BRRRR Method Downfall

48 Replies

@Chris Mandle I can't tell you to read my comprehensive BRRRR Sucks blog post because it references our website...its a shame because it might be the best BRRRR article ever written...maybe I'll go in and remove the link...

Anyway, the BRRRR strategy is the cause of many investors downfall...1 deal and done. Its an advanced strategy that only works in select parts of the country...or locations where you can buy property for .50 on the dollar. There's a lot more to this, but BRRRR can be very dangerous...if folks were honest, there would be an entire forum dedicated to failed BRRRR deals.

Take care

@Brandon Sturgill   Agreed..  its kind of funny really.. the term gets coined a book gets written and a new genre takes shape by folks who think this is some new information.

when in fact BRRRR has been going on for decades by local veteran investors..

the risk comes from selling it as a how to super size your portfolio and get infinite returns.

it leads ( especially out of state) investors to think they too can do this one their own..

it can be done in theory NO doubt.. but its not something that most are prepared to handle and do first time out of the gate and from half a country away..  

It's a great tool but there are plenty of downfalls, absolutely!  Like all tools, you need the right one for the job.  

BRRRR-ing a property comes with additional timelines. It may take you 3, 6, 9 or 12 months to complete the rehab on the property. What's the opportunity cost of your time for that 12 months? Would it have been easier to just purchase a turn key property and save up your own personal cash reserves from other income sources (job etc) for that same timeframe? When analyzing a property, consider the "time opportunity cost."

If you over run your budget on a BRRRR, this opportunity cost looks bleaker. It becomes less of a BRRRR and more of a learning opportunity! It depends a lot on your own personal abilities and the numbers of the property and rehab.

That said... I'm a big fan of BRRRR & learning opportunities! There is no method of investing, no method in life that is "perfect" and free of problems or downsides. Just pick one, do your research, do your research a 2nd, 3rd & 4th time and go for it!

First, I love having the opportunity to disagree with @Jay Hinrichs on this because I have had a LOT of success with BRRRR as an out of state investor and it's been pretty easy for me! ;) ;)

that said, after doing 8 of them I've learned a lot and gained perspective that I didn't have when I was new. 

This process absolutely has flaws, to name a few:

1. it doesn't scale at all

2. it only works in certain geographic markets

3. it usually only works on cash flow houses leaving you out of appreciation gains (the real money maker in RE)

4. it ONLY works when buying distressed properties. People try to buy retail for BRRRR and that's just desperation

5. it's NOT as passive as people wish it was. You trade managing tenants for managing property managers

I have only been successful at BRRRR because I bought my first one in 2014 when the market was still quite depressed. don't get me wrong it can be a great way to get started, I just finished my last one, but use it as a stepping stone, not an end game

@Chris Mandle

@Brandon Sturgill

@Jay Hinrichs

@StevieAnn Nance

I've been Investing with the BRRRR strategy for a number of years now. I didn't know it was called BRRRR until after I had a few. I just thought I was investing in rental properties. Like any investment strategy it takes education so you understand what you are doing. All of mine are in the Midwest (Illinois and Wisconsin) and are local to me.

You must be equipped to buy at the right number, understand rehab cost and unexpected cost, know your rental market and have the ability to refinance.

I spent a year researching the concept before I bought anything.  I partnered with an experienced investor on the first two and after that I was good to go.  I made numerous connections, found private investors for purchase and rehab and refinanced a number of properties.  I’ve used 5 different local banks.

Did I ever have money stuck in? Yes.  Did I ever have to bring money to the closing when I refinanced? Yes.  It’s reliant on buying right, keeping to a budget and improving areas that will get you the best return (kitchens and baths).  If the appraisal comes in low be prepared to fund the difference or challenge the appraisal.  I’ve had one success challenging an appraisal.  It is not a great strategy.  

As with all investments there is risk.  Your market dictates whether the numbers will work.  Remember it’s all about the numbers.

Good points from everyone.

Originally posted by @Kenneth Garrett :

@Chris Mandle

@Brandon Sturgill

@Jay Hinrichs

@StevieAnn Nance

I've been Investing with the BRRRR strategy for a number of years now. I didn't know it was called BRRRR until after I had a few. I just thought I was investing in rental properties. Like any investment strategy it takes education so you understand what you are doing. All of mine are in the Midwest (Illinois and Wisconsin) and are local to me.

You must be equipped to buy at the right number, understand rehab cost and unexpected cost, know your rental market and have the ability to refinance.

I spent a year researching the concept before I bought anything.  I partnered with an experienced investor on the first two and after that I was good to go.  I made numerous connections, found private investors for purchase and rehab and refinanced a number of properties.  I’ve used 5 different local banks.

Did I ever have money stuck in? Yes.  Did I ever have to bring money to the closing when I refinanced? Yes.  It’s reliant on buying right, keeping to a budget and improving areas that will get you the best return (kitchens and baths).  If the appraisal comes in low be prepared to fund the difference or challenge the appraisal.  I’ve had one success challenging an appraisal.  It is not a great strategy.  

As with all investments there is risk.  Your market dictates whether the numbers will work.  Remember it’s all about the numbers.

Good points from everyone.

 the key is local controls.. this idea of doing it with this dream team you create is what is going to get some in trouble.. dream team can work or you will get skinned alive.. mainly in the contracting and rehab portion of the transaction..  refi is what it is.. 

Originally posted by @Alexander Felice :

First, I love having the opportunity to disagree with @Jay Hinrichs on this because I have had a LOT of success with BRRRR as an out of state investor and it's been pretty easy for me! ;) ;)

that said, after doing 8 of them I've learned a lot and gained perspective that I didn't have when I was new. 

This process absolutely has flaws, to name a few:

1. it doesn't scale at all

2. it only works in certain geographic markets

3. it usually only works on cash flow houses leaving you out of appreciation gains (the real money maker in RE)

4. it ONLY works when buying distressed properties. People try to buy retail for BRRRR and that's just desperation

5. it's NOT as passive as people wish it was. You trade managing tenants for managing property managers

I have only been successful at BRRRR because I bought my first one in 2014 when the market was still quite depressed. don't get me wrong it can be a great way to get started, I just finished my last one, but use it as a stepping stone, not an end game

I look at it as hype..  people have been renovating and refinancing since refinances and renovations were done in the us probably in the late 1800s  so no mystery there..  What I see is this is being sold kind of like any other guru program   its sells a book that sells the theory and in theory for sure it all works .. just like in theory you can build a monster portfolio with none of your own money like the gurus say .. or you can snap flip and make 100k a month wholesaling  with none of your own money.. or the guys are hitting the tax overage stuff hard again on social media.. it all works in theory.

And for those that have the time energy and some experience I can see it working for them to.. but you sell this concept to brand new investors and I can just flat guarantee there are going to be a lot of folks that wish they never heard the term BRRRR.

In our BRRRR days it worked because we were the gate keeper for the investors.. HUGE difference..

@Jay Hinrichs

Excellent points. I believe running BRRRR locally (not out of state) works great because you can control things. This is a very methodical investment vehicle. Your return is slow. You definitely can take advantage of principal pay down, interest deduction, depreciation and on occasion but don't count on it appreciation. It's just not sexy like a flip. Of course it's not the glamour of HGTV with 90,000 flip profits.

Let's try a BRRRR show that will draw the advertisers.

Buy, Renovate, Rent, Refinance, Repeat (BRRRR) for Investors has always been the Refinance portion. I've never understood the need to pull all the equity out of a property until their monthly cash flow is approaching zero.
One of my properties is a Condo with a positive cash flow of 1200 per month. It makes no sense to have 4 properties bringing in the same income as one, especially if its bought at the height of the real estate market.

The last housing document, i lost count of the number of investors who went bankrupt or just plain lost all of their properties when their portfolio unzipped because of 1 or 2 properties that they could not rent and were upside down on their portfolio.

Anyone who considers BRRRR really needs to read AND understand @Brandon Sturgill post on BRRRR

Updated about 2 years ago

wrong word document should be down turn. I hate auto correct

Originally posted by @Brian Van Pelt :

Buy, Renovate, Rent, Refinance, Repeat (BRRRR) for Investors has always been the Refinance portion. I've never understood the need to pull all the equity out of a property until their monthly cash flow is approaching zero.
One of my properties is a Condo with a positive cash flow of 1200 per month. It makes no sense to have 4 properties bringing in the same income as one, especially if its bought at the height of the real estate market.

The last housing document, i lost count of the number of investors who went bankrupt or just plain lost all of their properties when their portfolio unzipped because of 1 or 2 properties that they could not rent and were upside down on their portfolio.

Anyone who considers BRRRR really needs to read AND understand @Brandon Sturgill post on BRRRR

Agree it doesn't make sense to have 4 properties to generate the same cash flow as one. I would only lever up if the same cash invested could get me significantly higher cash flow out of 4 properties (so I'd want to see a step-change in CoC return, from say <10% to >20%), after taking into account all costs including appraisals, refi, etc...

This means:
1) all properties need to be acquired significantly below market (hard, but not impossible) & acquisition should be all cash so you're not paying interest during a potentially lengthy rehab 
2) rents need to be high relative to acquisition price (1.5-2% rule, also hard, but not impossible if you did well in #1) 
3) you need to budget for reserves and have access to non-bank lending to scale (both need to be incorporated into your business model for long-term viability) 

If one can't do all 3 of the above, it may be better to buy rather buy & hold with low leverage in a market likely to appreciate.  

This is an excellent thread with some great responses! I've had some success with BRRRR, but I live in Cleveland and I'm a real estate agent with a construction background. You know it's totally possible to Buy a property that needs some work, Rehab it and Rent it. Then Refinance it and NOT take 100% of your money out! It's important to remember that many businesses fail because they are underfunded.

@Jay Hinrichs

Thanks for feedback. I own my apartment where I live. Basic 20 down and bank loan. Paying that off. I have saved, curious what kind of investment you would recommend as a first start? Knowing I am already paying g a mortgage, I was thinking of finding a beater and fixing it up, the. Flipping or renting.

Thoughts?

Originally posted by @Chris Mandle :

Curious if anyone out there as something bad to say about BRRRR or did not have success and has some experience on some pitfalls to look out for before starting? Thanks!

 It's not easy to pull off. If done successfully it's great, but so is winning the lottery.

I haven't done one so I cannot say what the pitfalls actually are, but I would think the refinancing part might be the biggest challenge as the guidelines seem to constantly change. The dti part would be difficult eventually. 

Originally posted by @Brandon Sturgill :

@Alexander Felice Well put, man. I think you summed up in 5 points what took me 10 pages, lol. 

 I have a lot of experience in making mistakes, this lets me explain them easily LOLOL

@Chris Mandle I started in an area I knew well, so I built the first portion of my portfolio while I lived there, but I did most of it after moving away. Building teams and managing human capital is what I'm best at, so some of it is natural.  few tips

1. be slow to hire, and quick to fire

2. be clear in your intentions, and firm in your convictions

3. spend time every day meeting new people

4. find people who have aligned long term goals

5. don't hire people, inspire them 

@Chris Mandle

I met my business partner at a local REIA meeting. You can make great connections by attending local events. Yes, my BRRRR projects are local within an hour of me in the burbs outside of Chicago.

Originally posted by @Brandon Sturgill :

@Jay Hinrichs I recall your podcast referenced this...you were doing BRRRR decades before this phrase caught on...what was the take on the strategy in your REI hayday?...was it well received as a fundamental strategy? not trying to date you ;)

I have wrote numerous posts on how this worked pre GFC .. however the fact is basically the entire Turnkey business was ALL BRRRR

it only became the current model when things got so tough to finance..  

folks got a little better buy on the assets since the turn key operator did not have to borrow the money to buy the asset and rehab it and pay all the tax's insurance etc.. which is what they have to do now.. that's why people beotch about why turn key is more than do it yourself someone has to pay for the capital to make it all work. 

Originally posted by @Jay Hinrichs :
Originally posted by @Alexander Felice:

First, I love having the opportunity to disagree with @Jay Hinrichs on this because I have had a LOT of success with BRRRR as an out of state investor and it's been pretty easy for me! ;) ;)

that said, after doing 8 of them I've learned a lot and gained perspective that I didn't have when I was new. 

This process absolutely has flaws, to name a few:

1. it doesn't scale at all

2. it only works in certain geographic markets

3. it usually only works on cash flow houses leaving you out of appreciation gains (the real money maker in RE)

4. it ONLY works when buying distressed properties. People try to buy retail for BRRRR and that's just desperation

5. it's NOT as passive as people wish it was. You trade managing tenants for managing property managers

I have only been successful at BRRRR because I bought my first one in 2014 when the market was still quite depressed. don't get me wrong it can be a great way to get started, I just finished my last one, but use it as a stepping stone, not an end game

I look at it as hype..  people have been renovating and refinancing since refinances and renovations were done in the us probably in the late 1800s  so no mystery there..  What I see is this is being sold kind of like any other guru program   its sells a book that sells the theory and in theory for sure it all works .. just like in theory you can build a monster portfolio with none of your own money like the gurus say .. or you can snap flip and make 100k a month wholesaling  with none of your own money.. or the guys are hitting the tax overage stuff hard again on social media.. it all works in theory.

And for those that have the time energy and some experience I can see it working for them to.. but you sell this concept to brand new investors and I can just flat guarantee there are going to be a lot of folks that wish they never heard the term BRRRR.

In our BRRRR days it worked because we were the gate keeper for the investors.. HUGE difference..

 Hype seems to be what gets a lot of newbies in trouble. Read a book or two and then all of sudden they think they're a pro.

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