Flaw in the BRRRR strategy?

16 Replies

Watched your webinar last night and, perhaps I missed it if you mentioned it @Brandon Turner , but one important consideration for me when I use the BRRRR strategy is price point, not only of the purchase price, but more importantly, of the ARV.

In my model at least, the BRRRR strategy will only work on properties with an ARV of at least $100K because when you go to do the cash-out refi, banks typically aren't interested in doing loans for any less than $70K. There just isn't enough money to be made from loans smaller than that.

Consequently, since most banks only offer a cash-out refi of 70%-75% of the property's ARV, the ARV's going to need to be pretty close to $100K to meet that $70K threshold. So, that limits my acquisitions to properties only in the range of $60-$80K, with a $10K-$30K reno budget + hopefully a small market appreciation to push me to the $100K ARV mark.

This is something I think is important to mention to newbies who may be thinking about buying the cheapest property possible, say $40K, and then sinking $25K into a reno, and now have $65K invested and can't find a bank that will give them a cash-out refi. Now, they're dead in the water and have all their capital tied up and will likely be forced to flip it, unless they go to private lenders or perhaps pay a very high rate at a bank.

Now of course there are plenty of other creative refi options available, but I'm just not experienced enough yet to be able to use them. ;) Gotta watch more webinars!!

BTW-- I also got lucky on my last deal since I was able to find a bank that would give me an immediate cash-out refi, although at a 1/8 point higher rate and at only 70% of ARV rather than the 75% I've achieved on another property. Although that cut slightly into my cash flow and locked-up a bit more cash (as equity) than I wanted, the numbers still worked. I just couldn't wait six months or a year in a rapidly appreciating market like Tampa, FL.

Agreed @Mark J.

Most lenders and banks have a minimum amount to loan. 

However, you also found a way by calling on different banks. Luck is often disguised as hard work. Like yourself, I found a portfolio lender as well and cashed out at 70% ARV within a couple of months. And that was before I found BP and realized what BRRRR is.

There are a lot of moving parts of the BRRRR strategy. For newbies, get educated first. Engage in the forums, and take action.

@Mark J. Cash out where I am is 75%. Minimum loan amount is $50k. What you are describing as a "flaw" isn't a flaw...it's a restriction or limitation based on the market you are investing in. BRRRR doesn't work on every property, in every market. What does?

The issue with the BRRRR is that it isn't an entrance strategy...it's an exit strategy, and the problems are the limited number of loans you can get, and depending on the appraisal.

Thanks @Joe Villeneuve -- agreed it's not a flaw, it's a limitation. But as an important limitation (for many markets & properties), I haven't seen it discussed as prominently as it probably should be. As a freshly minted newbie, I didn't know about this refi limitation until I started shopping around for rates near the end of the renovation project. Not so smart, right?! I called & visited over 25 banks, from small local ones to large chains to get the rate/terms I wanted. Fortunately, the numbers still worked out for me and I met the minimum refi amount, but I think it's something that newbies need to be aware of as part of the BRRR strategy. Perhaps call it the QBRRR model. Q for Quotes. ;) Hah! Doesn't really roll off the tounge now does it?! ;)

Also, would you mind sharing the names of the lenders who do cash-out refis at $50K? That would expand my options for sure. Do they offer rates/terms similar to higher loan amounts? Not sure I understand / agree with your assertion of BRRR as just an exit strategy. The power of BRRR is that it's a total strategy: entrance, process, exit, and next opportunity.

@Mark J. BRRRR is only an exit strategy because it is limited as an entrance strategy due to the limits in the number of loans. If your limit is 10 loans, you can exit out of the 10th, but where do you go then.

The key to REI is to never spend your money...use it on an unlimited number of properties, but never spend it.

@Mark J. Another option if you have multiple properties is to find a commercial lender who will do blanket loans (one loan cross collateralized across multiple properties). This takes your 5 40k properties and allows you to obtain a note for 200k.(just an example).

Good information guys! I flipped a couple houses in Boston, but now am finding it too expensive to invest in. So know I'm going to try out BRRR strategy in Philadelphia and Pittsburgh area! Very exited to get started! Little nervous investing out of state though.

@Robert Curls - Actually, I've always had a question about blanket loans. Wouldn't that essentially lock-up for your portfolio and prevent you from selling property secured by the loan or would you need to swap in a new property of equal value if you sell an existing one? Thinking as the bank, if there's less collateral securing the original loan, risk goes up. How do this whole thing work?

In my case, I wouldn't have the capital to buy x5 properties out-right and fund the renovation on each before even being able to get a blanket loan. Perhaps I could do it on two or three properties. Is there a minimum amount for a blanket loan? How are rates / terms affected by this type of financing?

THANKS!

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