Trying for 100% back BRRRR is a bad strategy!

Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes

5y

I completly agree with you @Jorge Vazquez - 100% cash out is a bit unrealistic. I have been BRRR-ing single family homes in Milwaukee for over 10 years and my all-in cost is usually 90% to 100% of ARV. I would say only 1 or 2 out of 10 come in at 80% or better.

We do things the right way, the goal is to not touch the property for at least a decade or two. Sometimes we also add lifestyle value, which certainly does not help to keep cost down. One of my current projects is a prime example. Did I have to replace the drive way and pour a concrete patio in the back? Of course not!

But having a functional and private back yard patio and a finished basement adds value to the property and is the reason why we have next to no turnover. I figure that a typical turnover will cost me 3x rent or about $5,000 - it pays to retain good tenants long term.

The best way to reach 100% cash out is by not doing any major capex projects. Keep the old roof and the old windows. Don't replace the old siding and the driveway may be hard to look at, but replacing it will not add much ARV. I just listed 35k of work and kicking that can down the road will let you cash out better, but it will catch up with you eventually.

That's why we do things right away; even though it costs more, the result is a better asset, better tenants and better long term performance.

10 Reply

Kenneth GarrettPro Member

Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes

5y

@Jorge Vazquez

The BRRRR strategy works but not exactly as described at least for me. I have completed about 15 BRRRR's. I have cashed out 100% on a couple. It's definitely not the norm. Typically I've got $5000 or so stuck in. It's not bad. I usually have all my money back out within 12 months. I try to select properties where the roof and siding have a good 10 years left. When your analyzing a property and you have 15K-20K before you get inside makes it very difficult. I finish them flip ready. New kitchens, bathrooms, etc. It gets you the higher ARV and better tenants. Best part very few repair calls. I agree with @Marcus Auerbach don’t cheap out on the rehab, it will cost you more in the long run.

4 Reply

Matt Goldstein

Member since 2020 · 11 posts · 6 votes

5y

@Marcus Auerbach

Newbie question here. Is there an advantage to doing Brrrr vs financing at 10% if you are leaving 10% in the property anyway?

And how long before you can refinance yourself money back out of a brrrr?

Thanks

Tuvia Goldstein

Developer · Philadelphia, PA · Member since 2019 · 30 posts · 25 votes

5y

The difference will be how much equity you have in the property. On a brrrr you build equity through improving the property, so even if you can’t pull out 10% of your money, you’ll still be left with more than 10% equity.

Jorge VazquezBusiness Member

OP

Real Estate Broker · Tampa, FL · Member since 2017 · 1k+ posts · 685 votes

5y

@Matt Goldstein That is an excellent question. One of the main reasons why Investors want to do "BRRRR" is to buy cheap/distressed, to build up equity by rehabbing the distressed property themselves. The worst, the better usually! These types of properties can never be financed the conventional way until the properties are fixed.

Once you're done with the property, you could go long-term conventionally and get a nice low rate. It becomes a double "whammy" cheaper total investment and a more affordable long-term rate. If you're getting these nice terms initially, I'm assuming that you are buying the property turnkey or almost turnkey? This is usually not the ideal scenario because most of the time, if the properties are already rehabbed, somebody has already gained the equity by selling it to you. So it is a simple answer if you have the capabilities of doing everything on your own, buy the distressed property, fix it, get to know it intimately, gain more equity, refinance it, pull your money out, and then rinse and repeat the process! This is the "BRRRR" way! Just my personal opinion.

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Andrew SyriosPro Member

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Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes

5y

Our average is about 81% and while I think 75% is a good number to aim for, it's not easy to hit, especially in this market. If you have some excess capital to leave into deals (you should always have some money when trying to BRRRR in case things go a bit wrong) it's OK to aim for 80 or even 85%. But I would not aim any higher than that. Rehabs tend to go over budget and if you're aiming much higher than that, there's a decent chance you will finish up at market value.

Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes

5y

@Andrew Syrios - well said. You can contain the SOW to what the budget will allow, which means you may have to make some hard choices and leave things unattended, that still have life left.

I just replaced a concrete driveway, because it had cracks and was badly deterioated on the surface. The rent is $1950 and I did not want the ugly driveway destroy the overall curb appeal, it was an eyesoar.

Could I have left it and achieved a better number? Yes absolutley.

3 Reply

Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes

5y

Originally posted by @Marcus Auerbach:

@Andrew Syrios - well said. You can restrict the scope of work to what the budget will allow, which means you may have to make some hard choices and leave things unattended, that still have life left.

I just replaced a concrete driveway, because it had cracks and was badly deterioated on the surface. The rent is $1950 and I did not want the ugly driveway destroy the overall curb appeal, it was an eyesoar.

Could I have left it and achieved a better number? Yes absolutley, it is a choice that we make based on the believe that over the long term it will pay dividends and the portfolio does not carry much of an aggregated liability in form of deferred maintenance.

Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes

5y

Originally posted by @Matt Goldstein:

@Marcus Auerbach

Newbie question here. Is there an advantage to doing Brrrr vs financing at 10% if you are leaving 10% in the property anyway?

And how long before you can refinance yourself money back out of a brrrr?

Thanks

That's a great question Matt. Example: if I spend 100% of ARV on acquisition and remodelling, why bother in the first place and not just put 25% down?

The answer is in the condition of the property and the remaining life of it's components. You can achieve an almost new house condition, thus eliminating (or greatly reducing) the need for future capex. If you don't have to set aside reserves for capex every month the result is much better cash flow.

When you look at an investment property, consider it over time, say 30 years. If your roof has 5 years left, you don't have to do it now. Once it starts failing you may even be able to repair some of the worst spots and squeeze another 5 years out of the remaining shingles. Or you can put a new roof on day one and not have to worry about it for the next 30 years. Neither is wrong I would say.

Usually it takes 6 months to refinance, depending on your loan product. What you will find is that 6 months go by quickly, we usually try to have the appraisal done just before the property goes on the market (still empty) and then close on the loan after we have provided a signed lease to our (commercial) lender a couple weeks later.

5 Reply

Alexander Szikla

Real Estate Agent · New York City · Member since 2020 · 818 posts · 639 votes

5y

@Jorge Vazquez I agree with you! Getting a little bit of equity locked up is not the end of the world. What matters is the return on that equity. If the return is paltry and you counted on redeploying it that creates issues. But if you focus on good deals and can deploy at 30%, 40%, 50%, etc. then feel free to let equity get "stuck".

Any investor should be happy to realize such great returns.

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Andrew SyriosPro Member

Moderator

Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes

5y

Originally posted by @Marcus Auerbach:

@Andrew Syrios - well said. You can contain the SOW to what the budget will allow, which means you may have to make some hard choices and leave things unattended, that still have life left.

I just replaced a concrete driveway, because it had cracks and was badly deterioated on the surface. The rent is $1950 and I did not want the ugly driveway destroy the overall curb appeal, it was an eyesoar.

Could I have left it and achieved a better number? Yes absolutley.

Another good point. It's not worth sacrificing doing it right to "hit a number."

Ricardo S.

Flipper/Rehabber · Atlanta, GA · Member since 2014 · 166 posts · 88 votes

5y

I'm in the process of doing a Brrrr in Atlanta right now. The plan is to do a cashout at 75% LTV then get a HELOC for the other 5% or so. Then when its rented I will make back the balance of my initial investment within about 12 months. This is why it is good to do 3 flips for every Brrrr because it will keep your cash reserves healthy for the next deal.

3 Reply

Demarcus Crump

Financial Advisor · Atlanta, GA · Member since 2020 · 97 posts · 24 votes

5y

@Ricardo S. Nice strategy, what city is your BRRRR in ATL being done?

Michael Noto

Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes

5y

@Jorge Vazquez Very good points. People aligning their expectations to what their local market is offering is a big part of investing that people often overlook.

John MorganPro Member

Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes

5y

I have a hard time pulling all my $ out of BRRRRs. I think when this strategy came out a few years ago, real estate wasn't nearly as competitive. It's nuts right now with everyone jumping in flipping and BRRRRing. I've only pulled 100% of my $ out in a couple of mine. The rest I left in 20-30k. I'm ok with leaving some $ in. However, some people read these BRRRR books and think they're going to get most of their money out to conquer go the world in real estate. Just be realistic with yourself and know you'll probably be leaving $ in the deal.

Gary Parilis

Rental Property Investor · NJ and PA · Member since 2019 · 206 posts · 105 votes

5y

Here's another thought: Alternating BRRRRs and flips. If you have limited funds and need to recycle them through multiple projects, leaving cash in each BRRRR quickly depletes your capital. Once you've rehabbed a property, get it appraised, and if too much capital would be left in, sell it and move onto the next BRRRR (potentially with 1031). Thus you you can go into the BRRRR with extra capital you've just earned, reducing the downside of cash left in. My objective is acquiring properties, not putting short-term cash in my pocket, but this strategy will keep me on a sustainable path of serial BRRRRs. Slower, but sustainable.

Any problems with this approach?

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Tucker Cummings

Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes

5y

I tend to try to look at this way:

Leaving 20% in a deal is like a single. This is just an MLS deal, and I'd aim to get 25-35% ROI in year 1 or getting all your money back in 3-5 years or so.

Leaving 10-15% is like a double. You got a pretty good deal you might be able to brag about, but nothing crazy. Probably going to get all your money in 2-3 years

Leave sub 10% in the deal, that's a triple and triples are awesome. Doesn't take much to get home, so I'd aim for full 100% ROI in Year 1, give or take a few points.

Leave nothing in the deal, that's a home run. You got all your money back immediately and you're ready to get another player on base.

Get more out of the deal than you put into it, that's a grand slam. You got all the money back in for this deal, plus more (maybe made up for single's and doubles you hit along the way).

If you've ever played ball, you know that if you're always swinging for the fences, you'll probably have a poor batting average. However, if you just focus on consistently getting on base, you'll get some homeruns here and there. Every once in a while, all the players line up and everything falls into place in just a way you get that grand slam everyone talks about.

The most important thing though, you gotta step up to the plate and swing!

7 Reply

Andrew SyriosPro Member

Moderator

Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes

5y

Originally posted by @Ricardo S.:

I'm in the process of doing a Brrrr in Atlanta right now. The plan is to do a cashout at 75% LTV then get a HELOC for the other 5% or so. Then when its rented I will make back the balance of my initial investment within about 12 months. This is why it is good to do 3 flips for every Brrrr because it will keep your cash reserves healthy for the next deal.

I call that the "flip and hold" strategy and think it works really well. If you can "settle" for deals that aren't quite 75% (80-85% or so) by raising money elsewhere, it makes investment a whole lot easier.

Courtney Walker

Investor · San Antonio, TX · Member since 2017 · 31 posts · 33 votes

5y

@Marcus Auerbach

I learned this lesson on my first two properties.

Dan V.

Real Estate Consultant · Norfolk, VA · Member since 2017 · 345 posts · 201 votes

5y

I don't have BRRR property yet but starting to include it in my exit strategy. My main criteria,

1. Positive cashflow - I adjust the refi amount until the cash flow is positive

2. Cash on cash return - I adjust the refi amount until the CoC return is at least 15%

3. Debt service coverage ratio - At least 1.2, just for long term goal if I decided to use a commercial loan.

Ricardo S.

Flipper/Rehabber · Atlanta, GA · Member since 2014 · 166 posts · 88 votes

5y

@Demarcus Crump

The 30318 zip code

0 Reply

Ricardo S.

Flipper/Rehabber · Atlanta, GA · Member since 2014 · 166 posts · 88 votes

5y

@Andrew Syrios

Hmm, Sounds like a good title for a future real estate book lol. I haven’t tried raising money yet but it’s in my future plans