors, and have even gone over their own numbers and percentages for reserves.
Can we please not blame them for your selective hearing? You should always look at your own situation whenever you hear advice. Brandon and David are far more successful than I am and as such may require different reserves and other factors than I would specifically because they have a different financial situation than i do. (Pssst, more advice they give pretty consistently on the podcast).
They give solid advice if you apply it to your own life and situation correctly. That is why I am house Hacking Success and not flipping or brrrr(‘ing?). I applied their strategies to where I was in my life. Do that, and you will win.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes6y
Originally posted by @Peter Tverdov:
Originally posted by @Scott Trench:
Originally posted by @Peter Tverdov:
I've been saying this on here for 2 years. I have started threads on here asking people about reserves and got crickets.
I hope I don't get banned for tagging them but at what point do higher ups like @Josh Dorkin and @Brandon Turner share blame? You can't go one Instagram post, one podcast, one forum on anything Biggerpockets: BRRR! BRRR! BRRRR! Just BRRRR!
I submitted a video to be on their podcast and didn't get picked. Not really sour grapes but part of it (maybe?) was because I didn't brag about BRRRing to 100 doors. I own 10, boring but they cash flow (for right now) and I have reserves.
I see all these clowns on Instagram with houses the size of my car bragging about BRRRR and just take their online class and you can be successful too! These people are going to get absolutely annihilated in a few months. Majorleague bullcrap artists are all over the internet and suckers everywhere just handing them money. Blows my mind.
Biggerpockets created morale hazard promoting BRRRR so hard and I say it as someone who has done it to an extent, has reserves and I am still uneasy about it all. I cannot imagine the people who own a 105k SFH rental in a low income area and their credit card is the reserve.
Peter - You can't go on one instagram post, one podcast, one forum, one blog post without seeing "reserves" "cash flow" "CASH FLOW" "CASH FLOW".
I'm extremely concerned by this post here. I wonder how loud Josh, Brandon, and I can possibly scream about the importance of investing with appropriate numbers, about the importance of reserves. And how frequently. About the importance of analyzing deals. Josh Dorkin founded this platform and has literally been predicting a bubble since 2013! Brandon has championed our calculators and the importance of analyzing deals for the past 8 years that he has been a part of the community.
I'm so passionate about reserves that I have written literally dozens of blog posts on the subject, written it thousands of times on the forums, answered hundreds of PMs about it, and talk about it for an hour every week on the BiggerPockets Money Show Podcast. that show's entire purpose is to help people who are not financially prepared to invest in real estate and help them build a financial foundation capable of supporting responsible long-term investing. You can link to many of my posts talking about responsible long-term investing in the post found here.
Every month (if not every week) for the past five years, a blog post has talked about a possible recession. Nearly every week we've had trending forum discussions. We've released books on how to BRRRR, yes, and we've also more recently (in mid 2019) released books on "Recession Proof Real estate Investing" and my book, which talks about nothing but building a strong financial foundation capable of sustaining investments.
I think that many investors here on BP are prepared, a few may not be. There's only so many times you can scream from the rooftops about good financial habits, and investing from a position of strength. NO ONE has advocated buying property when one has no job, no income, no credit, and bad debt. I have never seen someone advocating buying without reserves.
It is truly sad to see this type of accusation. I have worked tirelessly for several years, continuing the work of Josh Dorkin, to help our community prepare for both long-term wealth creation and precisely for a recession, which always looms on the horizon.
And frankly, I think that most of our users are reasonably well-capitalized, have long-term debt locked in, have adequate reserves, did invest for cash flow, and will be able to weather the storm and thrive. Most of them have listened to hundreds of hours of podcasts, read books, networked, learned from the last recession.
I'll repeat - calling the investors who feel that they are NOT well capitalized and overleveraged! Where are you? Tell me your story.
If there is a sizable minority of BP investors who are overleveraged and in over their skis, not invested for cash flow, and without reserves, then I have failed, and BP has failed. I don't know what more we could have done. But, I bet that's not true, in the slightest. I bet our community is as well prepared as a group as is possible to be. I know I am. I know that the other folks on this thread largely are.
Please, show me the masses who are unprepared, and I'll relent.
I understand why you're writing this response but you're joking only yourself if you don't think Biggerpockets has encouraged that for years. Hell, people think you guys created it and that it wasn't called pyramiding 10+ years ago. Every single podcast I have listened to its on there. Telling everyone how great it is and how much you can scale and blah blah blah and then throwing a little disclaimer at the end? C'mon. This is a great site but let's top pretending we're encouraging rationale behavior. I get enough phone calls, DMs or emails from people telling me they want to buy a house for .70 on the dollar and BRRRR. Total newbies who haven't a clue. Go look at the success stories of people declaring themselves retired at 23 years old. If there were articles on being properly capitalized they get buried because I've never seen them. Hoping we all get through this but going forward I would hope you guys take away a sense of balance in all of this and learn fro mit because far too many people think you can just BRRRR your way to financial freedom. This platform has encouraged it.
Honestly, I don't see it. I think people see or hear what they want to hear. I don't think the forums encourages anything one way or the other; I've been here a long time, before I was a mod, and I think there has always been a diversity of opinion and strategy among different posters.
I've been on the podcast. I advocate the boring way, and I tell my story of losing my *** the first time around in RE. Other podcast guests tell a different story. Some strategies I find dubious; others are sound. Jay Hinrich was on the podcast and he's a very conservative guy. So if you say every single podcast, you didn't listen to at least two off the top of my head.
Webinars: they tend to appeal to newer investors and yes, they are designed to excite. But I have sat through a number of them and I never heard Brandon tell people "don't worry about reserves."
Forums: these are not controlled other than us kicking out spammers and advertisers. Today (I mean before Corona) you see a lot more "risky business" posters, but that is just a function of where the market is rather than a concerted effort by BP to push a point of view. I've been a mod for 3 years and no one has ever asked or even intimated that I should push a company line. I could probably list a dozen prolific posters off the top of my head that preach a slow and steady approach, including myself. In fact, I have been known to deliver a scathing retort to the Ninja investors.
Bottom line to me is that you're blaming the platform for the message, when it is the posters that get to decide what they want to say and follow. I also find it somewhat baffling that you would stick around here if you think the overriding message is financial foolishness; why would you want to keep posting under those circumstances?
Skyline Properties @Peter T.
From the early days of BP they have warned against what they have called the “gurus”, warning members against paying high fees to get sold promises of get rich quick schemes. This is what drew me to BP 8+ years ago. Not sure why you would reference the “Instagram clowns” in relation to BP?
Back in the day @JScott posted the Atlanta fix and flips he was doing with numbers for each property, lessons learned, transparent on mistakes made, etc. Fast forward to today and he recently did a business podcast talking about how he wanted to start a new business that had to be recession proof (because one was coming) and has done podcasts specifically on how to prepare for a recession, specifically stating “move to cash” aka “reserves”.
Even doing a BRRRR requires a bank ordered appraisal and with cash out you can only do 70-75%LTV. Banks require months of reserves for all properties you own, so this is all built in as a minimum in order to even do a BRRRR.
Your criticism of BP is somewhat unfair. Should they have stopped teaching people about BRRRR as they simultaneously warn about cash flow, reserves, etc? @Scott Trench's first book was basically about being as financial responsible as you can in life...riding a bike to work over spending money on a car and house hacking so you have no housing payment.
This is a great thread and post, a lot of insightful thoughts from people with many years of experience in real estate. Albeit I'm definitely a newbie @ real estate investing (mostly due to analysis paralysis ha), I've been watching the broader market and the economy for years, mainly driven by my own interest and partially driven by the nature of my day-time job. Apology for the long winded intro to this post, but I'll get to my point as to why I think real estate along with other real assets (e.g. gold, BTC to the extent) will perform well in the next few years.
I do think we're witness and living at the proverbial "Fourth Turning" as eloquently coined by Mr. Neil Howe (great read btw, if anyone's interested, similar to Sapien, focus on the "big picture thinking"). There will be a fundamental shift in the landscape of what we perceive as the modern economy and already taking place of "de-globalization".
As we're witnessing in real-time, the Fed and government are running out of options; monetary policies have not been responding the way they did back in Great Financial Crisis in '08-'09 b/c while this will ultimately turn into a liquidity driven event, which providing liquidity to corporations could help, this is once in our life time black swan event. Undoubtably in my mind, the goon't will have to make some tough decision, unpopular ones such as bailing out the airlines and other leisure conglomerates such as Hilton Global - reminiscence of the '08/'09 bailout of Wall Street, though different to some extent as the airline / hotel type of "blue chip" stocks are majority owned by Fidelity and Blackrocks of the world, which in turn is own by major pension funds, and guess who's the largest holders or contributors of pensions funds, your everyday teachers, fire fighters, police officers and etc., so I would imagine the govern't won't have much of choice...
However, all this will inevitably to amount to the main street or everyday folks loosing faith in the centralized government planning and monetary policies (in this case they'll have no choice but to continue provide liquidity,, leading to the potential real black swan, which is inflation. An ugly term that we haven't seen in decades, but it's like the boogie man, if you say his name enough times, he'll show up... all this leads to my view on my investment thesis and 2 prone-approach: 1. assuming you've been discipline and waiting for the right opportunity to strike, you've build a formidable cash position, when the equity market retreat to a reasonable level (i.e. S&P around 1,800 - 2,000), it could be a good opportunity to invest in the market to reap the benefits. 2. now that you've build even a larger cash position through potential gains, it could be a good time to deploy that to the ultimate wealth building machine - real estate. I like real estate as a superior vehicle to accumulate and preserve wealth.
As a quote popularize by Mark Twain - History doesn't repeat itself, but it rhymes. Choppy water ahead my friends, but with discipline and sober planning, we shall navigate the turbulences and come out on top, stronger than ever.
Please stay safe and thanks for baring my long post.
- Rental Property Investor · Glendale, CA · Member since 2015 · 14 posts · 3 votes6y@Mike Dymski thanks for sharing.
Ive just started a couple years ago. All ive done is brrrr. I have my 5th unit about to brrrr in a couple weeks. With this low interest rate, im thinking great. I typically buy at 50 to 60% of the arv. 25% equity position day 1 after refi. Cash flow $400. I have 10k in cash reserves per property. I also have another business with more cash reserves. Am i doing something wrong amidst this downturn? Serious question really. I feel i can leverage and brrrr up to 10 then start paying them off. What would you more experienced investors do in my position?
- Developer · Marlton, NJ · Member since 2019 · 44 posts · 8 votes6y
@Michael Ablan
U feel that concerned you pulled deals already
I have a deal on table now to purchase a flip think i should move ahead or squash deal.
I have another flip currently 85% done and was ready to list in 2 weeks. Hoping this situation blow over shortly but who knows. Could be done this new house by June or early July and sell before end of summer numbers are good but don’t want to be foolish
- Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes6y
The BRRRR strategy can definitely be misused because people often don't hit that 70 or 75% mark. For this reason, I always highly recommend BRRRR investors have some money on hand in case things go wrong and also be willing to sell instead of refinance if you have to leave too much money in the property and that leaves you without much money in the bank.
- Rental Property Investor · Los Angeles, CA · Member since 2018 · 84 posts · 54 votes6y
This is very true at this stage since the recession just get started. That's why CASH FLOW is very important so you will feel more secured even if there's no plan A & B. I'd like to hear more success stories from other BP members who have 100+ units (with a C-D class properties) with BRRRR method survived in the recession phase.
I played high stakes poker for a long time, did well over the years before getting into a regular lifestyle and real estate investing and I see a lot of similarities to poker strategy with real estate. Some players play every hand they can where they think they have an edge and capitalize by pushing thin edges in poker which leads to more risk and volatility but should yield more returns in the long run. Other players will play more conservative and pick and choose their spots to play in and grind out a steady profit albeit a likely lesser return.
Same principles go into real estate - there are people that are leveraged to the max (and lets assume they're making good investments which is a big if), they're pushing thinner edges with more risk to get the maximum returns. Others are happy to make more conservative plays and make a tidy return with less volatility but likely not maximizing their potential gains. Neither strategy is wrong, both have their pros and cons, and just depends on the person.
There is one famous lesson that always stuck out from my poker days which was to always leave yourself with outs - that is having a way to win even in a non-ideal situation.
- Rental Property Investor · Enterprise, AL · Member since 2019 · 137 posts · 85 votes6y
@Russell Brazil
If you have a property rented, no intention of selling for another 15 years or more, and have a proper amount of reserves, is being over leveraged really a concern?
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