Brandon and David were COMPLETELY WRONG in podcast #327

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Brandon and David were COMPLETELY WRONG in podcast #327

Joel Arndt
Hamilton, On · Member since 2018 · 75 posts · 36 votes

First of all, why is there no dedicated BRRRR section in the forums?

Anyway, this is about one point that Brandon and David made in the Bigger Pockets Real Estate Investing Podcast #327. It is an excellent episode and I highly recommend you listen to it. It's all about the BRRRR method.

But I have a beef with ONE point that Brandon made (and David agreed to).

Brandon explains how he is often asked how BRRRRing can work in markets with relatively higher prices. People complain a lot about how expensive it is to buy in their market, making investing in their own backyard next to impossible. That's why you buy David's book "Long Distance Real Estate Investing" because it's is the single most practical guide to investing in properties that you will likely never walk through. David and Brandon make that point first in this episode. 

But then Brandon goes on to say something that I fell is COMPLETELY WRONG.

Brandon says, "Is anyone flipping houses in your market? Because if anyone is flipping houses in your market, you can definitely BRRRR there too."

I understand where he's coming from, and in most cases, this is probably true. But in hotter markets, this isn't always the case.

First, I'm a newb. I've done exactly 1 wholesale deal since I discovered real estate investing 1 year ago. So I look forward to being proven wrong. But from that one deal, and from understanding my market (Hamilton, Ontario), I'll prove that, just because you can flip a house in a market, does NOT mean you can BRRRR as well.

The one deal I've closed was a wholesale assignment to a flipper. I got the house under contract for 430k, the flipper had to put 120k of renos in, and it will sell for 630k - 650k. This house will never cash flow positively as a rental, even if it was converted to a triplex, which would arguable cost more than a straight reno.

Rents are high in that neighbourhood, but not that high. Which brings me to my ultimate point.

The BRRRR method is dependent on many factors, but the single most important factor is the rent you can achieve.

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Steve Vaughan
Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
7y

The value of this strategy or any value-add play in  expensive markets may all be in the equity capture, not cash-flow.  

At the end of the day, when you eventually sell, the important return measure will be your IRR. While monthly COC or yield is easily measurable and therefore hyper-focused on, equity gain will usually be the meat and potatoes of your return, the cf and COC just gravy.

My last BRR (no refi) basically breaks-even, but added 55% equity to my balance sheet.  Fine for more seasoned investors, but tougher for newer ones.

That said, I have always thought the brrrrr acronym  was missing 2 important components- Seasoning and Costs.  Many are surprised they need to season for 6 -12 months or that it costs so much to refi. 

Gutsy post!

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  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    7y
    Originally posted by @Drew Brown:

    @Joe Splitrock at the end of the day it is all about being able to pay your bills. You could have 10% or 90% equity in a deal, but if you can't pay the creditors at the end of the day things are going to get ugly. This is why you should always have cash reserves or line of credit to cover shortfall issues. It seems like in there show they talked a lot about knowing your numbers? Doing the prep work and analysis correctly and not hoping and praying will allow you for the worst case scenario so that you can cover your butt. All-in-All I felt that @Brandon Turner and @David Greene nocked the show as most 'out of the park!'

    I agree it is about paying your bills, but business health is also measured on the balance sheet. There is a big difference between having 10% or 90% equity. If I have 10% equity, I can't secure any loan against the property and even if I sell the property, I may not even walk away with money at closing (after sales expenses). If I have 90% equity, I can easily restructure debt or even use the property to secure cash. I could also sell the property to get a cash infusion for my business. Businesses fail when they are under capitalized during difficult times.

    I thought the podcast was great. I just cringed when I heard "more leverage is less risk". That is not an accurate statement based on commonly accepted business measures. 

    They do talk about knowing your numbers for property acquisition, but they rarely talk about knowing your business numbers. I am talking balance sheet and income statement. That is where risk is measured.

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  • Bill Goodland
    Rental Property Investor · Allentown PA, United States · Member since 2016 · 567 posts · 442 votes
    7y

    Is BRRRR tough in a low rent to value market? Absolutely. But if someone can flip in the market, then one can most likely still rehab to add enough value to build enough equity to pull your cash out, hold for a few years to break even, and 1031 into a bigger cash flowing asset. And if that strategy doesn't sound appealing enough, plenty of people still BRRRR in expensive markets with commercial properties that don't rely as much on comps. While so many focus on the low yield from a cap rate perspective, don't forget that lower cap means you have a stronger multiplier for the value the rehab and subsequent NOI increase brings when you refi or cash out.

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