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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167 Replies
- Hard Money Lender · Baltimore, MD · Member since 2017 · 16 posts · 13 votes7y
I recently completed a BRRR in Baltimore. The deal worked great 6-months ago, I was able to construct a beautiful house, rent it out very easily and I only have $15k in a house worth $500k. I have a property manager and I am still able to make $500/month.
Cut to 6-months later, my property taxes have doubled and I am now making $100/month. This does not seem like a good wealth building strategy anymore and I am concerned that I will lose money when appliances start to break.
Should I rent out the property for more money and keep it or sell the property and find something else to invest in? I like the idea of having a cash flowing property, what is a good cash flowing asset to 1031 exchange my profits into?
- Investor · Minneapolis, MN · Member since 2014 · 743 posts · 927 votes7y
I think we have to start with definitions. If someone's idea of BRRRR is they have to be able to pull out 100% of all money they put in, I'd say those days are most likely past and in my opinion, that not an investment strategy because you would cause yourself to be too susceptible to many issues including not making enough cash flow.
l've chosen over time to keep a smaller number of really profitable properties rather than maximize the number of doors. Having a high number of doors might sound impressive but I see high cash flows with 20-30% ROI's, as the real answer. I also don't own a property farther than 4 miles from my house so everything is close and intimate.
Can you do it and cash out some of the money/renovation portion? Yes, I've done a couple dozen times including 4 this past year that worked that way. I just bought one a month ago that already has a post renovation ARV at $100,000 more than my purchase/renovation so I could get all my money out quickly but if I plan to hold it, I'd rather get a 20% ROI leaving in my 20% upfront construction loan amount versus a very small income from a $0 all in investment. It still take time to manage and run.
Most of the talk about this seems to be from newbie's as John points out since they don't actually have the money to invest/manage and the idea of "get rich quick" is too appealing to shake but the adage "slow and steady wins the race" still makes sense.
- Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes7y
BRRR is still alive and going strong in our Chicago market. It's not always the BRRR you read about on BP though with the 100% cash out, etc. You can do that in lower priced high cap rate areas but in the class A to C neighborhoods it's more like build $100k of added equity and pull out $50k of it back to still cashflow a safe amount. I see a lot of owner occupant "house hackers" now instead getting a HELOC where they can pull some money out temporarily and then pay it back so the property still cash flows same as before once they repay.
Check out a BRRR deal diary I created for a client here https://www.biggerpockets.com/forums/664/topics/57...
To skip to the numbers.....
"Got my appraisal back last Friday 11/2/18 (actual appraisal happened 10/27) at 750k!
mini recap on the numbers:
530k purchase, 5% down, 7.5k seller credit.
Cash used was: 80k rehab + 30k down and closing costs + 11.4k holding costs = 121.4k
Current loan balance is ~502k
Looking for my next steps with @Landon Hoon on how to best use the equity gain. We're thinking the rate and term refi with a next day HELOC with access to 210.5k.
(750k* .95) -502k = 210.5k
Let me know your thoughts, excited for this to snowball!"
- Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes7y
@Bruce Runn I'm boring and would rather take my time to build up my portfolio. I don't want to be highly leveraged on anything and can wait/put in the hard work and time to make it happen.
The Moorhead Team5140 Reviews - 7yScott JensenPro MemberFinancial Advisor · Blaine, MN · Member since 2014 · 477 posts · 387 votes
For my situation, BRRRR seems most compelling.
I have one paid for rental property, which is a pretty conservative way to invest, especially for a 32 year old. I just refinanced my rental property in order to put in a cash offer on a SFH to BRRRR. Six months after the purchase I should be able to refinance and pull out most (or all) of my cash and decide whether I want to do it again or not. I really like that with this strategy I always have one paid for rental to help cover cash flow in the event of a market downturn or some bad tenants. With the numbers I am looking at, after vacancies and repairs, there is roughly $100 cash flow ($200 if I self-manage) per house. So, the cash flow isn't great, but that should improve over time and the mortgage balance will continue to go down as well.
For me, BRRRR is a good way to deploy more of my equity, be positioned more for long term growth, and spread some risk out over multiple properties.
- Investor · Minneapolis, MN · Member since 2014 · 743 posts · 927 votes7y
I'm with you-I also like having equity in deals. Let the appreciation build and the paydown occur and set up heloc's to use each properties equity to chase down opportunities. I'd rather not take money out of deals but rather have it available when I want to utilize it. I figure, let it reduce interest costs/increase cash flow if I don't need to deploy it right away.
- Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes7y
I agree with @Bruce Runn, to me it makes sense to have a few paid of properties with LOCs so I have money available if something comes up. Sure, a cash out refi would work but I don't like paying principle and interest on money sitting in a checking account.
- Rental Property Investor · Union, ME · Member since 2018 · 161 posts · 104 votes7y
See: Long Distance Real Estate Investing by David Greene. Sometimes prices don't work everywhere. In my market, BRRRR's don't work very well as far as running the numbers go (I haven't bought many properties yet, so keep that in mind). What I will say is that I've been looking to invest in Georgia and the numbers will accommodate BRRRR investing in some of those markets.
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?
- Rental Property Investor · Gallatin, TN · Member since 2016 · 21 posts · 9 votes7y
@Tom Shallcross thank you for your analysis of the BRRRR strategy, and the real-world application in your market. This is a method I've been doing a lot of research on here in the forums, but have not yet decided if it is something we should be implementing. I think in our Middle TN market where house prices are $250,000 - $300,000 or more, it could certainly impact our cash flow negatively.
I do have a rental house I purchased in 2013, whose numbers are more similar to your example, and think it might be a good candidate for this method.
- Investor · Waterford Works, NJ · Member since 2016 · 24 posts · 14 votes7y
It's all about the Purchase Price... Period !!!
If you buy right, and you should ... because you've analyzed so many different deals, you have searched for markets that outperform others, understand the current rental absorption rates, the current vacancy rates, current as well as future ( 12-15 mths. extrapolation, interpolation...) homebuyer's options in your rental price range,and definitely know the SFH prices extremely well. You should be familiar with a distance of 1/2 - 1 mile out, depending on your market, and the past 6 months of closed sales for properties that are a close match to yours, in the defined areas.
The deals are there. Just a bit trickier to uncover. They are out there. Do your due diligence, the rewards will surely follow! Good Luck!
- Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes7y
Great post. Real estate is capital intensive. On the negative, a BRRRR strategy can result in a portfolio of over-leveraged real estate. One the positive, highly leveraged investments tend to work when the investment performs.
The way I see it, the bank is cheaper than a partner who provides equity capital. So go for the BRRRR strategy, but keep plenty of reserves, as a bank will not bail you out if there are unforeseen capital expenditures, an eviction, etc...
As said on this post, you need to have liquidity to get into this business.
Do Not: BRRRR properties and end up with a minimal cash flow like $150 per month. You'll end up feeding the property when repairs come around. Unless you were operating in a fast appreciating market like Seattle, it will be a long unpleasant ride.
- Rental Property Investor · Philadelphia, PA · Member since 2016 · 41 posts · 14 votes7y
Originally posted by @Jay Hinrichs:
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.
If you are re-financing into an LLC, and you are just a guarantor for the entity, how would you be tying up your credit? Especially, if you acquire financing from banks who keep the mortgages on their books. There are options where a guaranteed loan will not show up on your personal credit, unless it goes delinquent. Considering this, if you pulled out all of your original investment, or even pulled more than originally invested from the refi and still remain cashflow positive - wouldn't it indeed be considered an ∞ return? What's your take on this?
- 7yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Originally posted by @Henry Lazerow:
BRRR is still alive and going strong in our Chicago market. It's not always the BRRR you read about on BP though with the 100% cash out, etc. You can do that in lower priced high cap rate areas but in the class A to C neighborhoods it's more like build $100k of added equity and pull out $50k of it back to still cashflow a safe amount. I see a lot of owner occupant "house hackers" now instead getting a HELOC where they can pull some money out temporarily and then pay it back so the property still cash flows same as before once they repay.
Check out a BRRR deal diary I created for a client here https://www.biggerpockets.com/forums/664/topics/57...
To skip to the numbers.....
"Got my appraisal back last Friday 11/2/18 (actual appraisal happened 10/27) at 750k!
mini recap on the numbers:
530k purchase, 5% down, 7.5k seller credit.
Cash used was: 80k rehab + 30k down and closing costs + 11.4k holding costs = 121.4k
Current loan balance is ~502k
Looking for my next steps with @Landon Hoon on how to best use the equity gain. We're thinking the rate and term refi with a next day HELOC with access to 210.5k.
(750k* .95) -502k = 210.5k
Let me know your thoughts, excited for this to snowball!"
You can find a 95% LTV HELOC or refi on an investment property?
I think more likely is ($750K * 0.75) - $502K = $60.5K. It is still a good investment and helps prevent over leverage. It also will help with the cash flow because the payment on the lower loan amount will be less.
I, therefore, suspect you have closer to $60K to reinvest than the $210K.
If you find a HELOC or refinance it at 95% LTV, I would be interested in where you got the financing.
- Rental Property Investor · Orange County, CA · Member since 2016 · 740 posts · 529 votes7y
@Jordan Moorhead hi. I totally get what you are saying. But it depends on the market. I’ve been doing brrr in Alabama and I see some decent returns. I think partly because taxes are so low there, and I have a great team I can trust. I live in California—but invest out of state. I hold, flip, wholesale, etc.
- Developer · Point Pleasant Beach, NJ · Member since 2015 · 303 posts · 216 votes7y
@Jordan Moorhead I keep an eye on the twin city market because I am there often. It’s similar to my market near Philadelphia. It was a great strategy after the market crash but right now prices are so high it’s hard to find a good deal. So yea, you are right. It’s not a great strategy right now.
- Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes7y
@Dan H. it's 95 LTV on an owner occupied investment property (1-4 units) heloc. PM me for the bank name
- Real Estate Agent · Souderton, PA · Member since 2016 · 591 posts · 414 votes7y
@Russell Brazil I think you ask a great question here. I'm not sure I would exactly say the strategy is "overhyped", but I would say it's a whole lot harder to actually pull off, in most markets today, compared to anyone who has completed one in the last 10 years. The truth is the market has been too good for too long, and because of this not only have prices shot through the roof, more and more investors have entered the space. And I use the word investor loosely. It sounds like a lot of you are agents working with a new buyer each week that binge watched Income Property this weekend on HGTV and is now a pro. There is just a lot less meat on the bone, the days of jumping on the MLS and picking your favorite listing, and BRRRIng is to perfection just to move onto the next is a pipe dream. We all listen to the same podcasts, and read the same blogs on this site. They all make it sound so easy. We hear the stores of that perfect BRRRR where they not only cash flow ridiculous amounts of money each month, they pulled out all their money plus another $100k good measure. And I wouldn't ask them to do it any differently, I love every podcast they ever produced, and all of the guests are just sharing their experiences and knowledge to helps us all. We just need to be aware enough that these stories are 1 of many that they've done. It's likely they best deal they've ever done, by far. And for every great deal we hear of, there are hundreds of OK deals, and probably even more flat out bad deals that we are not reading about or listening to week in and week out. I'm sure there are a rare few that have done it over and and over and built million dollar portfolios, but again that's the rare few, there are hundreds of thousands of landlords on this site, alone, and millions? worldwide.
So is it harder? Yes. Overhyped? Maybe. Impossible. No. Investors just need to get more creative as the market compresses like this. We need to see deals where others don’t, think of ways to create income and/or cut costs where other don’t. Deals don’t just happen, they are created, to quote Brandan in nearly half of all the podcast. So get out there and create. If the numbers don’t work in your market, find a new market, find a new property type, think outside the box, add a bedroom, add a unit, you get the picture.
Others have also made some great points for example too many people think BRRRRIng means they don't need any money, they can somehow finance the whole thing but it doesn't matter because it all gets recouped when you refi in the end, right? The ugly truth is it's very cash intensive, and I have simply shifted my goals a bit. Knowing it's unlikely I'll pull all my cash out, I have to make sure my cash flow is enough to get the COC returns I need for the cash that might be tied up, whether it's a light appraisal, interest rate hikes, or budget overruns, in the end your almost always left with less than you had planned.
- 7yCassidy BurnsBusiness MemberInvestor · Alexandria, VA · Member since 2016 · 859 posts · 460 votes
My answer to your question is, yes it is overhyped. I personally think the BRRR strategy is better in lower income, therefore lower price point entry areas. But even in those lower priced areas you still need $$$$$$$$$$$$.
If you are in an area like Washington, DC you really need capital to be able to perform this, not only capital but a very thorough marketing campaign to make sure you are purchasing these properties at the value that is necessary to complete the Refinance.
Then you must ask yourself, is the property still cash flowing to after that refinance and higher loan amount?
I think the best strategy currently is to purchase a primary residence (1-4 units), be patient, slowly pay down your principal, and then when you are experienced/ready, do a HELOC (only if the #s still work on your primary) and then use that to purchase a potential BRRR w/ 20% down or purchase another primary residence w/ 3-5% down, again making sure the #s work.
#s don't lie.
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Joshua Lidberg:
Originally posted by @Jay Hinrichs:
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.
If you are re-financing into an LLC, and you are just a guarantor for the entity, how would you be tying up your credit? Especially, if you acquire financing from banks who keep the mortgages on their books. There are options where a guaranteed loan will not show up on your personal credit, unless it goes delinquent. Considering this, if you pulled out all of your original investment, or even pulled more than originally invested from the refi and still remain cashflow positive - wouldn't it indeed be considered an ∞ return? What's your take on this?
your average investor at least starting out cannot get a loan from a portfolio lender who lends to an LLC with a PG. they have to get a loan from a govmit backed lender.. and those are reported to fico..
- Real Estate Broker · Louisville and Southern Indiana · Member since 2018 · 11 posts · 4 votes7y
I'm closing on one in Louisville Ky area this week. Purchase price 45k. Rehab costs 20k. Should appraise for 110k. Refinance should let me walk away with 20k or so with a 75% LTV. It should cash flow about $100 a month. Definitely one of my better ones.
- Property Manager · Syracuse, NY · Member since 2016 · 601 posts · 384 votes7y
You have to buy the worst house in the best neighborhood. I have properties that are only good as flips and then I have another building that I will be pulling $140k out of in the refinance and still cash flow $900-$1,100 a month when the remodel is done. Check out HUDHomestore, Fannie Mae Homepath.com etc, get in with some wholesalers. It can be hard to find deals that are on the MLS that will work for this method.
- Rental Property Investor · Redmond, WA · Member since 2017 · 47 posts · 37 votes7y
Quite a few times on this thread, the term cash flow is used, where it is mentioned that a BRRR is not worth for $50- $150 in monthly cash flow. How is this cash flow defined? Is this the cashflow after PITI + reserves (vacancy + repairs + capex) + PM ?
I am currently looking at a BRRR which I will have done a complete rehab (new roof, new electricals, add a 2nd bath) and will be all in at 70K. Appraisal is around 100K. Rents are $825 - $850. Maybe $900 given a newer property. After all reserves and PITI I have about a $100 left a month. I keep $2000 in repairs and capex per year.
- Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes7y
With the 10 and 2 year treasury inverting meaning a recession is 6-18 months away its best not to invest off pro-form. Only cashflow today is a good way to move forward.
- 7yWesley WhiteheadPro MemberRental Property Investor · Depends on where my employer sends me · Member since 2018 · 171 posts · 142 votes
@Kenneth Garrett agree with this strategy. Have a specific number in mind that you are looking cashflow after you refinance. If the deal does not meet that threshold, then move one. You might have to look a bit harder but you will get a deal that fits your criteria
- Rental Property Investor · Boise/Portland · Member since 2017 · 709 posts · 742 votes7y
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.
Joseph,
There's a serious deficiency in your $50/month basis because that sum is not providing a reasonable ROI, and you'll end up losing money when you consider the cashflow stream that compares outgoing funds to the magnitude and timing of incoming returns tied with inflation. Your low-end figure doesn't take into account the complexities of IRR which deserves more than the $ figure you've identified as a metric. $50 cashflow positions you at a loss before you get out the gate. My context here is that you're comparing BRRRR and a return being infinite. It doesn't compute.
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