Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
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
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.
Just don’t care to be on page one of Google. When I get to 500 votes, or just annoyed at the sales pitches here I delete and repeat. It’s like brrrr but for time wasting online. Don’t need fans. Don’t need to measure with others. Don’t need to raise my profile to raise capital. I’m good with being a nobody.
construction · Nacogdoches, TX · Member since 2011 · 2k+ posts · 1k+ votes
5y
I know construction very well. I have been in it for 40 years. Now as a GC I can tell you that no matter how good you think you are there will be issues on every job. You can never go into a job and think conservative. I am not saying is isn't doable because it is. Just understand beforehand that one thing that is constant is problems with subs (or GC's).
That being said, I am about to BRRRR a MHP into another MHP. But it has also come with challenges.
Rental Property Investor · Camas, WA · Member since 2020 · 284 posts · 202 votes
5y
@Matthew Irish-Jones
It seems to me that most of the concern has to do with HML and under capitalization. I certainly have heard all the talk of BRRRR but looked at it from my background of commercial construction and know that you need reserves + contingency dollars. They can't be the same funds. So if you need 6 months reserves and 15k for your rehab you add them. You can't do fuzzy math and use the same 15k for both. That and the due diligence of actually learning to price out a rehab, getting multiple bids understanding the processes and work required seem to be the main gripe in this thread.
To sum up my understanding of this post BRRRR isn't a beginner strategy and construction implies risk so learn more than just the basics before planning to be a construction manager.
Investor · Irvine, CA · Member since 2016 · 25 posts · 9 votes
5y
@Patti Robertson
Would you mind sharing what parameters you had to meet to buy at? I’m crunching numbers and trying to set my criteria now, and it’d be good to get some perspective. Thanks!
Property Manager · Virginia Beach, VA · Member since 2016 · 2k+ posts · 2k+ votes
5y
@Joe S. No, but not because we don’t love the brand. We sold our HomeVestors franchise last year with three years left in the term. We knew we weren’t going to renew it because we are close to our retirement goals and the market shift has made buying harder. We sold it which benefited the new Z’ee who was able to buy at a little discount vs buying direct from the franchisor and also put some cash in our pocket rather than just not renewing it in 3 years. We have shifted into Property Management and bought a Property Management Inc franchise that we rolled our local PM company into.
Investor · Granger, IN · Member since 2015 · 195 posts · 129 votes
5y
There is a lot of risk in any strategy for beginners for the same reason you call out BRRRR. Beginners don't know what things actually cost, they don't know the rules or what really needs to be done on properties for both value enhancement and to meet code requirements and they lack connections who can help them in those areas. We learned a ton from our first few houses. I think the quotes on the first flip we did ranged from 8K to 33K. But you have to learn somewhere and there is no getting around first hand experience, especially given all the "experts" who want you to pay them to help you. I think paying guru's is a much bigger risk as most don't deliver what they promise and my guess is that getting into real estate through turn key investments generally is a losing proposition for beginners. BRRR is great for those with no money to start, for those who have ample cash reserves any method will do because you can take the hit and work through it. Happy Easter!
Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
5y
I have completed many BRRRR projects and like all investing has its risk. I tend to rehab the same as a flip. I could flip or hold. I have completed many flips as well. Do all strategies work all the time, NO. Be prepared for the unexpected. The BRRRR and flip strategies are very similar. Yes, I have encountered many surprises during rehabs, that's part of the deal. Be prepared. You still have to buy right, have the means to refinance and be a landlord or hire a mgmt company. It is not the holy grail of investing. It takes hard work and above all you must buy right. The market is insane now and unless your buying a smoking off market deal market your better off waiting. That's tough to say, but if the numbers don't work don't buy. It's not the strategy that doesn't work, it's the execution of the strategy.
I recently bought a short term rental property (beach house) out of state. The potential is way better on cash flow. In just two months I have booked 15 weeks of the year. At this rate the return is unbelievable. Could something go wrong, of course. A guest destroys my property, hurricane etc; it’s real estate investing. Once again, It’s not the strategy, it’s the execution of strategy.
Rental Property Investor · Gilbert, AZ · Member since 2016 · 3k+ posts · 4k+ votes
5y
@Matthew Irish-Jones At the risk of sounding arrogant, I would need to say that the past 3 pages was just full of whining. Basically this is what I read over and over again, "The BRRRR is hard. Things could go wrong. BRRRR is over rated. The people who make it easy are lying to you." etc. etc.
This reminds me of what Robert Kiyosaki says when when people ask him if real estate is a good investment and he replies, "it depends, are you a good investor." In other words, a bad investor can kill a good investment, and a good investor can create/or know how to recognize a good investment.
The problem is not with the strategy. The problem is with the implementor of the strategy. The strategy is the basic strategy most retail businesses use: Buy low, add value, sell higher.
Most people who are new, don't know what they don't know. That doesn't mean the strategy is more or less risky. It means that they don't have the the experience to factor in and take into account what could go wrong (what you call risk). And when it comes to real estate investing, the risk is most often: under estimating rehab costs (including contractor issues), over estimating the ARV/or what you can rent or sell it for, and not being able to qualify for bank financing if you are trying to keep it in the case of doing a BRRRR.
So the answer is not to shy away from this strategy if you are new, the answer is to partner up with/or get coaching from an experienced investor (by the way, this is not self-promotion, this is simply stating the obvious way of how to reduce risk). Over the past 2 years or so, I have helped around 10 or so investors buy properties using the BRRRR method (or BRRRLO Model) and they have all created between 20k and 50k of equity following this approach. The money that they paid me to help them do this was a small fraction of the equity that was created (usually between 3 and 5k fee). But by the end of the deal, they had created a lot of equity. Even if they were not able to take out all of their money at the refinance, they were much better off financially than if they had bought a property at market value. And they were able to be a part of the process and learn along the way in order to do it themselves afterwards.
So again, the problem is not with the strategy, the problem is with the expectation of those who are new that think that after reading a few blog posts on the strategy, and after listening to a few podcasts, they should be able to execute the strategy without any hiccups.
Rental Property Investor · Allentown PA, United States · Member since 2016 · 566 posts · 441 votes
5y
@Matthew Irish-Jones I think there is more risk in taking on a big rehab and taking on a highly leveraged HML than there is with the strategy itself. Nothing adds more value than a lipstick paint, flooring and fixtures rehab which has relatively low risk if you have anyone with a brain doing it. Yes, if you're doing large structural or full gut rehabs that's a huge risk, but in my opinion is a bigger issue than the BRRRR strategy itself. Same thing with a HML. If you can buy something ugly even with conventional financing for say 90k, throw 5-10k in there as a simple rehab, rent it for 1200 then refinance out at an ARV of 120-130k, even if it's not a stellar deal, I would say that's a way better way to start your investing by adding some value to your deals, building some equity and repositioning it later on to allow you to safely and effectively scale as opposed to just waiting to save up another downpayment
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.
@Jim K. What do you think is the best path for someone getting started right now? I'm attracted to the real estate space precisely because it takes more time and hard work and the potential to benefit from my own footwork. If I wanted easy I'd just stay completely in ETFs. I want to diversify. I'm going to need something to do after I FIRE. I'm looking to generate passive income over the long haul, not make a quick buck.
From your response above it seems that finding renters and managing the property long term is inherent to all rental strategies, not just BRRRR. Regarding what you said about renovation, are you saying looking for something turn key or needing only simple fixes is a better approach?
Hi, Ryan. Yes, it would be good to contribute something more useful to this thread than "BRRRR is not for newbies, don't do it!" as pointed out above.
On our first rental deal, we got very lucky. We hit a single. Not a double, not a triple, most certainly not a home run. But a good solid base hit. The more time I spend on this board, the more obvious it is that people who are in this over the long haul have a similar story that goes along with their first deals. It's either a single or a failure that can be turned around with enough work. Nobody nails it the first time and goes on, from strength to strength to strength. You are best off starting small so you can fail small.
Perhaps the biggest problem with BRRRR for beginners is that the possibility for catastrophic failure is really so extreme. You can fail on the buy, on the borrowing, on the renovation, on the landlording, everything. And there is no such thing as having a real talent for any of these things. Skills have to be acquired in each of them. Initial luck can easily become a curse later on. Imagining that paying someone such as a property manager or contractor is going to eliminate or even mitigate the risk is wrongheaded, because managing property managers and contractors require their own skill sets, which also have to be built over time.
I am a huge fan of househacking for beginners. Currently, that's what my wife and I do. I would very much advocate the same strategy in a duplex for everyone looking to get into residential real estate. You get to take a minimal risk on the buy thanks to the advantageous FHA financing available (I didn't). This minimal risk allows you to buy a duplex in relatively good condition (I didn't). A duplex isn't so big that you can't learn the practical basics of single-family home maintenance with it (this is why I don't advocate buying a larger and more complicated quadplex as a first buy). And finally, while you're learning the practical landlording ropes with your duplex, you also get to see how cutting down significantly on your housing expenses, typically the largest expense of any family, fundamentally changes your family finances.
That's how you really get a solid foundation in personal finance and landlording with minimal heartache. You also get to ease your family into this life. Because without their support, the chances of you failing in the long run are astronomically high.
On to the second step, by all means, work towards BRRRR as a strategy. There are two ways to learn how to successfully manage a full-on residential renovation. The first is to start after at least a few years working in the residential construction industry. The second is to fail and fail and fail and fail at it until the failure beats you into basic competency. To be perfectly honest, this also pretty much describes what spending your first few years in the residential construction industry is like, and it takes longer.
Successfully managing a full residential rehab of even moderate complexity is murderously difficult to learn how to do well. I mean, it's just nuts, well beyond anything on the safe side of sanity. You've got to know a lot about a lot and stay on top of a lot of stuff all at once. Most successful general contractors do not get there without working under mentors, as well as sleeping a lot of night in their vehicles in the driveway of the property they're working on. Most construction leads do not become leads without significant formal and informal teaching experience. And thanks to decades of their work being denigrated and dismissed, most successful skilled tradesmen CANNOT STAND smug college graduates and look to undermine them wherever they can. The numbers of quality GCs in the US workforce is shrinking far faster than it's being replaced, if you can even find someone competent who is not overbooked already in today's market. Remember, by the time you get to people you can hire for your first BRRRR, they have failed to find steady, reliable, highly-paid work in new construction, also on established renovation teams for well-respected concerns, and they're not busy on their own projects done on their own dime. Unless you pay top dollar for a boutique rehab (which is typically not what you would want for a BRRRR), you're working with the fourth or fifth string of GCs only.
So successfully finding and working with a GC on your first BRRRR is far more a matter of luck than most people make it out to be, while successfully acting as your own GC on even a moderately complicated single-family renovation for rental purposes is a lot more complicated than most people understand.
What's the solution? Find that GC, cultivate a personal relationship with that GC, treat that GC like gold. Until you have someone like that in your corner, be very careful about doing full-house rehabs with borrowed-money budgets. It might work once, it might work twice, but if it keeps on working and working, you were either born under a very lucky star or you're setting yourself up for a monumental failure.
Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
5y
Most people on free forums don't have much money (net worth under 250k) so they have to trade time and take on more risk in terms of the way they invest.
Note this is coming from an Accredited investors POV who used to do turnkey rentals.
I personally would not do Remote BRRR as there is just a lot of risk with 1) risk of embezzlement with contractors 2) change orders and 3) bank doing bait and switch doing a lower appraisal and/or LTV on the refinance.
This is especially true for high paid professional or those with a net worth of over $300,000.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
5y
@Lane Kawaoka wow I must really live under a rock as this accredited investor only posts on free forums. I must of missed the email with the invite to the paid forum when I made my first multi million $ transaction. Maybe I will go check my spam folder ;)
@Lane Kawaoka wow I must really live under a rock as this accredited investor only posts on free forums. I must of missed the email with the invite to the paid forum when I made my first multi million $ transaction. Maybe I will go check my spam folder ;)
@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.
Great point here. People try to get too sophisticated. KEEP IT SIMPLE STUPIDS!
I love to watch the antics of Ben Mallah on YT....he's crass as can be but perfect because he keeps it simple. He invest in things he knows and nothing that requires the aforementioned HGTV rebuild. Its mostly carpet, paint, cabinets.... or maybe a commercial buildout. I have yet to see a foundation wall extended, wall blown out, etc.... on that show.
And debt can definitely be of benefit when working in REI, but I think everyone needs to ask themselves "what is my pain tolerance?" Would you rather be in debt up to your eyeballs just waiting for the day you can cash out or would you rather be debt free and add on an additional property as funds allow to supplement your lifestyle? THIS IS HUGE! I've been on both sides of that fence and I can definitely say not having debt is well......great.
Its not always about being a millionaire as quickly as possible...just focus on simply trying to make your life better first...
@Lane Kawaoka wow I must really live under a rock as this accredited investor only posts on free forums. I must of missed the email with the invite to the paid forum when I made my first multi million $ transaction. Maybe I will go check my spam folder ;)
If you find that Forum were all the exceptional smart and rich post please let me know, because I would be willing to pay for such a forum.
I did pay for pro here before, but did not use any of the specialty features that was supposed to come with the membership.
Burnaby, BC · Member since 2017 · 282 posts · 268 votes
5y
I'd assume one of the other big risks you take on is market timing. By the time you finish your renos, the market may downturn and you can't sell or refi for what you had anticipated and may be stuck in a longer hold than planned?
Real Estate Agent · Sisters, OR · Member since 2014 · 1k+ posts · 1k+ votes
5y
This is a great thread.
I don't do BRRR's. I can't justify the risk of buying something with hard money, rehab all that crap. I think BP (which I love) does hype BRRRs to much.
When you compare that to just regular buy and hold investing which biggest risks can be so easily managed through good management seems way to risky. I think when you find people who have done this it is not a normal guy working all day and having a wife and kids its DINKs or someone with tons of access to capital.
I don't think you can argue with the strategy of buying a plex to house hack. And plan to buy and hold property with great financing the rest of your life. I see that as the best safe path to wealth.
The thing that BP sometimes does is that I really don't like is tell people that they need to have more. That they need to have a big life! It can make folks such as myself feel a little putdown. But its BS and frankly I don't think they mean it financial freedom is the goal I think most investors could give a rats *** about owning a Tesla.
That being said if you can see a safe way for you to become a the next overnight real estate millionaire I suggest you do it. And I will try and not hate on you to much! LOL
Real Estate Agent · Sisters, OR · Member since 2014 · 1k+ posts · 1k+ votes
5y
@Account Closed
Have you read Set for Life by @Scott Trench? The best BP book in my "humble opinion" and all about FI and how real estate plays into in a very practical way.
FYI don't learn to much this stuff is not rocket science. Learning is no substitute for action.
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
5y
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.
Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes
5y
I can agree to an extent that the BRRRR strategy seems overblown. I think that:
1) It's setting an expectation that you should aim to get all your money back. This just isn't realistic to expect on every deal. Expect to leave anywhere from 5-10% in the deal. If you're leaving 20% in the deal, might as well just buy off the MLS, since it's way less of a headache.
2) Most BRRRR property shouldn't be a massive rehab. Aim for your cosmetic fixes and small functional repairs. But I wouldn't advocate for taking on the full risk of a gut rehab to recycle the money. It seems like it's being pushed that "the more beat up a property is, the better the deal." While this might be true for flippers who go with higher end finishes, the risk isn't worth it for a rental.
I've done the BRRRR on 4 properties now. Got money back at refinance on 1, left about 7% in another, 10% on another and the last I'll probably leave about 12% in, which is more than I'd like. I think it's a great strategy, but like all strategies it has its time and place.
Real Estate Broker · Fayetteville, NC · Member since 2020 · 251 posts · 244 votes
5y
Good insights from @Tucker Cummings as usual.
Great points regarding risk being made here. I think the reality is is that if you don't have enough money to buy a rental with *cash*, then your opinion in support of the BRRRR method can't really be fully valid.
That is to say that the real reason people get so fervorous over the BRRRR method is that they want to go from zero to fifteen units in five years and they have $70,000 in the bank.
