BRRRR vs Traditional

8 Replies

I'm starting to understand why BRRRR is so valuable however I am confused on why you can't borrow against you investment the same way in a "traditional" investment as you would the BRRRR method. For example: traditonal method - if you put 20k down on a 100k house, fix it up (put in another $30k) and refinance for $150k, then are you limited to a certain amount of the $150k you can out?

BRRRR method you will have to buy the house out right for $100k put another $30k to rehab (in for $130k) and refinance for $150k and you are allowed to take out 70% of the 130k you have in it, allowing you to put that money into another property?

I guess the disconnect is why can’t you do the same with the traditional method. Is it because the bank won’t give you the loan in the first example vs the second?

Does any of this make sense? Haha

@Eric Kulling You answered your own question. It is much more difficult to find great value-add deals on mortgageable properties. Properties that are in a state such that they can only be bought with cash (or maybe with a construction loan) are automatically going to go at a discount. (This doesn't mean they have to be a total wreck, but maybe someone started remodeling and there are some open walls or they don't have a working bathroom, or the roof needs to be replaced immediately.) So, on occasion you will be able to buy with a traditional mortgage and BRRRR, but most of these deals are going to be cash deals.

@Larry T.

From David’s BFFFF book he says “The problem with the traditional model is you leave so much equity in the deal when you are done that you can’t access this capital to buy the next property”

I’m confused on what he means by “leaving so much equity in the deal and you can’t access this capital for the next property”

Do you know why you can’t access that capital?

Originally posted by @Eric Kulling :

@Larry T.

From David’s BFFFF book he says “The problem with the traditional model is you leave so much equity in the deal when you are done that you can’t access this capital to buy the next property”

I’m confused on what he means by “leaving so much equity in the deal and you can’t access this capital for the next property”

Do you know why you can’t access that capital?

I haven't read David's book, but the 'traditional method' of building a rental portfolio was to put 20% or 25% down, keep the property, save up for your next down payment over a few years, then buy again.  If you also worked on the rental  those costs would be sunk as well.

This is what I've done and it did take time and sacrifice.  Now I buy, rehab and rent. No refi.  Eventually your pump becomes 'self-priming' but it takes a while. 

@Eric Kulling

By buying the property outright you have many advantages.  

  • Buy distressed property at a discount 
  • The rehab forces the equity
  • Property does not qualify for FHA financing or in some cases conventional
  • By forcing the equity through the rehab you can pull your money out. No money left in the project. Your ROI or CoC is infinite.
  • Tenant pays for your mortgage and and all other expenses.  It produces cash flow.
  • This process is repeatable and can produce financial independence for you.
  • Good Luck. 

@Eric Kulling I’m the traditional model you get a property that a bank is willing to finance. It takes 1-2 months to get everything completed with bank financing if there are no issues that the bank has with the property.  Usually there is more competition for a property that is bank financeable that is under market value which then drives up the price and thus decreases eventual profits.  Then you put 30k into the repairs and your home value will likely be valued at what you bought it for plus 30k.  When you refinance, you need to requalify and you will likely only be able to get 70-75% of the repair costs amortized into the new loan so you will still have 25-30% of your money still left in the deal as equity. 

What makes the BRRRR method so attractive is that you can usually buy a property much lower than market value that a bank would not likely finance and you can buy it quickly because you are using hard money which is looked at the same as cash often. Then after you fix up the property the value is much higher than your all in costs. Then, you go to refinance it, and if your bank doesn't have a long seasoning period, you can get a 70-75% loan on the current market value of the property. This allows you to leave very little if any of your money still into the property creating 20-30% in equity and an increase in net worth. With all of your money back out of the property, you are able to do the last "R" (repeat) and go and do it again. This makes scaling a lot easier.

Originally posted by @Kenneth Garrett :

@Eric Kulling

By buying the property outright you have many advantages.  

  • Buy distressed property at a discount 
  • The rehab forces the equity
  • Property does not qualify for FHA financing or in some cases conventional
  • By forcing the equity through the rehab you can pull your money out. No money left in the project. Your ROI or CoC is infinite.
  • Tenant pays for your mortgage and and all other expenses.  It produces cash flow.
  • This process is repeatable and can produce financial independence for you.
  • Good Luck. 

Alright so...

From what I understood, BRRRR method requires purchasing a property (property that is under market value due to its current physical state) and paying it in full with cash, correct? By doing so, and assuming I got that correctly, I'd then move on to rehabbing, renting and refinancing, I'd be able to pull virtually all of the initial public equity out? Ex. Property value = $100k, purchase price =$70k (all cash), rehab expenses = $20k -at this point, $90k down and new property value, lets say, $130k. Once stabilized/seasoned with a tenant, refinancing for 75% of $130k = $97.5k. This example would allow me to take out my $90k and then some. Is this right? Especially the part about paying off the property with my own money in full?

Thanks for your input!