HERE IS WHY THE BRRR METHOD IS NOT WORKING FOR ME

David Hendry · 2017-04-08T12:42:00-07:00

HELLO ALL,I know I am not a vocal member on BP Community. However, I havnt missed a Podcast. I jumped into my first rental 3 years ago. Im up to 4 now. I cant tell you how many times Ive heard Brandon say he uses the " BRRRR" method, I know I added another R. Here is why this method is not working for me. It doesn't account for closing cost, time, and rehab fees. Not to mention to get a loan you can only get 75% of ARV. So lets first address time. It takes at least 6mos for your property to " season" so you can get a refinanced loan on it, for my first 2 it took a year. This is an extremely slow process. Im not complaining but at this rate, Im not going to reach my number till im 85. Hearty laugh. For my first property, I took a HELOC loan on my primary residence. Now after 4 properties heres where im at. The first I purchased cash $47k I cash out refied at 75% of ARV of 56k, giving me $42k. Loss of 5k. Im ok with that because its cash flowing $1000 a month, minus mortgage and ins 600. So -5k. Second property I bought for 70k then 23k in repairs. It cash flows $1150 but is work 120k now. However when I Refi I got 75% of 80k or 56,000. So -14k, add in repairs $-27k. The last 2 properties have not been seasoned yet and I bought cash with the remainder of the HELOC $67k and 70k respectively. Now I have a maxed out HELOC, 2 properties with 30yr mortgages and 2 under the HELOC. I have 6 mos seasoning on one that I cant yet get a loan on. The other will not be seasoned for 5 months. So you can see how this can easily add up. My agenda of this post is to not point a finger or even complain but to make BP newbies like myself aware. Hey, there are costs to loans, you can only get 75% back out, and this takes time...Fortunately, Im a medical professional. I have some disposable income, but Im having a hard time seeing a light to the end of the tunnel.

Roy N.Pro Member

Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes

9y

@David Hendry

The amount you are able to pull out of your property when refinancing is going to vary by location and lender. Here we can pull out anywhere from 70 - 80% depending on the lender. We also do not have the seasoning restrictions often read about in the U.S.A.

The forced appreciation play - buy, renovated, refinance - was around long before Brandon and BP started saying BRRR.

The "Buy" step should entail your entire cost of acquisition and not just the agreed price of the property itself. Inspection costs, realtor fees, Closing costs, etc. are all under this umbrella.

The "renovate" step is where you include your holding costs and, naturally, the cost of the retrofit/renovation itself.

The "refinance" step is where you place a mortgage in exchange for a note. There may/will be appraisal, registration, legal fees associated with this activity as well.

I'm not seeing the problem with the approach - w/ or w/o the slick acronym - but you might want to tighten up on your numbers and incorporate all of the periphery costs in your deal analysis.

20 Reply

Percy N.

Developer · Philadelphia, PA · Member since 2015 · 2k+ posts · 905 votes

9y

Its a good reminder that like most strategies, BRRR only works if you buy the property at the right price.

If you follow the general rule of purchase price is less than 70% ARV - Rehab - Other costs, then even if banks let you refi at 75%, you will be ahead by 5%

Yes, it is getting harder to find properties at that price in many markets.

Also try approaching local banks that do portfolio lending and after a few they may let you borrow upto 80% LTV.

6 Reply

Natalie KolodijBusiness Member

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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes

9y

It seems like the biggest issue you're running into is that you're purchasing your properties too high.

If you ran the numbers on a BRRR deal accounting for knowing you'd only be able to refinance for 70% of arv, the costs of repairs, and repaying the initial HML....you wouldn't have bought those properties.

I'm fairly new to the BRRR method myself, but did attend his podcast this week and have run 10 different properties throught he BRRR calculator on here.

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Natalie KolodijBusiness Member

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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes

9y

While we're on this topic- Can I ask those more experienced with BRRR if cash flow or appreciaiton is more important with BRRR?

I always assumed cash flow trumped, but after listening to Brandon's podcast I think that buying in a stagnant appreciation market (but that cash flows well) would make the refinance part and ultimate selling angle would leave you stuck.

Any input on these elements of BRRR?

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2 Reply

Drew Bonner

Lynchburg, VA · Member since 2017 · 61 posts · 41 votes

9y

I think this is why Brandon says to know the ARV value BEFORE you purchase the home. Your ARV numbers are way too low for the BRRRR method. Your cash flow is saving you, but you will be coming out ahead if you can get the right ARV for the property before deciding to purchase. Hope this helps!

1 Reply

David Hendry

OP

Investor · Merritt Island, FL · Member since 2015 · 16 posts · 4 votes

9y

@Drew Bonner I agree. If I appraised my first two properties now, I would be able to get the full amount. Unfortunately that wont change where Im at now. Roy N put it best there is a myriad of costs involved with this.

0 Reply

Justin Tahilramani

Rental Property Investor · Fayetteville, NC · Member since 2014 · 884 posts · 670 votes

9y

@David Hendry - Maybe you should consider purchasing 4-plexes instead of SFRs. That will allow you to hit your goal well before 85 ;)

5 Reply

Roy N.Pro Member

Rental Property Investor · Fredericton, New Brunswick · Member since 2013 · 7k+ posts · 4k+ votes

9y

Originally posted by @Natalie Kolodij:

While we're on this topic- Can I ask those more experienced with BRRR if cash flow or appreciaiton is more important with BRRR?

I always assumed cash flow trumped, but after listening to Brandon's podcast I think that buying in a stagnant appreciation market (but that cash flows well) would make the refinance part and ultimate selling angle would leave you stuck.

Any input on these elements of BRRR?

Natalie:

Location is a big factor in what is of more consideration: cash-flow or {market} appreciation, even if you will be forcing appreciation.

In our markets one can anticipate modest appreciation - hopefully ahead of inflation - but we never count on appreciation when underwriting a deal ... Cash is King!

As a consequence, most of our appreciation is of the forced variety ... we make our money at the time of purchase and then force a little extra out of the business. Forcing appreciation also improves cash-flow (in the longer term).

1 Reply

George Taylor

Wholesaler · Myrtle Beach, SC · Member since 2017 · 276 posts · 80 votes

9y

@David Hendry There are us HML's out there that require no seasoning after purchasing and rehabbing a property. I'm not trying to solicit business or anything but just saying there are us that don't require it. For example, if someone bought a property with cash and wanted to refinance it a week after the purchase we would do it up to 65%. There are a lot of those lenders that will go to 75-80% but require that 6 months to 2 years seasoning so it just depends on what you want to accomplish.

0 Reply

Natalie KolodijBusiness Member

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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes

9y

@George Taylor I think a key element to the BRRR strategy is then getting OUT of the HML many start with once the property is rehabbed and into a normal 30 year loan. I don't think you guys will match the financing at 4% for 30 years.

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George Taylor

Wholesaler · Myrtle Beach, SC · Member since 2017 · 276 posts · 80 votes

9y

@Natalie Kolodij I completely agree with you. I know those who can but we won't. I didn't mean for this to be a long term solution at all but in the case they were wanting to use a HML as a temporary solution then it's there.

1 Reply

David Hendry

OP

Investor · Merritt Island, FL · Member since 2015 · 16 posts · 4 votes

9y

@Natalie Kolodij I agree completely. Most of the lenders that offer loans on unseasoned properties are around 6-9%

0 Reply

David Hendry

OP

Investor · Merritt Island, FL · Member since 2015 · 16 posts · 4 votes

9y

@Justin Tahilramani that is a very valid point. Are there a lot in NC. As for my area in FL not to many but Im now looking at surrounding areas. Is there a website you like to use?

0 Reply

Dallas Trufyn

Investor · Edmonton, Alberta · Member since 2017 · 94 posts · 72 votes

9y

I started flipping cars when I was 16. Made very little, if any, money buying advertised cars, clean/fix them up and advertise for more. Easy money, right? Didn't learn the most important tip till many years later;

"You don't make money when you sell a car, you make money when you buy it."

You can't buy at advertised/retail price and expect to make money. You have to buy at investor/wholesale prices. Just like Walmart does. They buy at wholesale, but their shipping, staffing, etc. expenses are still in the formula, AND they still make large profit on top.

You simply did not account for the renos in your formula, which you must do.

75-80% of ARV - Renos = MAX OFFER

Remember, the renters are supposed to pay for everything, not you. Just to clarify some of your numbers here;

"Second property I bought for 70k then 23k in repairs. It cash flows $1150 but is work 120k now. However when I Refi I got 75% of 80k or 56,000. So -14k, add in repairs $-27k."

- You bought for $70k + $23k = $93 into the property (you didn't include closing costs)

- You say it's worth $120k, so $120k x 75%(refi) should = $90k which would pretty much cover your initial investment.

- If the house was only worth $80k after renos, you were not able to get the forced appreciation, which is a key component of the BRRR.

- You were only able to get $56k back from the original purchase (-$14k), add in repairs ($23k), should be -$37k.

I appreciate your honesty and openness. There is always good support on here from others who have been where you are. David, I think you did not "buy the car right" here. I have lost on cars and I have done very well on cars. I have not lost on houses (yet, except one potential current deal where we are taking a contractor to court for not completing work) and I have made on houses. It is SO important (newbies, listen up!), to stick to the formula!!!!! Can't stress that enough.

Remember, the house DOES NOT matter (don't get emotionally attached), where you can or will get the money is irrelevant, the location (location location) may or may not matter, but the numbers mean absolutely everything. Everytime. Period.

12 Reply

Account Closed

Specialist · Ocala, FL · Member since 2017 · 7 posts · 3 votes

9y

Make your money when you buy. Given if you know you can only pull out about 75% you may want to start asking for a seller's concession so you can use that money for repairs and closing costs. be sure to also check property appraisal records so you know what the county values the property at. No point in paying say 80k for a property valued at 50k by the county.

1 Reply

Aaron Cullen

Real Estate Broker · Portland, OR · Member since 2015 · 201 posts · 98 votes

9y

@David Hendry First I would like to say great job on getting after it and being proactive! You have the action down. I think you just need to button up your process. I've gone through the same thing, as I BRRRR all of my buy and holds. My first deal wasn't that great, but my next deal was better, and better, and better. I kept looking at the process and evaluating what I could do better and built systems along the way.

Like a few others have pointed out, you probably needed to buy the property for a lower price to get your money out. How do you know what price to buy at? look at the comps with in a .25mi radius.

You should also put together a refi packet to give to the appraiser. I've done this on every refi and I can tell you it works. I include the comps I've pulled (These are the ARV that I want), the current leases to show what I'm getting for rent, the renovation bid with every line item, and before and after pictures so they can see how much "awesome" work I've done to the property. I also put a stat page on the front like a cover letter with the property details and a quick cost breakdown of the deal. By doing this I've gotten every refi appraisal back with-in 1k of my "suggested" ARV.

Good luck and keep up the progress!

10 Reply

Wade Sikkink

Real Estate Investor · Lincoln, NE · Member since 2013 · 584 posts · 353 votes

9y

Completely agree with the comments above on the importance of buying right. It's absolutely true that you make your money going in. If you buy right, everything else takes care of itself. That means you can't buy properties off the MLS or other "retail" channels. You have to find off market properties. I recently wrote a blog post about an off market SFR we just bought. It was a turnkey, so no BRRR, but buying right was still important to make the cash flow work so well.

[Moderator's Note: Removed link from post ... next time, will remove entire post].

0 Reply

Joseph Hennis

Fairfield, CA · Member since 2017 · 98 posts · 84 votes

9y

@Natalie Kolodij Cash flow vs. appreciation... I would require greater cash flow in an area that doesn't appreciate, and less cash flow in an area that does appreciate. That's why there is some discrepancy among investors on whether it's a 1% rule, 2% rule, 50% expense rule, etc.

Ideally, your portfolio should contain both areas that appreciate well and areas that cash flow well. When looking at appreciating areas, just be sure to avoid negative cash flow. That's a skilled investor's game and can be high risk.

1 Reply

Joseph Hennis

Fairfield, CA · Member since 2017 · 98 posts · 84 votes

9y

@David Hendry There is a guy here on bigger pockets, Chris Mason, who does conventional loans at 4-5% interest rate. There are plenty of others, you just need to look around.

FYI: the seasoning requirement is a LENDER overlay, not a Fannie Mae requirement. So you need to shop around lenders and find out what their overlays are. Overlays can change drastically from lender to lender. One lender I am working with now, the way he calculates rental income from my properties is ridiculous and makes all my properties look like they are negatively cash flowing. All other lenders I have spoken with have calculated my cash flow as positive.

This is because of differences in their overlays. Overlays can reduce risk, and I have found that lenders that offer very good rates usually have the most overlays (this isn't a hard rule, but think about it, overlays reduce risk even more than fannie mae requirements, less risk = cheaper money) Companies like the one Chris Mason works for don't have lender overlays.

1 Reply

Joseph Hennis

Fairfield, CA · Member since 2017 · 98 posts · 84 votes

9y

@Aaron Cullen Putting together a refi packet is a great idea. Giving comps to the appraiser is a common practice for Realtors. I was taught to do that when I worked for Century 21. If you don't, you risk that the appraiser will miss the comps and the value will come in too low.

2 Reply

Chris MasonPro Member

Moderator

Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes

9y

Hi @David Hendry,

I think @Joseph Hennis is referencing this thread from a few days ago. To quote @Jenifer Levini:

@Ori Skloot didn't just go doing his thing, and figure out if he could get the financing executed the way he wanted after the fact (the answer would have been "no" if he had, which might be why that is the answer you are finding?). Start to finish that BRRRR was like 7 or 8 months (it included a start-to-finish eviction, me learning about an early 1900s court case that set a relevant precedent for why a title company might not want to insure title, and a zillion other little things, much of which I wasn't a part of), but only 2 months of that was in hard money before he had recouped his full purchase price with a cash out refinance and paid off the hard money. The groundwork to be in-and-out of hard money at 100% purchase price LTV as soon as possible was where we started, and then reading Fannie guidelines, worked backwards from there. And from Fannie's perspective, even at 100% of purchase price LTV, there's still $150k of equity in it as confirmed by a conservative cash out refinance appraisal, so she isn't complaining because to her this is a rock solid gold-standard 65% LTV loan.

Now, worth mentioning, mortgage guidelines always change. The BP podcasts don't get into nitty gritty mortgage guideline details, because they could (will?) be wrong by the time you listen to the podcast a year or three later. The method that currently works (as of this post, not as of you future-people reading this 4 years from now in the sci fi future year of 2021 when you have flying cars and the like), which is basically to make it fall under FNMA D.F.E. as technically an "all cash" (but actually financed) purchase in order to skip the 6-12 months seasoning requirement and compress it down to 1-2 months to recoup your capital while still getting an Agency 30YF mortgage, might not be around two years from now, and it was likely a different trick that worked back in the first podcast wherein someone invented the term BRRRR years and years ago (BRRRR wasn't new, but the name was, and outside of BP the term is regarded as a sort of quirky BP-ism, and one of the ways that BPers flag themselves to the old-timers).

At the end of the day, the Golden Rule applies: she who has the gold, makes the rules. Fannie Mae has the shiny 30YF gold that everyone wants. So we've got to play 100% by her rules, or she might just put us in the penalty box for 6-12 months.

2 Reply

Chris MasonPro Member

Moderator

Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes

9y

Originally posted by @David Hendry:

HELLO ALL,

The last 2 properties have not been seasoned yet and I bought cash with the remainder of the HELOC $67k and 70k respectively.

Now I have a maxed out HELOC, 2 properties with 30yr mortgages and 2 under the HELOC. I have 6 mos seasoning on one that I cant yet get a loan on. The other will not be seasoned for 5 months.

.

Actually, reading that, I think you can do a DFE cash out refinance on both. If the equity is there, you should be able to go right up to your initial purchase prices if you don't want to wait the remainder of the six months. Except you seem to think it's 12 months of seasoning, not six months, meaning you should be able to do a cash out refinance right now right up to the LTV cap, regardless of purchase price.

1 Reply

Jenifer Levini

Attorney · Santa Cruz, CA · Member since 2015 · 345 posts · 358 votes

9y

The take-home message for me, from @Chris Mason's post is that having a knowledgeable money person, whether he/she is a lender, mortgage broker, or some other title, as part of the team, is a key to success when youre working with bigger quantities of money and/or have some financial goal such as getting your money out faster.

Chris, there are a few investments that I'm looking at, that I'd like to run the numbers by you. I'll PM you.

0 Reply

Ryan MurdockPro Member

Rental Property Investor · Austin, TX · Member since 2016 · 1k+ posts · 1k+ votes

9y

@David Hendry

on BRRRR strategy : "It doesn't account for closing cost, time, and rehab fees."

It does. You didn't.

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6 Reply

Ori SklootPro Member

Investor · Berkeley, CA · Member since 2016 · 242 posts · 304 votes

9y

@Chris Mason Very well said!

0 Reply

HERE IS WHY THE BRRR METHOD IS NOT WORKING FOR ME

HERE IS WHY THE BRRR METHOD IS NOT WORKING FOR ME

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