Is BRRRR overhyped in the current market?
Jordan MoorheadBusiness Member
Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
The Moorhead Team5140 Reviews
Is BRRRR overhyped in the current market?
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
7yMy issue with people trying to implement this strategy is they have no money. Buy, Renovate....it is a capital intensive strategy, that those with a few hundred grand liquid can implement. People come to me week in and week out that are broke...Thats simply not a strategy they are adequately funded to implement. No money, but a primary residence with 3% down instead.
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- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes7y
My issue with people trying to implement this strategy is they have no money. Buy, Renovate....it is a capital intensive strategy, that those with a few hundred grand liquid can implement. People come to me week in and week out that are broke...Thats simply not a strategy they are adequately funded to implement. No money, but a primary residence with 3% down instead.
District Invest Group545 Reviews - Rental Property Investor · Chicago · Member since 2018 · 612 posts · 1k+ votes7y
@Jordan Moorhead - Great point to call out on an overlooked aspect of the process!
I feel a lot of people are going to respond with "you need to buy right" and find enough equity in the deal. Yes this is a huge aspect of it, but I think the cool point you're making is that even after buying right, if you pull out all your funds (because you get that higher appraisal (and at 75% LTV or 80% LTV you can recoup your initial investment) your higher mortg payment can kill the cashflow number.
This actually (kinda) happened to me on my first rental property. I ran my original numbers assuming mortgage would be 75% of my investment, but luckily it appraised higher and I could pull out my entire initial investment of purchase/rehab. This brought up the mortgage $125. I still cashflowed, but it was such a simple misread on my end that no one really talks about. I'm in a very solid cashflow market so all good, but I can see if you're in a tighter market where property prices are high compared to rent, that this could hurt the deal.
If you actually are able to pull out all funds, I feel as long as you're cashflow positive (even if it's just $100-200 after accounting for CapEx, PM, vacancy....etc) it still makes sense as you have an infinite return. I know that last statement can be misinterpreted, especially by folks trying to force deals to work looking to make an excuse to move their underwriting numbers, but if you have no money into the deal and have covered up on CapEx and Vacancy (especially after you do an extensive rehab cover a lot of the CapEx) you are looking at an infinite return with wealth in equity.
I also echo @Russell Brazil. You need funds for this to work. Purchasing something off the MLS with some low down payment is not going to work. Basically need a cash or hard money purchase and then the same for extensive rehab. The only times I've successfully pulled out all money it was an extensive rehab, not a quick 10k lipstick on a pig type thing.
- Rental Property Investor · Chicago · Member since 2018 · 612 posts · 1k+ votes7y
To help demonstrate my point above below are numbers to make it easy to follow:
I had a purchase of 60k and rehab of 52k (all-in for 115k with closing costs). I ran my numbers assuming a mortg payment of $525 which was 80% LTV, 5.5% rate and 360m. However we appraised at 142k which almost got me about 110k of my 115k back (loan was like 113k but had to cover fees).
I was ecstatic to get my funds back, but overlooked that the mortgage payment jumps to $645. Again, I think it's well worth it to get the cash out and put to work on the next deal, but was an overlook on my end and I should have been running at $645 from the get-go.
This is in MKE which is a great cashflow market so I'm still looking pretty, but I can definitely see if you were in a very tight market and/or higher home values, this can throw off the deal. I say higher home value because it's much more of a dramatic effect in an area w/250k or 350k homes than my 115k example.
- Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes7y
The strategy has a solid foundation but we have to remember that the people who developed this strategy lived in other markets. What may work in rural Washington doesn't necessarily work in a competitive and appreciating markets like Minneapolis.
In working with many clients with different investment approaches I have come to the conclusion that many who pursue this method are doing so because they don't have enough money or RE equity. At some point they run our of cash or financing because they can't refi out all of their investment and they get stuck. Personally this is why I run a "flipping" and "rental" business. In both instances I pursue major rehabs however some properties I am selling because they won't provide enough cash flow, others we are renovating because they will provide great equity and cash flow.
This somewhat revolves around the "payoff properties or not" debate. Some people are fine going into debt to make $150 "per door", to me it isn't worth the risk. Sure, volume can change things, 100 units will be more appealing than 4 but we all have to value our resources and our time.
- Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes7y
The main issue I see with people newer to the BRRRR strategy is they expect to get every dime they invested back on the refinance. While I have had deals where that has happened that is certainly not the norm.
To me, if I have a property that has been completely renovated and is performing I am ok with it taking a year or a year and a half to get my money back.
- 7yKenneth GarrettPro MemberInvestor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
The BRRRR strategy does work but you need to do your homework. Unfortunately it relies on an appraiser to see the market as you do. The reality of today is you may not be able to pull all of your money back out.
I take the approach if I can get my ROI at 100% within the first year it's a go. I agree with everyone about the philosophy you don't need any money. What happens when the appraiser comes back with an appraisal of 150K and you calculated 175K. That's a hit to you.
I have done a number of BRRRR's. This market is tough. You need to meet with the appraiser when they come out and give them the comps. Provided you did your analysis properly this does help. I would love to say I always get 100% of money out each time but that's not reality in today's market. My last one I bought at 100K put in $15,000 appraised at 160K. While I was going the appraisal process, the property was rented increasing my return. In this case the process worked and cash flows 550 per month. My RII was infinite. I have had situations where I needed to bring money to closing. You need a back up plan in case things don't go according to plan. This market is definitely more difficult. Numbers are much tighter.
Good Luck.
- Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes7y
@Russell Brazil that makes sense. Most of the people I talk to want their 5-25% back. I just couldn’t pencil out how that worked.
I think in Minneapolis currently you’re more likely to find this strategy working on uninhabitable homes in our Class D areas.
The Moorhead Team5140 Reviews - Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes7y
@John Woodrich I agree with your strategy. I either buy and hold with a decent down payment or sell my property if there’s a large upside. I don’t try to hold onto a place and avoid putting more money towards my investments. In my head it just makes sense to make more money, invest it and move on. I don’t need to reuse a chunk over and over. Through strategies like househacking and just living frugally I invest most of what I make.
The Moorhead Team5140 Reviews - Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes7y
Individual and commercial investors BRRRR at all points in the market cycle. It's just tougher for the part-time individual investor at high points in the cycle.
Cash isn't king in REI, deal flow is...lots of it. We need to drive hundreds of opportunities into the funnel...or to invest with someone who does. BRRRR is alive and well.
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
as it relates to SFR rentals or small balance deals.. this was the norm pre 08 its how these mid west rentals were bought and how the product was marketed.. it was only after the GFC and turn key operators had to pivot to provide a home that was already rehabbed and on its way to being rented. the reason was the average investor who wants a 100k rental in memphis has 20 to 30k but does not have 75k to do the buy and rehab which is risky from afar.
so how the business worked and i did well over 1000 of these as a HML.. it went like this.. and so this BRRR that we did was before BP was on the internet its nothing new.
You had the following players.
1. West coast marketing company
2. Mid west provider ( find beat up house and do rehab)
3. Property manager.
4. HML and take out lender
5. Buyer with 700 plus fico and w 2 earnings.
so West coast marketer would market these mainly getting leads from their Saturday radio shows..in LA SF and San Deigo I worked with them all.
they would advertise a program were the buyer in LA with the fico and w 2 could buy a rental house in the mid west for 1k out of pocket and then when the refi hit get 5 to 10k back tax differed.. do 4 at once and they ended up with 4 rental houses for 4k out of pocket then when the refi hit they get 20 to 30k back netting 16 to 24k in their jeans and in those days all in 100 month Cash flow was just fine the market accepted that.. so money at close 400 a month. just need 1k and good credit per house.
So lead comes in and the major supplier in our chain had a radio show and was the take out lender.. I was the HML who put the LA buyer into title and handled the rehab draws.
I went out to the mid west vetted the turn key guys.. and then we had them provide the inventory. the LA investor takes a loan from me.. we put up the money to buy the home and rehab it.. we would only do the loan once the Lender in LA had a pre approval form Country wide or Wells or whoever.. so in those days you got an ARV appraisal right up front in your take out mortgage submission.. and the loan would close with the lender sending out appraiser to do a 442 which verified the work had been done.. NO seasoning in those days.
So loan closes I get paid back my HML LA investor gets their cash and their cash flow. The local turn key / rehabber got paid up front.. they got all their profit when i closed the HML. So thats why i built the teams on the ground it took a lot of trust on my end to put up all the money to make this all work.. Our average turn time was 91 days for about 5 years.
Now this was all predicated on the turn key rehabber being able to buy the asset and rehab it all and include my fee's for 65% ARV... the LA buyer did a 75% ARV loan and thats how they pulled out the cash.
so you had say a 100k ARV in Detroit or Memphis.
and my loan was 65k including my 5 points and 15% interest.. So i made 3,250 in fees plus 750 a month in interest X 3 for another 2250.. and 250 in junk fees.. so this was my profit per deal. roughly 6k per file . ( which is what you need to stay in business.
so take the 65k loan i did back out 6k and that left 59k to buy the home rehab it and give the rehabber/ turn key company usually a 10k profit.. so they had to be able to source for 49k the wholesale price and the rehab and their profit. The marketing companies would then charge 2 to 5k per sale as well and that was wrapped into the 65K
So you can see this worked when you could routinely buy a house that would ARV for 100k for 20 to 30k wholesale.. and do 10 to 15k in rehab..
Now a days the rub is turn key providers beat most people to the better deals.. and they sell for full ARV not 65% of ARV like we used to do in the day.. so they pay more for the house rehab cost have gone up.. they have to include their carrying cost into the deal then back out their profit.
so why BRRR is tough these days is the market has rebounded.. and wholesaler prices are higher and rehab costs are higher.. can it still be done at the 75% sure it can.. but in select markets sure does not work easily for cash flow properties in expensive markets unless your doing bigger commercial deals.. you have too much competition in what in reality is the cheapest improved real estate on the market. What killed this model and what risk today U run is that in 08 finance STOPPED you could not get an investor loan unless you were a 1% er. so the whole model came to a screeching halt and thats why i ended up owning about 200 of these things in the mid west.. my HML could not be refinanced.
So the risk today is you dont get ARV appraisals up front to know what your exit loan is going to be .. big risk.. and well you have seasoning and then what if the market changes etc.. so for me I do a little of this these days still but i know what the exit would be.. i would no way do this for the general public who is relying on a rate and term refi and is marginal on cash.
- Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes7y
Originally posted by @Jordan Moorhead:
I get asked about the BRRRR strategy all of the time and honestly don't know if anyone that's done it in my market where the property cash flows afterwards.
It sounds great. Keep using the same money over and over. It just doesn’t seem realistic at this point in time in my market. Am I missing something? Is anyone successfully doing this currently in the Minneapolis market and actually pulling out good cash flow afterwards?
Yea. You've gotta be doing a ton of marketing & finding distressed sellers to get all of your money back out these days. In a hot market a buyer being able to end up in a position where their cash in the deal is less than what the traditional 25% down payment would have been should consider their deal a win.
- Rental Property Investor · Delray Beach, FL · Member since 2014 · 224 posts · 169 votes7y
Originally posted by @Tom Shallcross:
To help demonstrate my point above below are numbers to make it easy to follow:
I had a purchase of 60k and rehab of 52k (all-in for 115k with closing costs). I ran my numbers assuming a mortg payment of $525 which was 80% LTV, 5.5% rate and 360m. However we appraised at 142k which almost got me about 110k of my 115k back (loan was like 113k but had to cover fees).
I was ecstatic to get my funds back, but overlooked that the mortgage payment jumps to $645. Again, I think it's well worth it to get the cash out and put to work on the next deal, but was an overlook on my end and I should have been running at $645 from the get-go.
This is in MKE which is a great cashflow market so I'm still looking pretty, but I can definitely see if you were in a very tight market and/or higher home values, this can throw off the deal. I say higher home value because it's much more of a dramatic effect in an area w/250k or 350k homes than my 115k example.
Nice example, Tom. In addition to higher payments, I think another forgotten aspect is the double closing costs, which for a ~$150k house could be $5k on both ends of the financing process.
- Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes7y
In MN I think the trick is really buying at a low enough price. We are working on a SF-Duplex conversion right now. We will be pulling all our money out when complete and it will cash flow, we will be all in for ~$100k and it will be worth around $180k-$200k. We probably won't lever all the way up but we will see, it would cash flow if we do.
Two weeks ago we bought a 4BR/1.75BA house live auction for $26k, ARV will be around $170k-$180k depending on finishes. That would work for a BRRRR but only because we bought it so cheap.
No they are not North Minneapolis, the two I mentioned above here are within 40 mins of the cities.
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @James Wise:
Originally posted by @Jordan Moorhead:
I get asked about the BRRRR strategy all of the time and honestly don't know if anyone that's done it in my market where the property cash flows afterwards.
It sounds great. Keep using the same money over and over. It just doesn’t seem realistic at this point in time in my market. Am I missing something? Is anyone successfully doing this currently in the Minneapolis market and actually pulling out good cash flow afterwards?
Yea. You've gotta be doing a ton of marketing & finding distressed sellers to get all of your money back out these days. In a hot market a buyer being able to end up in a position where their cash in the deal is less than what the traditional 25% down payment would have been should consider their deal a win.
thats why it worked back in my day the local flippers got the deals.. U did not have a massive army of unlicensed wholesalers going after the same assets.. demand gets high supply gets low prices go up the model becomes less attractive or sustainable.
- Rental Property Investor · Montgomery, AL · Member since 2017 · 277 posts · 221 votes7y
@Jordan Moorhead Not in Minneapolis so can't speak directly to that market but I would guess BRRRR is still possible in your market it is just about finding the right deals. For example, you are never going to find a deal that you can BRRRR and then still cash flow on the MLS in my market, it is just to good to be true. However, our company is still able to find deals that BRRRR and still cash flow from motivated sellers off market. Also agree with @Tom Shallcross in that cash flow isn't as important when implementing BRRRR because even if you cash flow just $50 a month your return is infinite, just want to make sure you can cover your mortgage.
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Joseph Back:
@Jordan Moorhead Not in Minneapolis so can't speak directly to that market but I would guess BRRRR is still possible in your market it is just about finding the right deals. For example, you are never going to find a deal that you can BRRRR and then still cash flow on the MLS in my market, it is just to good to be true. However, our company is still able to find deals that BRRRR and still cash flow from motivated sellers off market. Also agree with @Tom Shallcross in that cash flow isn't as important when implementing BRRRR because even if you cash flow just $50 a month your return is infinite, just want to make sure you can cover your mortgage.
I dont exactly agree with your though process on that one Joseph.. I can subscribe to that in traditionally appreciating markets were over a 5 to 10 year run you expect to make significant up side on values.. but in low to no historic appreciating markets ( which is much of the mid west and rust belt) to tie up your personal credit and ability to borrow money on something else just to make 50 a month I dont get that one.. the risk is far to great that your 50 a month becomes negative and and exit will cost you money. most investors have 4 easy mortgage slots and then 6 more to get to 10.. to tie up one of those valuable mortgage slots for 50 bucks I dont get that one.. UNLESS you are in a historic market that will move up in value.. or your fairly certain the area is in a regentrification mode and there are new builds and pop tops on your same street.
- Investor/Agent · Kansas City, MO · Member since 2017 · 291 posts · 308 votes7y
I think as others have said it seems to be have a lot to do with where we are in the cycle. I'm an agent and rental property investor. We'd done a number of BRRR's using private money. Some we've gotten 100% of our cash back at refi and some we had to leave money in the deal. It's significantly more difficult to find them now than a few years ago in my market, particularly in the areas/neighborhoods we want to invest. Many of the turnkey guys in our market have pushed into more undesirable neighborhoods to make their numbers work. IMO if you were doing this 3-5 years ago you probably did pretty well and are sitting on decent cash flow and a fair amount of equity. If you are starting today and trying to find MLS deals I'm not sure you'll have a lot of success. Every market is different, but that's what I see in mine.
- Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes7y
As you know I did a ton to BRRRR from 2008 through 2015 and it work well at the time. Numbers started getting tight in 2014 and near impossible by 2016. By Now in 2019, I don't see how you can do a full cash out BRRR and still maintain cash flow and feel good about your leverage. This speaks to the Twin Cities only. Other markets may have potential.
- Investor · Tampa, FL · Member since 2011 · 2k+ posts · 3k+ votes7y
Cash flowing $50 a month does not sound sustainable. If you need to change a water heater out or have 1 month of vacancy, it will bury you for a year. If your property needs a new roof it could wipe out your cash flow for 12 years. Assuming no other maintenance or vacancy, which is impossibly optimistic.
Pro forma $50 will certainly be a net loss in the real world.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes7y
@Kenneth Garrett making BRRRR work doesn't just depend on the appraiser, but also depends on math. Even if I can get an appraiser to say my property is worth more money, I still need to be able to satisfy the debt payment. That is what @Jordan Moorhead is saying.
Two things are required for BRRRR:
1. High enough value to pull cash out (requires appraisal and loan)
2. High enough income to pay new payment (rent-expenses must exceed loan payment)
Just do the math and make sure you have a safety factor in the numbers. Running your business 100% leveraged is a high risk game.
- Rental Property Investor · South shore, MA · Member since 2017 · 1k+ posts · 1k+ votes7y
In my market, I can cash flow with 100% financing. The problem is the 70% max LTV refinance on conventional loans. That money is stuck in the property.
- Philadelphia, PA · Member since 2019 · 11 posts · 1 vote7y
@Russell Brazil how do you think it would work out if you was using hard or private money tho??
- 7yKenneth GarrettPro MemberInvestor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
Completely agree. It’s all about the math. Purchase + Rehab + Holding Cost = Toal Cost.
Appraisal is important to pull your or your investors money out. At the end of the day it still must cash flow. I never go above 75% LTV. If those numbers don't work move onto another project.
Good Points.
- Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes7y
I think its overhyped. It sounds fancy and great for a cocktail talk but few really know how to use it properly and are always undercapitalized. Does the strategy work? Yes. Does it work all the time? No. It works best when the market has been depressed and supply high and more difficult in this environment. Cash out refi and buy another deal and kill your cash flow to $50-100 per unit. Seriously?? Not sustainable and a ticking time bomb. I think people really need to learn about risk management.
I think the idea gives people hope that you can get rich fast. You can scale and move onto the next deal and keep multiplying it without much money to start with. Sounds like a similar strategy I heard in 2004-06. Just buy new construction prices always goes up and you can take cash out and buy the next one. (not exactly the same but just giving you a premise on the idea). It works great in a bull market. Bull markets hide peoples mistakes and let them think what they are doing is correct.
- WorldWide · Member since 2016 · 1k+ posts · 1k+ votes7y
Overhyped? In what market? Numbers don't lie. If your calcs are bulletproof (purchase price, rehab, holding costs, refi costs, ARV(!)) and your numbers work, I don't see anything that could be considered overhyped about it. i'd venture to say most newbies get excited about this strategy, while not having enough experience to run the numbers and end up getting burnt in the end. If something is not brrrr material, then it could be turned into a flip instead, or pull out less at refi and turn it into a cash-flowing rental.
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