Is BRRRR overhyped in the current market?
Jordan MoorheadBusiness Member
Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
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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 · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes7y
@Jim Macedon I was certainly part if the former party but after almost dying in a motorcycle wreck I'm a little more risk averse and have had more and more thoughts of how I can pay off my current properties and live well off of that. I'm not sure if the new mindset will last but I just don't want to take outrageous risks anymore.
I believe being in the mindset that you just need to do deals to acquire as many as possible is living in la la land and ignoring risk.
The Moorhead Team5140 Reviews - Investor · New York, NY · Member since 2017 · 263 posts · 118 votes7y
@Jim Macedon @Jordan Moorhead I include three points in my post, if you could please take a closer look, actually none of them pertaining to using higher leverage, rather:
1) Infinite return does not equal high absolute return/cash flow, though not mutually exclusive, should target both;
2) BRRRR does not equal overleveraging per se, leverage is defined by LTV already set, and interest coverage dependent on property selection
3) Cash out a function of net return rate (generally), no more
Thus, BRRRR is more of a relative return vs absolute cash flow play/balance. It is indeed levered as may be a turnkey property, with more operational risk and possibly less market risk than the latter due to potential cushion from the upside.
I think many people here pick properties for BRRRR that do not cash flow well at their ARV. One can do similarly with turn key properties and this would be equally "levered" though then you don't make money on the upside (and some risk trade-off per above)
- Round Rock, TX · Member since 2017 · 86 posts · 45 votes7y
Well sure, BRRRR isn't strictly equivalent to the idea of going a mile wide and an inch deep, but they are very closely related. The purpose of the former is to do the latter. Keep getting bigger and bigger. How? With high debt and low income. That's the entire goal of BRRRR.
- Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes7y
Originally posted by @Jim Schneck:
Everyone's a genius in a rising market. When rents drop 25%, and at some point they will, those BRRR experts will be gone like a foreclosure notice in the wind.
Have rents ever dropped 25%? I cant find a consistent source for a long period of time, but glancing at some different sources, the largest decrease I can find on a national level is a 1.7% drop from 2008 to 2009.
District Invest Group545 Reviews - Member since 2019 · 1 post · 0 votes7y
I'm in my early 40's have zero experience(just some self-education) and I see RE investing a decent hedge on inflation and a way to put my money to work for me.
I plan on using a mentor/coach to help cut the learning curve. The mentor/coach I've been considering uses this method. If you have insight on using a mentor, I'm all ears.
I've read through most of the posts and it seems to be split down the middle with some similarities.
1. Market is important, some are arguing A-B neighborhoods, while others are sticking to C-D.
2. Up-front cash or access to capital to purchase that first property is huge
3. The numbers have to make sense, it sounds like there are mixed reviews on the refinance. Is this because the math wasn't correct in the beginning or rehab ran over budget?
- I have heard that appraisers these days don't have the market knowledge they once had which causes issues with the comps they locate
One thing I didn't see in the threads and its entirely possible I missed it. But isn't part of the process to road map your strategy(how many properties, how long you are holding, mortgage paydown, tax strategy)?
Like I said, I'm new to this, so I may sound naive and more excited than someone that has gone through the grind. Any insights are welcome.
- Investor · New York, NY · Member since 2017 · 263 posts · 118 votes7y
@Jim Macedon I know what you are trying to say, though the result here is really different (not 'more leverage' per se). Leverage for BRRRR is pre-defined (by lenders) at 70-75%, there is no "more leverage" that gets achieved through BRRRR.
I think the question is what gets "bigger and bigger". And that is "earned ("free") money/equity subject to market and liquidity risks" (my point 4. above). It would be better if that earned equity is supported by an excess cash flow (better property selection) or not subject to market/liquidity risks (such as if one successfully sells the property). Though still this is earned equity and this aspect is not to be discarded.
- Round Rock, TX · Member since 2017 · 86 posts · 45 votes7y
We're talking past each other. We both know the bank caps each property at 75%-80% debt. But guess what, if you have 10 properties with 75% debt, that's more debt than 1 property at 75% debt. There's a balance between potential vs risk. Back to John McNellis' quote, but here is a more real example with 25% equity as the requirement:
Just assume every house is worth $100k for easy math. You can either be worth $1 million in this example by having:
A. 10 houses owned free and clear.
B. 40 houses with 25% equity and $3 million in debt.
C. Somewhere in between.
C is probably the best spot to be in, but for the sake of argument, let's just look at the extremes because I see a lot of people on here that are convinced that B. is the obvious choice. In order for them to come to such a hasty conclusion, they have to completely disregard risk. Yes, B has advantages. Namely, potential... if everything goes right. ROI is most likely higher as well. However, income is much lower to go along with all that debt. Low income and high debt is not a great combination. Just ask the bank when you're applying for a loan.
B. could work out and after 30 years you may end up way ahead of A. Or you could have an unfortunate set of events crush you. As others have said, with B. you better have a ton of cash reserves. Who has the "dead money" now?
- Rental Property Investor · Akron, OH · Member since 2017 · 22 posts · 12 votes7y
You do not have to just refi each single property. You can get a portfolio loan (one loan, multiple properties) and pull out most of your money. You will still have some money in each property, but will have cash to start buying again, and the loan to value ratio is low so it is lower risk.
- Investor · New York, NY · Member since 2017 · 263 posts · 118 votes7y
@Jim Macedon If you have 10 properties with 75% debt, that's indeed more 'absolute' debt than 1 property at 75% debt. It is also the same relative debt. No question about it and it shouldn't be taken lightly. That said, real estate has additional characteristics (cash flow income / value-add on the renovation), it is not mere numerical leverage such as employed in finance. The latter characteristics can change the overall analysis, in principle one may have massive excess monthly income/combined one-time upside earned on the 10 properties. I appreciate your input and indeed 'absolute' debt is something to consider. I will think about it.
- Investor · New York, NY · Member since 2017 · 263 posts · 118 votes7y
The below aims to make the general leverage discussion more rigorous.
The question posed by John McNellis in @Jim Macedon post has a 'partial' solution in finance via Sharpe ratio (risk-adjusted excess return), as the latter (return minus risk-free rate divided by volatility) is not impacted by leverage.
This is arithmetically true as the ratio remains the same after scaling by a factor of 'n'. So it appears one should be indifferent (arithmetically) between using more or less leverage (from a risk-adjusted perspective) and so indeed it could be a question of taste as @Jordan Moorhead is suggesting.
Now, in the real world there is call risk and other material qualitative factors, and so significant pure market-exposure levering (such as $1 billion position on a $1 million equity) is, very likely, inferior to say just $1 million of market-exposure. One would very likely go bankrupt.
Cash flow characteristics and opportunity for upside (akin to arbitrage/difference-seeking) makes in my mind real estate different from finance to a point that Sharpe ratio doesn't apply so well. Take the 'higher return implies higher risk' truism in finance, may not be true in real estate after incorporating cash flow (more cash flow = higher return but also lower risk).
Leverage in real estate is typically 4/1 for investment properties rather than 1000/1 as in John McNellis example, and the latter payments are supported by cash flow and, in the case of BRRRR, potential upside from renovation. The specifics of the question of whether to use more leverage are thus different.
- Real Estate Broker · Central Coast, CA · Member since 2019 · 15 posts · 10 votes7y
I can never make it work and actually have cash flow in the property afterward--the numbers are just too tight usually
- Investor · New York, NY · Member since 2017 · 263 posts · 118 votes7y
@Dianna Vonderheide The cash flow is actually defined a priori by your target ARV and estimated rents. Unless your ARV comes surprisingly high (which is favorable as you can take a smaller loan), not being able to cash flow is due to property selection. Doing BRRRR on a single family home or in many areas upto 3-family home may not work simply because turn key properties in the area aren't cash positive either. So nothing to do with the BRRRR itself, unless the latter specifically leads to an overrenovated property with lower rental yield (which seems like a plausible scenario to be balanced against).
- Real Estate Agent · Souderton, PA · Member since 2016 · 591 posts · 414 votes7y
Originally posted by @Jim Macedon:
We're talking past each other. We both know the bank caps each property at 75%-80% debt. But guess what, if you have 10 properties with 75% debt, that's more debt than 1 property at 75% debt. There's a balance between potential vs risk. Back to John McNellis' quote, but here is a more real example with 25% equity as the requirement:
Just assume every house is worth $100k for easy math. You can either be worth $1 million in this example by having:
A. 10 houses owned free and clear.
B. 40 houses with 25% equity and $3 million in debt.
C. Somewhere in between.
C is probably the best spot to be in, but for the sake of argument, let's just look at the extremes because I see a lot of people on here that are convinced that B. is the obvious choice. In order for them to come to such a hasty conclusion, they have to completely disregard risk. Yes, B has advantages. Namely, potential... if everything goes right. ROI is most likely higher as well. However, income is much lower to go along with all that debt. Low income and high debt is not a great combination. Just ask the bank when you're applying for a loan.
B. could work out and after 30 years you may end up way ahead of A. Or you could have an unfortunate set of events crush you. As others have said, with B. you better have a ton of cash reserves. Who has the "dead money" now?
I kinda of got lost in your debate with @Stefan Tsvetkov, but I could at least see the point you are making with the example above. While I agree with you, and I think option A. is the easy choice (to you and I) in a vacuum, but real life doesn't exactly place these 2 options on our doorstep at birth and force you to choose one. We are all investors, trying to take what money we do have, and turn it into more. Using your same example, let's assume I have 80k cash, I buy for 60k, use 20k for renovations, and now its worth 100k. I refinance and pull my 80k back out, and do it again, until I get to 40 units. The question I have to ask, as it relates to the OP and these rest of this thread, is how does someone achieve option A through the BRRRR method? What makes the BRRRR method so appealing to everyone is the potential to reach option B, with only enough capital to complete the first deal. When someone gets to option B through the BRRR method, they have created the $1m in equity by buying right, renovating, and refinancing to do it again. It's simply impossible to use the same 80k to reach 10 properties free and clear in your example, or am I missing something?
I think @Stefan Tsvetkov was arguing option B might be more appealing if cash flows were greater, and although I made some major assumptions, in your example the cash flow of both these properties appear be equal. I came to about 5K cash flow on each, assuming 1000/month for rent, the 50% rule on all properties, and about 15k in debt service each month on the $3 million.
10x1000 -50% =5k
40x1000- 50% -15K ds= 5k
So that would only make my decision even easier to choose option A, but until I find a genie in a bottle offering up these 2 options to me, I'll continue working down the path of option B, in hopes of eventually selling off some properties to pay others down and reaching a happier medium as you were eluding to with option C.
- Real Estate Agent · Souderton, PA · Member since 2016 · 591 posts · 414 votes7y
Originally posted by @Stefan Tsvetkov:
@Dianna Vonderheide The cash flow is actually defined a priori by your target ARV and estimated rents. Unless your ARV comes surprisingly high (which is favorable as you can take a smaller loan), not being able to cash flow is due to property selection. Doing BRRRR on a single family home or in many areas upto 3-family home may not work simply because turn key properties in the area aren't cash positive either. So nothing to do with the BRRRR itself, unless the latter specifically leads to an overrenovated property with lower rental yield (which seems like a plausible scenario to be balanced against).
I think what she means is in this current market the price she would have to pay for a property will push the expenses plus debt service over the market rents. As compared to the good old days when properties cash flowed day 1, and the renovation process just made the margins bigger. Correct me if I'm wrong @Dianna Vaderheide.
Also can you clarify how a surprisingly higher ARV would result in taking a smaller loan? Smaller in terms of LTV, sure. But if I'm doing a BRRR and have 80K cash invested into the property and now its worth 120k instead of the 100k I thought it would be, Id still pull the 80K and now have 40k in equity compared to 20k.
- Professional · Parsippany, NJ · Member since 2013 · 384 posts · 262 votes7yThe acquisition price of distressed property has increased substantially especially on REO sales. Additionally construction costs have been on the rise and the ARV (upper end) has remained stable with appreciation capped out. At the present time you will need More Capital in the deal. Market has shifted
- Rental Property Investor · Havre De Grace, MD · Member since 2017 · 26 posts · 18 votes7y
I have 18 units in my real estate holdings with 6 different properties. The last duplex I purchased in September of 2018 is my first BRRR attempt and here is how it has played out....
I purchased a duplex near my other 4 duplexes in the area and paid $160,000 for the property. I gave the sellers $30,000 down and did interest only payments on the $130k for 2 years or less. The duplex was so dated and needed a full rehab. All in with the rehab cost and my interest payments I am at about $45,000 with both units ready to rent by March 1st. Rents will be $1,000 and $1,200 for a total of $2,200 a month. Currently my interest payment in $705 a month so the cash flow starting next month will be great. Once I get the leases in place and a couple months of cash flow I will refi the property. It will look like this.
ARV will be $220,000
Cash in the deal will be $75,000
Current Debt is $130,000
75% of $220k will be $165,000
After paying the debt I will get $35k of my $75k back. I will have $40k invested in a brand new fully renovated duplex.
I have to admit I am not totally thrilled with the numbers. But after looking at it at this angle I changed my mind. I could of bought the property for $220,000 and had to put $55k down. While having the mystery of not knowing how well the property had been rehabbed or treated.
Overall, even with the BRRR not living up to the hype I feel like the deal has worked out better than buying the conventional way I bought my other properties. However, I did miss out on cashflow for 5 months, as well as spent many hours, days, and energy at the property. I think this was not a great move nor a mistake. But another way for me to expand my portfolio.
Good luck investing
- Investor · Minneapolis, MN · Member since 2014 · 743 posts · 927 votes7y
We differ in the thought that equity sitting in a property earns zero percent return. The cash flow you earn is a function of the lower payment because you have equity. IE, if you buy a $300,000 duplex and have a $225,000 loan @5% interest on it, you have $75.0 in equity. If your cash flow is $12,000/yr after all expenses, you have a 16% ROI. That's the return on your equity in my book.
I access my "extra" equity through HELOC's so its not untappable or only avail if I sell/refinance which I don't want to do. If I bought that duplex 5 years ago, it has appreciated and it's now worth $400,000 and I've paid down 25,000 in loan principal so I can access $100,000 of the equity or in a very real sense, all of my initial money. I consider that best scenario of BRRR and what I've practiced. I think we are nearing a peak in value before a correction so it is getting tougher to get your money out but this is the best scenario I can think of as you only use the money when you need it to buy again and when not using it, it's working to keep your loan lower and cash flow higher
- Flipper/Rehabber · Minneapolis, MN · Member since 2016 · 1k+ posts · 1k+ votes7y
@Tim Zajicek I second what Bruce says, I also use LOCs to access money/equity if I need it. For me it makes no sense to take on debt and incur additional P&I payment for money sitting in a checking account. I can tap my LOC for cash deals, renovations, etc and borrow money when I need it, I don't have to borrow when I don't need to. At the same time there are expenses associated with a refi that you don't have with a LOC.
My approach doesn't work for all investors. Those who have substantial equity in properties can setup LOCs with large balances. Newer investors who don't have sizable equity may need to refi and pull out all the money they can. I know many people who lever up as much as they can but I am not one of them.
- WOODBURY, MN · Member since 2018 · 22 posts · 5 votes7y
If what you thought about equity and rates of return turned out not to be true, when would you want to know?
- Rental Property Investor · Triangle, VA · Member since 2019 · 29 posts · 18 votes7y
Originally posted by @Melissa Nash:
@Ronnie Fielder Great question. I have a few great people that a met through other people/groups/investors in Alabama, and then just jumped in and gave it a go. If your looking for people in AL, I am more than happy to send you my contacts. This forum is a great place to get started, and talk to other investors that are buying in the markets you want to buy in. Most markets don't make sense-- the south is always going to cashflow high where this system works well.
Melissa, in the 2 markets I'm currently familiar with (Chicago and Beaufort, SC), I know people in those areas. Even with that, sometimes knowing people that can take care of things is not always the best fit. Most of the time this is family or friends, which introduces a various level of skillets; or lack thereof. As I redefine what I actually need in those markets, it seems that I'm to the point of transitioning to all professionals. I definitely agree with you on most markets not making sense. The South and MidWest seem reasonable and pretty consistent. I think linking up with professionals that actually have boots on the ground is the correct way to do it. As for Alabama, it depends on which city/area. I have a sister in Montgomery, but my initial test of the market with her wasn't very successful.
- Rental Property Investor · Triangle, VA · Member since 2019 · 29 posts · 18 votes7y
Originally posted by @Jennifer Joseph:
You do not have to just refi each single property. You can get a portfolio loan (one loan, multiple properties) and pull out most of your money. You will still have some money in each property, but will have cash to start buying again, and the loan to value ratio is low so it is lower risk.
Jennifer, Have you been successful in getting the portfolio loan? If so, were there any weird stipulations and/or minimum amount of properties the bank required to produce the loan?
- Real Estate Broker · Louisville, KY · Member since 2014 · 362 posts · 232 votes7y
@Jordan Moorhead on our brrr or near brrr deals I. Louisville I can tells you that 1-2 inspections can stretch the rehab out an additional 2 months which eats the brrrger before you can. An extra 2 months of utilities at 200 per Mo, 2 months hard money interest at 1k a month and suddenly you have to leave 500-1500 in the deal. I’m still pretty stoked about that as long as my partner and I walk away with 75-125 a month income as by the end of year 1 in now net 0 but still bringing income. The reality is anyone who is targeting a full brrr or additional cash above that out at closing doesn’t want to invest. It’s a goal not a mandate.
- Real Estate Agent · Souderton, PA · Member since 2016 · 591 posts · 414 votes7y
This thread has so much momentum for a few days there is was hard to keep up with all the responses, and now it’s crickets. Maybe it has become a case of TL;DR. Maybe it’s that the OPs question, in the abstract is just impossible to answer given the countless variables everyone faces not only deal to deal in their own market, but how wide of a spectrum our experiences seem to be as we try to compare what is happening in one market compared to another. Or maybe just about every active member on this site with an opinion on this thread, has already given it. Whatever the case may be, this topic and method of investing resonates with a lot of people and I’m posting in hopes to keep the discussion atop the “trending”list and alive and well.
@Jim Macedon I appreciate the points you made and agree with most of what you say. Just curious how one is to achieve option A, own X number of homes free and clear, by starting with limited resources and using the BRRRR method to build a portfolio.
- Rental Property Investor · Louisville, KY · Member since 2017 · 58 posts · 34 votes7y
Originally posted by @William C.:
... Just curious how one is to achieve option A, own X number of homes free and clear, by starting with limited resources and using the BRRRR method to build a portfolio.
By paying down the debt rather than pull all the cash flow out each month. That's my plan at leat. I'll use the dave ramsey snowball method and payoff the smaller debts first and build momentum.
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