Why push the BRRRR so hard

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

5y

Originally posted by @Matthew Irish-Jones:

@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.

how

How is it different to a flip? For me they are essentially the same strategy except with a flip you take the equity as profit and with BRRRR you leave the equity in the house and use the finance to pull out the capital invested. They are both risky in the same way. If you budget wrong, mess up the rehab or are off on valuation you will not have the equity you thought you have.

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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. 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.

I think you covered that in your opening post rather well. I just wanted to highlight the element that people need to not look for big construction projects, but instead look for cheap deals.

I started with rentals in war zones, and spent far to many cold winter nights knee deep in raw sewage and flooded basements to count how many mistakes I have made over the years.. Just as much as I am likely working on a few new mistakes as we speak.

We only make mistakes when the conditions are not just right. If you buy it cheap enough, you can afford a lot of mistakes!

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Dustin Mathenia

Flipper/Rehabber · Dallas, TX · Member since 2017 · 174 posts · 157 votes

5y

@Matthew Irish-Jones

You're not losing money over a 30 year period, just investing more than you wanted to. Brrrs are overhyped on BP I'll give you that. Also you didn't mention you have to be quite bankable to pull it off.

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Bill F.

Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes

5y

Originally posted by @Matthew Irish-Jones:

@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.

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.

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Travis Biziorek

Investor · Arroyo Grande, CA · Member since 2014 · 1k+ posts · 1k+ votes

5y

@Matthew Irish-Jones funny you grouped D-class neighborhoods and BRRRR together. I invest solely in C and D-class neighborhoods in Detroit and been killing it.

I do agree that a successful BRRRR is harder than people make it out to be. It took us three tries to successfully do it but now we're doing so consistently with a general contractor but no HML. I tell people it's harder than it's made out to be, but it's largely about finding a BRRRR-able property.

Anyway, to answer your question, the reason it’s pushed is obvious to me. It sounds too good to be true, but it can work. So it’s incredibly enticing. Notice it’s not so much pushed by fellow investors as it is the market machine of BiggerPockets, paid for course “gurus”, etc.

There's far more money to be made selling the BRRRR dream than actually attempting to do it. And that's exactly why it's pushed so hard.

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Shiva Bhaskar

Investor · Los Angeles, CA · Member since 2017 · 523 posts · 476 votes

5y

Originally posted by @Matthew Irish-Jones:

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

I agree Matthew. Single family BRRRR in less fundamentally sound markets always scared me. We know that big investors do a modified BRRRR on apartment complexes, hotels etc, but that is a very different game. I say modified because you rarely take out 100% of initial capital on those deals, but you do get close to it, and hold long term. They're often buying with long term, lower interest debt, adding value, and refinancing with long term, low interest debt.

Hard money loans with crazy rehabs in less desirable areas are a very different things. You and many other experienced folks know what tenants and construction issues can cause in a problem property.

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Jim K.

Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes

5y

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.

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Chris Levarek

Real Estate Syndicator · Phoenix, AZ · Member since 2018 · 903 posts · 1k+ votes

5y

@Matthew Irish-Jones I did four BRRRR's in North Carolina with family while living in Phoenix, AZ. This was how I got started. I can understand the appeal to new investors who lack the network and capital to fully fund 1 or 2 or 3 or X deals. Reusing capital or equity sounds like a quick way to financial freedom!

In our case, did we pull out 100% of capital in all four of the BRRRR's? Most definitely not! However, the return on equity is still greater than if we had left 20-25% in as in a normal down payment for example(as we left in 2-5% in a few).

I still strongly caution new investors on using this strategy and have a very different view on the strategy now then back when I started. I've had my fair share of varying appraisal amounts, misjudged contractor costs and over purchased assets. All of which make the ARV difficult to accurately estimate or BRRRR hard to pull off.

Yet, I think BRRRR local or out of state holds just as much risk. At least of out of state, you or more likely to take the time to vet your team, because you have to. Locally, you might just take the first one you meet, because you feel you can pick up the slack. Which ultimately can be just as bad, while building poor investing habits.

So I believe it does balance in risk as far as location, my opinion however.

Still, caution to the new investor on the BRRRR! Especially now with inflated pricing. Buying a low cost D or C class asset to pull off a BRRRR, is a lot tougher at present.

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Account Closed

Member since 2021 · 237 posts · 153 votes

5y

@Jim K.

Jim, if you ever find yourself lost on the prairies of Canada, fire me a message. Over the last 7or 8 years and likely 10 accounts with various anonymous names I’ve used on here I’ve always enjoyed the heck out of your posts. Be well my friend.

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Ken Naim

Investor · Lake Worth, FL · Member since 2016 · 233 posts · 140 votes

5y

@Matthew Irish-Jones just because a strategy is easy to define doesn't mean it is easy or hard or that it is risky or safe. Learning to play chess takes 5 minutes but a lifetime to master.

Brrrr like any other investing technique is risky. When done properly returns can be great, when done poorly losses will be great. Real estate is a high beta investment with buy and hold being on the lower end but still higher than an S&P 500 fund.

The nice thing about most real estate investing techniques including BRRRR is that knowledge and experience matter. Returns improve and odds of large losses decreases. This is not true with stock investing for example. Professional money managers don't beat the market 70% of the time.

Everyone pushes the technique that works for them, BRRRR, buy and rent, flip, wholesale, commercial, preconstruction, NNN, daytrade stocks, amazon fba, cryptocurrencies, mutual funds, penny stocks, gold, oil and gas drilling, letc. Etc. Etc.

Everyone that wants to invest successfully needs to figure out what works for thier temperament, skill set, personality, risk tolerance and then has to commit time to educating themselves and even money towards experience (losses).

Real estate doesn't offer the best risk adjusted returns neccesarily or the best returns but it is one of the best investments that gives the investor the most control over his risk and returns.

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Jim K.

Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes

5y

Originally posted by @Account Closed:

The main thing that appeals to me about BRRRR, especially in this market, is that I might get better deal using cash, and buying a property that needs improvement. Then getting my capital back out at a good interest rate and redeploying it.

Disclaimer: I’m a newbie I don’t know crap the above is just my working hypothesis. Feel free to disabuse me of these notions I’m on here to learn.

Everything you mention that appeals to you about BRRRR has to do with numbers, mathematics, and having a conversation with a banker and deal-finding agent, both of whom have very limited actual involvement with the property beyond finding and financing it. There are two parts of BRRRR that have very little to do with mathematics, nothing to do with bankers and agents, and require intimate involvement with the property.

Renovation: with or without the help of a general contractor, actual people have to fix actual problems with an actual structure within an actual budget.

Renting: after the property is renovated, with or without the help of a property manager, tenants have to be placed and the property has to be successfully and profitably run over the long haul.

These two things in the real world bear very little resemblance to crushing it in FarmVille.

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Zach GringPro Member

Realtor · Saint Charles, IL · Member since 2020 · 126 posts · 101 votes

5y

@Matthew Irish-Jones

Great post, I agree with you on many of those statements. I think the push is because so many people have excuses and reasons why they can’t invest mostly being money and lack of patience. I agree it’s powerful strategy but my question is why the push to have a perfect brrrr with infinite returns? On your first one? Good luck not loosing money.

I'm currently in rehab on my first one, bought it knowing the numbers worked with current rent tenants as is was 1.07% rtp ratio, it would have worked as a brrrr or I could have flipped it. I'm aiming to refinance out 30-40k leaving 20-30 of my own into it. Second rental first brrrr and I have made a tremendous amount of rookie mistakes even after reading dozens of books podcasts all of it. But, I had contingencies, I went into it with multiple exit strategies and I went into it with a position of financial strength so we'll see how it all unfolds. Currently general contractor is on day 4 past deadline, but it's all my money/LOC's on the line no hml or pml to worry about.

Great post man!

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Wesley B WilliamsPro Member

Rental Property Investor · Louisville, KY · Member since 2017 · 107 posts · 77 votes

5y

@Matthew Irish-Jones good point of view, this is why it's important to have someone more experienced than you that can help you out, and have appropriate reserves with multiple exit strategies. Plus you should always assume everything is going to cost more and you are going to make less. The experience and confidence you gain from completing a BRRRR even if you only break even at the end of it is invaluable.

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Patti RobertsonBusiness Member

Property Manager · Virginia Beach, VA · Member since 2016 · 2k+ posts · 2k+ votes

5y

@Matthew Irish-Jones My husband and I built a nice rental portfolio using almost none of our own money using the BRRRR method. I do agree that for most people it's hard to find properties with enough equity to make this work. We were HomeVestors franchisees so we were professionally buying houses in a discounted price, And as a long as we bought to HomeVestors numbers, which we always did, they would lend us 100% including financing cost. We would fix them up, rent them out, then refi out with our local lender. Over and over and over again. It's a great strategy if you have a source for discounted properties and reasonably priced short term money.

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Dan Schwartz

Real Estate Investor · Tempe, AZ · Member since 2012 · 874 posts · 648 votes

5y

Well, it sure crowded out "wholesaling-as-the-best-entree-to-real-estate-investing" mantra that was prevalent around here 10 years ago or so.

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Joe S.Pro Member

Investor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes

5y

Originally posted by @Patti Robertson:

@Matthew Irish-Jones My husband and I built a nice rental portfolio using almost none of our own money using the BRRRR method. I do agree that for most people it's hard to find properties with enough equity to make this work. We were HomeVestors franchisees so we were professionally buying houses in a discounted price, And as a long as we bought to HomeVestors numbers, which we always did, they would lend us 100% including financing cost. We would fix them up, rent them out, then refi out with our local lender. Over and over and over again. It's a great strategy if you have a source for discounted properties and reasonably priced short term money.

Are you still running a home Vesters franchise?

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Jim K.

Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes

5y

Originally posted by @Dan Schwartz:

Well, it sure crowded out "wholesaling-as-the-best-entree-to-real-estate-investing" mantra that was prevalent around here 10 years ago or so.

I still get plenty of calls, cards, and letters, but it's obvious only dumber and dumber types continue to drink the Sale-Aid as time goes by. The last guy who called me up about one of my properties identified himself only as "Mike" and immediately assured me that he was "for real."

Bully for you, Mike.

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Matthew Paul

Severna Park, MD · Member since 2013 · 7k+ posts · 7k+ votes

5y

The brrr method looks good on paper . New investors love the concept , run their numbers and get in trouble when they go over budget and realize they are upside down when done . It is the same with fix and flips . I am a contractor , i have buy and holds I get word of mouth . I pay cash and may pull 50% equity out if I feel the need . Fix and flip ? No way . Why risk my funds , time and effort to maybe make $50K . When I can sell a homeowner a job and make $50 K in less time and risk NONE of my cash .

I have told a few investors just starting , just buy a property thats move in ready , sure it will cost more but it will cost the same or less in the long term AND rented in a month bringing in money . Over time you will see a good return .

With the last year of ban on evictions , BRRR doesnt appeal to me at all . Making $200 a door per month isnt worth my time . Especially if the tenant doent pay for a year . Most new investors dont have the reserves to weather that storm .

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Matthew Irish-JonesBusiness Member

OP

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

5y

@Jim K. I was hoping you would chime in. Totally agree and I cringe when I see the local guru selling classes to investors at $500 per class, then $1000 per weekend, then $10,000 for the “special package”

This site has everything you need, and you can basically get it for free. Personally I buy all their books because I like reading and I want to support BP.

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Matthew Irish-JonesBusiness Member

OP

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

5y

@Frederick P wallberg what is the point of anonymous profiles... out of curiosity

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Matthew Irish-JonesBusiness Member

OP

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

5y

@Wesley B Williams amen to that. I paid for a college education screwing up flips and BRRR's before I got it down. It works awesome now and I love it... but when I meet a brand new investor who is doing their first deal and is partnering with uncle Bill for the $75K rehab part.... I start to get a bit nauseous LOL

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Matthew Irish-JonesBusiness Member

OP

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

5y

@Patti Robertson great point!! Totally agree. Even on a BRRR you make your money when you buy!

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Ryan Talmadge

Tampa, FL · Member since 2021 · 108 posts · 68 votes

5y

I was just talking about this with my wife today. People are getting sold a bunch of lies and it's not to down the community in anyway, but the way this stuff is peddled is crazy.

Yeah man.... you can totally "Make tons of cash tomorrow without using any of your own money and then get paid after the job is complete!". As someone who fell for it and sucked on the nipple I can say first hand that it couldn't be further from the case.

This takes work... has potential for serious fines and in some cases jail time.... potentially to have your property pooped on because uncle jims contracting didn't pull permits. Dude idk it's kind of sad....

To make a long story short... what kids need to do is save up and build a team over the course of 6 months... 2 of each that you can trust and save some bread... maybe 50-100k then JV a deal with a seasoned vet you can find at a local REIA after you vet them... 60/40 the profit in exchange for education and move on.....

This ain't a video game kids!

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Robert Olinger

Investor · Durham, NC · Member since 2016 · 16 posts · 9 votes

5y

@Matthew Irish-Jones if there is a 20% return you can imply the risk. Just calculate the delta between the 20% and the expected return of a turnkey.

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Jim K.

Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes

5y

Originally posted by @Robert Olinger:

@Matthew Irish-Jones if there is a 20% return you can imply the risk. Just calculate the delta between the 20% and the expected return of a turnkey.

"Just calculate the delta..."

Thar she blows! Mathematics will solve everything. The cult's been around since Pythagoras but it has new life in the digital age.

Except...a lot of people in turnkey right now are recalculating their expected return like GPS in a tunnel.

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Why push the BRRRR so hard

Why push the BRRRR so hard

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