I feel like someone needs to push back on the BRRRR strategy a bit. Disclaimer: I use the BRRRR strategy and it is a very powerful investing tool that can create great returns. With that being said, I lost a lot of money on my first couple. Only now after 10+ years of investing, property managing, working as an agent, do I have enough systems in place where I am having some BRRRR's go well. This strategy seems to be the most attractive to new investors. For the most part they are highly intelligent, successful in the industry they work in, and impatient. When they add up the returns of traditional RE investing it feels like it can take more than a lifetime to get to financial freedom and enough units to live on the beach. While that may be true what is not as easy to measure is the amount of risk these projects come with, how much can go wrong, and how you an actually come out of them WORSE OFF. I have done it. BRRRR's are very tough to pull off. Experience seems to matter a lot more than intelligence on a BRRRR. Quotes can be all over the place from a high end large contracting outfit to a low end, uncle Bill, one man band contractor who does not have insurance and can under cut anyone's price by $20,000, until he can't finish the work, and needs another $40,000. This is a very high risk strategy if you do not have all the pieces in place. It is comparable to D class investing with the amount of risk you are taking on. And it may amount to more risk because you can spend $50,000 to find out you are up a creek with the wrong contractor and have to start over. With a D class investment at least you have a finished asset in most cases. On top of all of this if you are borrowing money from a HML and you are over budget, and over time, you are going to continue to pay dearly. When you take into account a complex construction project that even seasoned veterans have trouble estimating, an order of operations that is not always crystal clear at the outset because you don't know what works and what is behind the walls, and the fact that you will be managing a plethora of contractors and subs, the BRRRR has as much that can go wrong as a high risk D class investment. Like I always say with D class investing, they are fantastic returns... if everything goes right. Same comment on the BRRRR... great strategy, if everything goes right

What you are looking for, already exists Mathew, its call expected value. You need to have an idea of how likly the thing you are worried about is going to happen and the costs. For example: You have a budget for repairs of $10k and the risk is going over budget. There is a 50% chance you stay on budget, a 40% chance you spend $15k and a 10% change you spend $25k. Multiplying all those together [.5*(10)+.4(15)+.1*(25)] you get $13.7k. So there is $3.7k of "risk" in the rehab. You follow the same concept for all the other risks: We thing the ARV is $230k, but there is a 40% chance it cold be $200 and a 5% chance it could comp out at $250, so your weighted ARV is $219k or $230k with $11k of "risk". The hard part is getting the odds right, which is an entirely different basket of worms, but for the most part, this type of thinking can help quantify the risk of the project by making the investor think about what could go wrong and attempt to quantify them in numbers.

There was a time when in the commercials a real estate guru produced, the disciples would sit on boats and brag about how much money they made in their spare time. If you bought the guru's secret system, you would, too. The guru was selling a secret.Then came a new thing, flip shows, where TV did its best to make a life of residential renovation management sound glamorous. The shows were selling residential remodeling and decorating as a way of life, funded by the advertisers who bought heavily into these shows.But the latest addition to the stable of techniques on how to sell real estate is what I call "magic spreadsheets." That's the idea that all a successful real estate investor has to do is find a property with values that lead to the right outcomes when you put them into a complex equation within an online app. This numbers-based approach implies heavily that all you have to do is find the property with the right numbers and you Just Can't Go Wrong. It's A Sure Thing.The people behind this are digital True Believers who understand that all they have to do to sell other True Believers something they already know in their heart's core to be true: that mathematics and computers and data processing can solve anything.In the history of how to sell real estate investing, BRRRR is far and away the latest and greatest investing approach that diverges from reality with the aid of numerology. The way it's sold is telling. Find a contractor you can work with. Find an agent you can work with. Find a property manager you can work with. Find a money guy you can work with. These are people reduced into four elements of the equation. If the numbers on the property work in the calculator app, then you plug the right four people in, hey, the rest of the equation works AND YOU GET RICH QUICK AND EASY.This idea is just incredibly seductive to anyone who gets paid to spend ten hours a day typing on a keyboard in front of two or three monitors in a 6x6x5-foot cubicle.

Giving an age old strategy a new name and making it sound simple and cheap and fast is what gets me. Very little discussion of seasoning or borrowing costs, appraisal delays, hassles of qualifying, etc. Many are surprised there is a six month holding period before their refi appraisal doesn't get brought down by their own purchase comp. Then surprised again that it costs $5k to get the refi. On top of the costs to borrow to buy if they needed to. Let's just call it refi and repeat and leave all mention of seasoning and high costs out of it.

Why push the BRRRR so hard

Olivia Radziszewski

Realtor · Chicago, IL · Member since 2019 · 274 posts · 191 votes

5y

@Matthew Irish-Jones- thank you for the post!

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Rik HunterBusiness Member

Real Estate Agent · Chattanooga, TN · Member since 2020 · 107 posts · 62 votes

5y

I only made out well with my first BRRRR because I did most of the work myself. It was a house-hacked duplex, so that helped a lot. Now I'm in a SFH BRRRR, but it's going to take less work to get it ready to rent, and I still do most of the work myself. I've been listening to the Real Estate Rookie podcast for a while now, and I get why Ashley looks for such low-valued properties; she doesn't do (much of) the work herself, and that's how the numbers work for her.

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Matthew Irish-JonesBusiness Member

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Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes

5y

@Rik Hunter doing the work yourself can certainly help. Most people are not qualified or don't have the time to take on a full blown BRRRR though.

Then there are the things where a small error can cause a massive problem in the future. Like not properly installing plumbing or electrical.

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David M.

Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes

5y

@Matthew Irish-Jones

I tend to agree, especially as it applies to real estate investing, in general. This is investing, not a job. Sure, there are many success stories (perhaps think of it as part of the American Dream fulfilled), but there are many horror stories.

You see it in BP with so many people posting with little means asking how to get started. But, thats part of the USA as well, people advertising 'get rich quick techniques' (for lack of a better term).

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

5y

@Matthew Irish-Jones Yup when this all came out as a new fangled way to do real estate and the term was coined and the book was published to me it was Holy cow there are going to be some serious sad investors who have no experience trying to do what is described.. no question this works but for those that dont live anywhere near the assets and trust some core 4 team they take huge risks that simply were never talked about ..

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Rik HunterBusiness Member

Real Estate Agent · Chattanooga, TN · Member since 2020 · 107 posts · 62 votes

5y

@Matthew Irish-Jones, agreed. I let experts do any more complex plumbing and electrical, especially when doing it wrong could cause problems or it's too much of a time commitment. But simple things like changing out light fixtures or a faucet saves a lot of money over time.

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Gail W.

Investor · IL · Member since 2019 · 151 posts · 135 votes

5y

I have done three rehabs in the last 2 years and I can't imagine how difficult it would be to do out of state. My first one I feel burned me, I finished over budget and had around 15% equity after all my work, but the market appreciation has made this a very nice investment at this point. The second was a foreclosure and after rehab the numbers came out pretty well 36% equity in the end, but I spent the first 4 months of my retirement completely dedicated to the project The last was just cosmetic in nature, very quick and easy 10% increase in value. So I agree with the OP there is a learning process. Oh and I should say I worked in the building maintenance and construction field all my life so I had some experience to rely on.

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Brent Coombs

Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes

5y

@Matthew Irish-Jones, how do you lose money, when you don't sell your "B"?

ie. If you get the numbers wrong regarding Rental returns, don't blame the strategy.

Also, if people are impatient, or don't have a good team, don't blame the strategy.

For anyone having the same sour grapes, don't blame the strategy. Cheers...

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Matthew Irish-JonesBusiness Member

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Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes

5y

@Brent Coombs I’m not blaming the strategy,

I’m explaining there is a lot of risk in the strategy.

You lose money by over spending on a rehab and being upside down on your equity.

You can also lose money by using a HML and going over budget and over on time, and having to pay a high interest rate for an extended amount of time.

You can also lose by having shoddy work done and having to track back and redo the work after it starts falling apart a year later.

Lastly, there is an opportunity cost. If any of the above happen you have to compare your time, effort, and returns to what could have been bought on the open market and been cash flowing from day one.

If you do a BRRR that takes 5 months and you end up with 25% left in the deal after 5 months of headaches are you better off than where you would have been had you paid full price for a turn key property.

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Matthew Irish-JonesBusiness Member

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Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes

5y

@Jay Hinrichs. Yeah exactly. What I would love to see is for some smart person to figure out how to add a line item for risk.

There is no line item for risk on these projects. Honest agents, property managers, and contractors will explain what could go wrong but it’s hard to quantify with a number.

When you see 20% returns and someone explains verbally there is risk, it’s enticing to go after the 20% returns and ignore the risk because it’s not as quantifiable as all of the other calculations.

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Account Closed

Member since 2021 · 237 posts · 153 votes

5y

@Matthew Irish-Jones

Look deeper. Why might it be in BP's & it's instapreneur's best interests to make it seem like BRRRR is easy?

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Matthew Irish-JonesBusiness Member

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Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes

5y

@Frederick P wallberg I’m not accusing BP of anything I love BP. I think BP is the greatest social networking platform for RE investors in the history of the world.

I guess the constructive criticism is that the BRRRR presents a lot more risk than it looks like up front.

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Stephen KeigheryBusiness Member

Rental Property Investor · New Orleans, LA · Member since 2018 · 716 posts · 555 votes

5y

@Matthew Irish-Jones I think what you are saying is right but it is not specific to BRRRR. You can say the same thing about any strategy. People need to do due diligence, have a level of competence and budget for contingencies otherwise things can go wrong.

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Darius Ogloza

Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes

5y

The points made here apply equally well to flips with the added point that miscalculating the ARV (or having the market move on you between purchase and sale) can prove ruinous.

The key takeaways IMHO are as follows:

Taking on RE projects without sufficient capital is a sure fire way to lose money (unless God is on your side for some reason)

Picking a RE investment is even harder than picking a stock because you do not have an even relatively efficient market pricing these assets

The risk number (like the "easy button" in those commercials) just doesn't exist - the concept of "risk-adjusted return" is often no more than wetting a finger and holding it in the air

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Account Closed

Member since 2020 · 983 posts · 1k+ votes

5y

I was always been against BRRRR from the minute I learned about the system. The profits are too low and the risks are too high for the small return. According to Murphy's Law, "If It Can Happen It Will Happen" and the poop will eventually hit the fan. Rather than risking your money and spending hundreds or thousand of hours of your time trying to build a portfolio where you own a bunch of hungry dinosaurs you have to feed and clothe for a few hundred dollars a month you would be better off cleaning tables in a fast food restaurant for a few years with your spare time, save more cash to get into even some small multi-units, earn 500% to 1,000% more on your money with multi-units and save yourself from the grief of having to pay $6,000 to $12,000 to clean, paint and -re-rent a single family home that has minimal returns.

YOU HAVE TO LEARN TO DO THE MATH and stop listening to wannabe so-called experts who did one real estate deal and figured out they could make more money by selling their story than they really can with their real estate investing.

I see too many amateurs risking their money when they don't have real estate experience, no business skills, nor trade skills. They can't do the math, don't have enough cash to weather a storm and they have a mind-set where they focus more on profits than they do on risks.

There is so much more profit when dealing with even small multi-units vs. single family homes and if you can't understand that then you should not be investing in real estate. The only exception to investing in multi-units is when you can get single-family homes for a steal, or when they appreciate in value, significantly, but you will never get rich from collecting rents when single-family homes don't appreciate. In fact, if they don't appreciate the chances of making any profit are slim when property taxes, insurance and maintenance costs increase every year and when you get hit with a bill for a new roof, new pipes, or you have to pay $6,000 to 20,000 because a tenant destroyed the house, or as the house ages you need to do install new kitchens, bathrooms, floors, etc..

Owning single-family homes for rentals is exactly the same as owning your personal home where we homeowners are constantly spending money on the home. I purchases a 3-bedroom home for myself in 1974 for $49,000 and still own the home today. Since I purchase the home, I remodeled the kitchens and bathrooms 3 times. I installed new windows 2 times, changed the heating and air conditioning 2 times, changed all the flooring 3 times and spent more than $400,000 on the house since I owned it.

Single-family rentals are no different than your home when it comes to costs. Rental homes need new roofs, plumbing, windows, flooring and every so many years the kitchens and bathrooms need to be remodeled. The difference with multi-unit properties is the time and cost. We can gut an apartment to the 2 x 4's and install new kitchens and bathrooms, plaster, paint, complete the rehab in 4 weeks and the cost is about $20,000. You can't do that with a home. So, do the math and multiply the cost and time difference and the money you save by the number of units you would like to own.

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Eric Gerakos

Investor · Costa Mesa, CA · Member since 2016 · 1k+ posts · 1k+ votes

5y

Nice to see a more balanced look at the BRRRR strategy. I have always thought the risks of this and some other similar strategies are often greatly underestimated.

5 Reply

Kyle O'Donnell

Rental Property Investor · Atlanta, GA · Member since 2015 · 31 posts · 44 votes

5y

@Matthew Irish-Jones

If someone gets a buys a screwdriver and tries to use it as a hammer, you blame the person. Not the screwdriver.

BRRR is one of the best strategies for growing wealth IF done correctly. If done incorrectly, the leverage can work against you and be catastrophic.

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Matthew Irish-JonesBusiness Member

OP

Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes

5y

@Darius Ogloza. Spot on!

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Matthew Irish-JonesBusiness Member

OP

Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes

5y

@Kyle O'Donnell pretty much. The point here is that the "if" becomes more complex on a BRRRR than some other investing strategies, and there is more downside.

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Levi T.Pro Member

Rental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes

5y

@Matthew Irish-Jones I have been at this for over a decade. The amount of wealth it has created has allowed me to move from single family properties, all the way to 100+ multi family value add deals.. The mistake I see people make is expecting to buy a property that needs big construction rehab, like what you see on HGTV, and that's all wrong. The goal is to buy it for cheaper than it's worth with as little work as possible, not buy it and make it worth more. Case in point, I bought a house recently for 130k, it appraised as is for 300k. I sent a carpet install, painter, and had a handyman do some basic with lightbulb and such, then had a cleaning lady wrap it all up. My cost was not even 5k. I then proceeded to refi it a month later for 150k, and rent it out for $1,850. When folks buy pigs and try to turn them into unicorns, that's when they can get in trouble with BRRR.

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Matthew Irish-JonesBusiness Member

OP

Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes

5y

@Stephen Keighery I think it's specific to the BRRR strategy because of the amount of risk. Especially for investors starting their RE career with this specific strategy.

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Matthew Irish-JonesBusiness Member

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Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes

5y

@Levi T. Yeah great point. Those types of deals are hard to find though.

Usually the most equity add opportunities are in the larger rehab projects, which naturally equates to a higher risk situation.

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Levi T.Pro Member

Rental Property Investor · Tucson AZ / Nice FR / Washington DC · Member since 2016 · 1k+ posts · 1k+ votes

5y

Originally posted by @Matthew Irish-Jones:

@Levi T. Yeah great point. Those types of deals are hard to find though.

Usually the most equity add opportunities are in the larger rehab projects, which naturally equates to a higher risk situation.

Agreed, it takes a lot of work to find those deals. I’m closing around 5 of them every 90 days or less, so it’s doable. That upfront work is far cheaper than the ladder.

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Matthew Irish-JonesBusiness Member

OP

Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes

5y

@Levi T. Case and point Levi. You have been at it over a decade and seem to have business systems built and a ton of experience. Those are fairly key ingredients in making this strategy work.

Did you have any trouble on your first BRRRR? Or can you share some experiences where it did not go well?

This whole post is in support of the BRRRR strategy if you fully understand the risk.

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Account Closed

Member since 2021 · 237 posts · 153 votes

5y

@Matthew Irish-Jones

Way more risks. And the book is a ~10,000ft view. And it’s intentional.

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Why push the BRRRR so hard

Why push the BRRRR so hard

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