Let's be realistic with the BRRRR thing

77 Replies

Okay, I'm tired of hearing how easy it is to BRRRR. And the numbers people (eh hem, Brandon) are not realistic IMHO. One example Brandon gives is $200k purchase, $40K fix, $10k soft costs, $350K ARV. First off, finding a 200k purchase that only needs 40k to be worth 350k is not common. I'm not saying they are out there but it is extremely rare to find such a deal. again, IMHO. If you have a wholesale business set up and can get great deals yourself, then this is more likely. Second, 10K is soft costs is just not accurate. Let's look at the numbers here: 5K points, 6k interest, insurance, title insurance, closing costs 5k. So 16k, not 10k. Now refinancing. Anyone who can get 80% on the new value has a great bank and I want their number. More realistically in this day and age is 65%. Now lets look at those numbers in a more realistic light:

$200k purchase, $40k rehab, $16k soft costs, $320k ARV (a 120k spread on a 300k house is great).

65% of 320K is 208K loan.  You are all in at 266k.  You need to come up with 58k.  If you want to do 5 houses in a year, that's 290k you need out of pocket.  And lets not forget seasoning.  Another PITA issue to deal with.  So Brandon, it is not as easy as you make it out to be and unless you are getting absolutely screaming, killer deals, it doesn't work without bringing a good chunk of money to the table.  I have done it and so I am not saying it cant be done and I am not a bitter "I can't do it so you're wrong" person.  It is just very hard and those deals are extremely rare.  Would love to hear others take on this and experiences

I agree with you. I focus on buying distressed properties and fixing them up so that my "all in" price becomes an amazing ROI once I get the units rented out. But the last "R", for refinance. Meh. I haven't bothered for a variety of reasons. By the time you are accounting for only a 65% or 70% LTV, I'm not getting much of my money back anyway so I'd rather just keep it in the original loan.

But I am getting ready to do my first BRRR...all the way to the last R. What's the difference this time? It's an 18-month bridge loan. So I HAVE to refinance it back out, lol.

Here are some of the details. Total purchase price of the properties (two duplexes) was $146K. I rolled $86K in rehab costs into the loan. Assuming I max. out the rehab plus my 20% down payment, my interest-only loan is for $206K. The ARV for each property $150K, so $300K total. My one major screwup is the rehab took way longer than we expected, which skyrocketed my holding costs and decreased the income I should have been getting. So, including holdings costs, I'm "all in" for around $250K. Not bad considering my gross rent for all 4 units is $1150-$1200/per. Three are already rented out and I have a tenant lined up for the fourth one that will be (finally!) done next week.

But now let's look at what I'm expecting for the refinance numbers. $300K value at a 70% LTV is a new loan for $210K. $206K will pay off the bridge loan. Oh look. I'll have $4K left to cash-out. Whoops! Forgot about closing costs. Bye-bye $4K. And I might even have to introduce you to some new friends out of my pocket to make the closing costs, lol.

No cash-out back for my original down payment or holding costs. But I do have a property with a great monthly cash flow and $90K in equity. I just can't access the equity until I sell it, which I have no intention of doing anytime soon.

Originally posted by @Scott Lepore :

Okay, I'm tired of hearing how easy it is to BRRRR. And the numbers people (eh hem, Brandon) are not realistic IMHO. One example Brandon gives is $200k purchase, $40K fix, $10k soft costs, $350K ARV. First off, finding a 200k purchase that only needs 40k to be worth 350k is not common. I'm not saying they are out there but it is extremely rare to find such a deal. again, IMHO. If you have a wholesale business set up and can get great deals yourself, then this is more likely. Second, 10K is soft costs is just not accurate. Let's look at the numbers here: 5K points, 6k interest, insurance, title insurance, closing costs 5k. So 16k, not 10k. Now refinancing. Anyone who can get 80% on the new value has a great bank and I want their number. More realistically in this day and age is 65%. Now lets look at those numbers in a more realistic light:

$200k purchase, $40k rehab, $16k soft costs, $320k ARV (a 120k spread on a 300k house is great).

65% of 320K is 208K loan.  You are all in at 266k.  You need to come up with 58k.  If you want to do 5 houses in a year, that's 290k you need out of pocket.  And lets not forget seasoning.  Another PITA issue to deal with.  So Brandon, it is not as easy as you make it out to be and unless you are getting absolutely screaming, killer deals, it doesn't work without bringing a good chunk of money to the table.  I have done it and so I am not saying it cant be done and I am not a bitter "I can't do it so you're wrong" person.  It is just very hard and those deals are extremely rare.  Would love to hear others take on this and experiences

Conceptually, it's a great idea but you're right that it's very difficult to get all of your money out in practice. Part of the issue may stem from the fact that BP started marketing the idea years ago when the RE market was less hot and it was more viable to get a good enough deal to get all of your money out. I BRRRed a property early this year and ended up leaving a bit of cash in the deal BUT it still worked out much better than if I had just bought a property on market. It's a great concept and I can't really blame them for pushing it as much as they do, it is possible. 

I get your point though, if you listen to too many podcasts or read enough books it's easy to start off thinking you can build a large portfolio without any money (good luck). The reality is, real estate investing is a cash intensive venture and it's best paired with a high paying job or lucrative business.

Dan 

@Scott Lepore   Agree with you as well, deals like this are hard to find and do require cash to make it happen.

I stick with smaller price points, some time ago I did a $50k duplex purchase which needed $25k in rehab, but did the ARV appraisal through a small community bank up front, which came in at $110k. They lent me the purchase + rehab financing and I did 20% down on the purchase price.

So $10k down, $10k to start rehab (later to be reimbursed from the draw schedule) and $10k in reserves.  So $30k cash for a $50k purchase. 

That said, I was able to finish, keep as a good cash flowing rental, and eventually pull out my original $10k down plus more equity to move onto the next place.

Hard to find and I do about one deal per year.  But I keep most of the rentals and slowly have been building the portfolio.

- Tom

Yes you may not get all your money out for BRRRR strategy, but if I can get 90% of my money out considering you purchase all cash, then I'm not complaining, fact si we all get the concept, I personally dislike overleveraging, i rather take cashflow over a long period

@Scott Lepore

I understand where your coming from. The BRRRR system works, but you definitely need to buy right. I have completed approximately 10 BRRRR's and 10 flips. I use a private lender to buy and rehab and I am able to get pretty close to all my money back. I've not gotten 100% yet, but I have had many projects where I only had $5000 stuck in and in one year I have all my money back out. The worst one I had 10K stuck in. I buy in the plus or minus 100K range. 20K-25K rehab and ARV is at 160K-170K. While your going through the refinance the property is rented and you can start recouping your money right away.

I would not BRRRR SFH in the $350 range. I don't think you can get those numbers to work consistently.. In my area, you need to be under 120K purchase to make it work.

BRRR, buy and hold, assignment sale, flip, spec-build, syndicating,notes etc. No REI strategy will work to capacity if you are not buying right. If you do not have sufficient cash, and subsequent access to cash, all REI gets very risky, and the less money you have the greater the risk. Anytime you are pressured to sell due to timing or lack of capital it generally won't go well. It is not just BRRR.

I think instead of thinking about "which strategy do I want to implement", you should look for deals, and based off of the deals that you find as "qualified", then you decide what you want to do (whether its to wholesale, fix-flip, BRRR, etc.). What do you guys think?

BRRRR works best in a rising market where there's still distressed inventory lingering around. Once the prices plateau and there's little to no inventory left it becomes very difficult to buy at a big enough discount. Buying at a big discount should be the foundation for any RE strategy, too many people settle these days for crap deals just to "get in the game".

@Scott Lepore

Realism doesn't sell memberships/ coaching... or book speaking gigs that will feed the client pipeline... or build 1M followers on a social media platform (inc podcasts) that can be used to leverage sponsorships and further leveraged into building a private investment fund from fanboy/girls.

Distilling a business plan into an insta-post doesn’t lend itself to the dirty details, but when repeated enough, with enough brand partnerships, and enough up & coming hgtv superstars able to paint a 100 year old door without cleaning or priming it but make it look pretty for an insta-story, it will complete the above progression in some cases. Not many, but some.

The value of BP is found in the membership.

@Scott Lepore I agree that the marketing hype behind BRRRR is a bit much. The idea is as old as the hills, and savvy investors have been doing this forever. It is much like the "house hack" term. I mean here in Chicago we are buying buildings that are 100 years old that just so happen to have been the perfect house hack buildings for generations. Its almost like people had this figured out 100 years ago!

At the same time, as long as people don't get hung up on getting every penny out of a deal then the idea of creating value is hugely important. I did a BRRRR deal last year in Cicero and, although I left 20% in the deal, I still created around 75k worth of equity that I was unable to tap into. That equity will eventually be useful and this is all part of the get rich slow game!

@Scott Lepore Sounds like you're an experienced investor. 

If a BRRRR "fails" and you have 5-10% left in the deal isn't that better than 20-25%? So what's the alternative?

A BRRRR is not easy but neither is saving up money for an additional down payment or dealing with the complexities of adding a partner.



The BRRRR's that we as a lender have seen work are typically, purchase price of like 20-50k for very dilapidated properties, and putting into them 100k with an ARV of 300k. Typically vacant and in bad condition multifamily.

The biggest lesson I learned from bigger pockets is knowing how to recognize a good deal.  That's the same lesson for doing any business.  Used car dealers get their car deals at auctions.  They would have a very low profit margin or no profits if they bought the cars at market value.  Once you've got a great deal, you will have to get it rented out as fast as you can becase that's your income.  If you take too much time, you're losing income.

Had you not done any reasearch, you would not know if the property was a good deal or not.

BRRRR certainly isn't easy, but at the same time, if you can buy a property to flip with the kind of equity mentioned above, which people certainly do. You can also find a property to BRRRR with the same numbers or at least similar numbers. (Being all in to a property for $250K that's worth $350K is pretty exceptional.)

That being said, with flips, if you go over budget a bit or the property isn't quite worth what you think, you just don't make as much profit. With BRRRR, you would have to bring money to the table at refinance or out of pocket to finish the job (which happens plenty). So it isn't a "no money down" strategy. Yes, it can be if everything goes right. But everything usually doesn't go right. So you need to have some money in reserve to cover that.

Careful OP, there are some sensitive mods on here that don't take kindly to you smashing their BRRRR marketing.

This is the thing I hate most about Biggerpockets. They marketed that so hard the last 4 years I get my inbox flooded with people who think they are able to buy a house, and refinance it and get all their money back out as easy as ordering food at McDonalds. 

I think a lot of things have changed since the BRRRR concept was coined by BP. In the years following the 2008 crash when there were a lot of distressed properties (and sellers) out there, you could pick up a property and make the numbers work. Now, we have fewer foreclosures and pre-foreclosures and a lot of properties have already been flipped or BRRRR'd so it's slim pickings in lots of markets. Also, lenders got very nervous about cash out refi's so they ratcheted down the LTV. It's more common to get 65-75% cash out. Those 80% deals are golden, if you can find them. So those all work against the method. Luckily, where we invest, the market keeps going up so we do have the ARV working for us, but then again the cost of labor and materials have gone up significantly and so have the time frames for doing the rehabs because all the trades are booked out far, far in advance. This increases your holding costs. That means the numbers really have to work in your favor and there's little room for error. While we do still believe in the BRRRR method, the number of properties we find it working on are much fewer than even 3-4 years ago. And we've adjusted our expectations. We don't expect to get 100% of our money back, and we're ok with that. It's still a good strategy, in my opinion. It's just that the metrics around it have changed and you have to be realistic and not distracted by the hype.

I don't know about the BRRRR strategy with bigger purchases, but I had one work for me.

I bought a foreclosure early 2016, 1/2 duplex. $23,000, $15,000 rehab, all cash. I had expressed interest to the elderly owner of the other half right away. I finally bought the other side April 2019. Took out a $60,000 commercial loan on the 1st property, purchased the 2nd 1/2 duplex for $40,000, rehab cost $15,000. The fees for the loan was $885. So basically I got a 2nd house for $0 out of pocket and $4000 cash left in my pocket after rehab.

So now I own both sides, I owe about $55k, they are worth about $110,000 each, and my rents combined are $2,400/month. Worked like a charm!

Not all strategies work in all locations.  If the price spreads in the location you are looking at do not work, and you wish to still use the strategy, then look at locations with larger price spreads.

Agree with the above....not simple. However, it's the concept people should understand. What if, instead of 6 months, it is a few years? Through loan paydown, and appreciation, the same thing can happen. They probably do over simplify it too much, but knowing how things work is the important part.

I'd agree with your initial post...

If you're finding the offmarket deals yourself (and not having fat trimmed by a wholesaler/agent), you could still make it happen depending on your location.

Where I am, finding 100% brrrr deals in say nice areas of Marietta is almost extinct. 

But in nearby cities, bought a house that (surprisingly) appraised for 207k --- I thought it'd be near 190k --- and we bought for 122k and put 8k into it renting for 1500/month. That we will get all our money out. 

In a more popular area, we bought a deal from a wholesaler, but we likely will still have about 20% of cash in it by the end.

First one, we sourced the deal ourselves off market

Second, wholesaler had bought for 30k less than what we bought it for...