BRRRR - How do you guys eat?

40 Replies

This question is for the folks who Buy cheap, Rehab fully, Rent, Refi, and Repeat (BRRRR strategy). I want to know how you make it work. Here's an example of what I'm talking about:

Purchase price: $10,000

Rehab (everything new): $40,000

Total "all in": $50,000 (fully financed, 15 year note, 5%)

Rent: $650/month.

If I apply my normal formulas to it....

10% maintenance (-$65)

10% management (-$65)

Taxes and Insurance (-$70)

5% CapEx (-$35)

NOI: $415

Less debt service (-$395)

Profit: $20/month.

We haven't factored in vacancy.

These are real numbers I'm getting from some investors in my market. Their rent to "all in" ratio is much lower than what I want, but somehow they use this strategy to get up to 100 houses. Interesting strategy, and in spite of my debt-averse nature I am simply curious about how they make it work.

No cash flow, or very little.

Let's say no maintenance at first and self-managers get to keep the management fee, leaving $150/month ($1,800/year) profit on a $50,000 asset. That's 3.6% return on capital and leaves no room for error. One vacancy every 2-3 years would devour most, if not all, of the profits.

If a person owned 20 of these houses, yearly income ($36,000) is about as as much as the manager of the local Video Rental store, but it comes with $1,000,000 in debt.

15 years is long time to carry around a deal that is essentially all equity and bare minimum cash flow. How do these folks eat?

Are my numbers wrong? Investors who follow a similar path to this example, what's missing in this picture? What am I not understanding about this model?

I am genuinely curious to understand this model. I've asked some of the local investors who claim they do this, but answers are vague.

Im all in on properties for about $50-60k but rent for $900-1000. Still not worth the time. So i put my rentals on market and learned commercial RE (self storage). One purchase would bring in income equal to 10-20 sfr rentals. So i know where my time is best spent. 

BRRRR in the sfr world has worked for some people. From a tax perspective it works on lowering your tax burden if you have have high income. I would never try to live off of cash flow from sfr rentals even if I had 20+. It really all depends on your goals and what you want out of it. Thats the beauty of RE.

Dont forget, you can also use the BRRRR with commercial properties. Thats where the real magic is in my opinion.

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If it's fully financed then you have no skin in it and your return is higher, theoretically 100%. Your rent seems low for the amount of rehab you state. Also, the goal is to force appreciation and hopefully get cash back at refi time. if you can get back most or all of your 50k, then you repeat. So I think some numbers are off.

Hey @Erik Whiting I think the main problem is your rent is abysmally low for your all in price. I'll give a real world example, I bought an property at auction for 34,000 the rehab should be about 11,000. So i'm all i for 45,000, I could rent this property for conservatively 900 optimistically 1000. Lets go with the 900 for the sake of this example, if I simply use your numbers even factoring in vacany of say 5% the profit shoots from 20 profit to at least a couple hundred. While this isn't a home run by any sense you can see how this can quickly scale. Also I don't want to speak for all investors but most I know don't have 15 year notes. Most shoot for 30 if they can get them and if not 25 or 20. Hope this helps!

Originally posted by @Erik Whiting :

This question is for the folks who Buy cheap, Rehab fully, Rent, Refi, and Repeat (BRRRR strategy). I want to know how you make it work. Here's an example of what I'm talking about:

Purchase price: $10,000

Rehab (everything new): $40,000

Total "all in": $50,000 (fully financed, 15 year note, 5%)

Rent: $650/month.

If I apply my normal formulas to it....

10% maintenance (-$65)

10% management (-$65)

Taxes and Insurance (-$70)

5% CapEx (-$35)

NOI: $415

Less debt service (-$395)

Profit: $20/month.

We haven't factored in vacancy.

These are real numbers I'm getting from some investors in my market. Their rent to "all in" ratio is much lower than what I want, but somehow they use this strategy to get up to 100 houses. Interesting strategy, and in spite of my debt-averse nature I am simply curious about how they make it work.

No cash flow, or very little.

Let's say no maintenance at first and self-managers get to keep the management fee, leaving $150/month ($1,800/year) profit on a $50,000 asset. That's 3.6% return on capital and leaves no room for error. One vacancy every 2-3 years would devour most, if not all, of the profits.

If a person owned 20 of these houses, yearly income ($36,000) is about as as much as the manager of the local Video Rental store, but it comes with $1,000,000 in debt.

15 years is long time to carry around a deal that is essentially all equity and bare minimum cash flow. How do these folks eat?

Are my numbers wrong? Investors who follow a similar path to this example, what's missing in this picture? What am I not understanding about this model?

I am genuinely curious to understand this model. I've asked some of the local investors who claim they do this, but answers are vague.

I think what you're describing is a massive wealth building plan vs a eat well on cash flow as you go plan. You described my plan although I don't brrrr much because I hate the fees and PITA of it. Been doing this 15 yrs and the loans are just falling off. Dropping like flies.

If you are getting back every dollar invested (which I have over time, too) and the tenants are paying off your houses every 15 years, then work a w2 to eat if you need to. In my case my wife has a w2 for the basics. In the end you'll have 15, 30 or however many paid off houses in your 40s, right? That's me, too. 

Don't let the how do I live richly while I go thought get in your way of building multi generational wealth. That is my why but your interests and mileage may vary.

Honestly the big issue I see with your #'s is the low rent. I personally wouldn't own a SFR that only rented for $650. In Indianapolis that's a REALLY rough part of town. Now if you're all in for 50k and getting 750-900 in rent... It's a different story.

Most of our BRRRR deals so far have actually been higher end.

The issues I see are that your rent is too low for your cash in, and you have a 15 year note, which should be refinanced into a 30. If youre looking for cash flow, you should be on longer term loans, since your tenants are paying anyway. Calculate with a longer term and see if the numbers look better.

"Total "all in": $50,000 (fully financed, 15 year note, 5%)"

What does this mean? Has the cash not been taken out during the refi? The goal is to get as high of an ARV as possible. In this example, you simply add 40k rehab to initial 10k for purchase and that's your ARV? Methinks your ARV "should" be higher, otherwise, this is not a good deal. And like Jason said, 30 yr fixed is much better for your cash flow.

You work a W2 and eat what you want. You have to refi for more than you have in it. Furthermore, you have to learn to be comfortable with leverage. $1,000,000 is not a big deal if your tenants are paying it. Cash flow is king!

Great question and good point.  Many mentioned that your numbers are a bit low, but I thought I might post on a different topic. 

Do you need investment ideas for money or do you need a salary? 

- If you have $500K plus in investments and want a great return, buying real estate in an IRA or for your long-term goals is a great strategy.

- If you have limited reserves or funds to invest and need a full-time job, that is different.  Typically, that would be geared towards making a commission upfront on deals or flipping so you get the income now.

Both great strategies, but it depends on the stage of life that you are in at this moment.  Thanks for the question, I hope this helps a bit.

Take your 15 year to a 30 year and you will see more cash flow (from $395 debt service to $268.41).  Also, your rental rate is low.  Can your market sustain a $750-$800 rental rate?

Your target should be to get at least $100 per door in cash flow.

Alternatively, if your strategy is to have it paid off the quickest in order to cash flow later, then your strategy to have a 15 year note is the best option.  Bite the bullet now, and reap the benefits later.

So, etiher way, it can work.

Thank you to everyone who took time to comment.  A few things need to be re-emphasized:  

These are not MY  numbers, nor are they MY deals.  For all the kind suggestions about raising my rents or lengthening my mortgage notes....thanks for the suggestions, but I'm not the one doing these deals.  I am trying to understand the people who say they are doing these deals.  So far, I still don't understand them.  The rents are low: yes, I agree.  The cash flow is bad: yes, I agree.  That's my whole point.  It doesn't add up.  Everyone here appears to be confirming that.  The only reasonable explanation I can find is they are supplementing with J.O.B. income, or perhaps living off the excess borrowed funds.
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Some part of their story is missing.

Last one I did

All in - $65

ARV - $95

Gross rent - $900

cash-out - ~$5K

nothing left invested. so it's free income. Do this 10 times.

Now I can eat whatever I want


you're asking how people do this but then you post numbers that most people wouldn't bother with. BRRR works and is really profitable, but if you want to ask about specific deals than you're going to find some that use this method poorly.

Originally posted by @Alexander Felice :

Last one I did

All in - $65

ARV - $95

Gross rent - $900

cash-out - ~$5K

nothing left invested. so it's free income. Do this 10 times.

Now I can eat whatever I want


you're asking how people do this but then you post numbers that most people wouldn't bother with. BRRR works and is really profitable, but if you want to ask about specific deals than you're going to find some that use this method poorly.

This is how it's (BRRR) done.

OP, why worry about what other "investors" are doing? Not every investor is created equal. 

Originally posted by @Erik Whiting :

Thank you to everyone who took time to comment.  A few things need to be re-emphasized:  

These are not MY  numbers, nor are they MY deals.  For all the kind suggestions about raising my rents or lengthening my mortgage notes....thanks for the suggestions, but I'm not the one doing these deals.  I am trying to understand the people who say they are doing these deals.  So far, I still don't understand them.  The rents are low: yes, I agree.  The cash flow is bad: yes, I agree.  That's my whole point.  It doesn't add up.  Everyone here appears to be confirming that.  The only reasonable explanation I can find is they are supplementing with J.O.B. income, or perhaps living off the excess borrowed funds.
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Some part of their story is missing.

 If someone posted that up in the forum and asked to analyze the deal, I would say it's not a great deal, but it's not terrible either. But there's a couple of caveats here, at least one of which was already mentioned:

1. If you have zero money in the property, you are making infinite return, whether it's $20 or $2000 per month. Of course, that return comes with some significant risk, so that always has to be factored into the equation.

2. If you are carrying a 15 year note, you are poo-poo'ing away the principal pay down, in which you have nothing in the deal and your tenant is now placing $50,000 in a bank account for you over the course of 15 years. Yes, cash flow in the scenario that you posted is minimal, partly because the imaginary BRRR'er has traded cash flow for principal. The guys that do that *usually* have decent paying day-jobs, and are more interested in having a bunch of paid-off properties for themselves or their kids when they retire than having an extra $150 per month right now.

If your question is "how can you do this and not work a regular job", then see @Alexander Felice 's post above. That comes with multiplication. And you have to be comfortable with a lot of leverage. People who are not comfortable with leverage should not try that strategy. 


Originally posted by @Alexander Felice :

Last one I did

All in - $65

ARV - $95

Gross rent - $900

cash-out - ~$5K

nothing left invested. so it's free income. Do this 10 times.

Now I can eat whatever I want


you're asking how people do this but then you post numbers that most people wouldn't bother with. BRRR works and is really profitable, but if you want to ask about specific deals than you're going to find some that use this method poorly.

These are my numbers almost exactly, but I do a lot of work myself, self-manage and keep costs low, my "all in" is usually around 50k but the rest of the numbers are the same.  Also, this is a long play, I see it as I am building up houses with cash flow, but also a good chunk of equity/appreciation should I need to sell off and use the cash for something else sometime in the future. Real estate values are rising rapidly in my area which is both good and bad.. makes it harder to find deals. 

I do have a day job, and I reinvest all my cash flow/cash-out back into buying more properties. Its for wealth building and taking small risks as I learn the game.  When I have my big-boy pants on, I'll start looking more into commercial

@JD Martin ... I understand everything you've said. but the topic of this post is not "How do BRRRR investors create equity via rapid principal pay down." The title is "How do you guys eat?" My concern is how they are producing bread on the table, today, not some future retirement strategy. Equity is nice, but it tastes like saw dust. ;-) My apologies if my intentions were not clear in the OP.

Originally posted by @Erik Whiting :

@JD Martin ... I understand everything you've said. but the topic of this post is not "How do BRRRR investors create equity via rapid principal pay down." The title is "How do you guys eat?" My concern is how they are producing bread on the table, today, not some future retirement strategy. Equity is nice, but it tastes like saw dust. ;-) My apologies if my intentions were not clear in the OP.

I eat with my whole face... really getting into it, like a starved dog. I dont get a lot of 2nd dates. 

Otherwise, I could eat my cash flow though. When the numbers work, they do work.  The per-door cash flows are equivalent to other methods, but you can just keep re-using that same chunk of money over and over again, so none of your own money gets "trapped" in the properties.   Its not a strategy for a full-time investor that wants to live off their profits right away though. I see it as a stepping stone. 

EDIT: Forgot to mention, you need that stable W2 job to get the nice conforming 30 year mortgage for the first 10.

Originally posted by @JD Martin :
Originally posted by @Erik Whiting:

Thank you to everyone who took time to comment.  A few things need to be re-emphasized:  

These are not MY  numbers, nor are they MY deals.  For all the kind suggestions about raising my rents or lengthening my mortgage notes....thanks for the suggestions, but I'm not the one doing these deals.  I am trying to understand the people who say they are doing these deals.  So far, I still don't understand them.  The rents are low: yes, I agree.  The cash flow is bad: yes, I agree.  That's my whole point.  It doesn't add up.  Everyone here appears to be confirming that.  The only reasonable explanation I can find is they are supplementing with J.O.B. income, or perhaps living off the excess borrowed funds.
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Some part of their story is missing.

 If someone posted that up in the forum and asked to analyze the deal, I would say it's not a great deal, but it's not terrible either. But there's a couple of caveats here, at least one of which was already mentioned:

1. If you have zero money in the property, you are making infinite return, whether it's $20 or $2000 per month. Of course, that return comes with some significant risk, so that always has to be factored into the equation.

2. If you are carrying a 15 year note, you are poo-poo'ing away the principal pay down, in which you have nothing in the deal and your tenant is now placing $50,000 in a bank account for you over the course of 15 years. Yes, cash flow in the scenario that you posted is minimal, partly because the imaginary BRRR'er has traded cash flow for principal. The guys that do that *usually* have decent paying day-jobs, and are more interested in having a bunch of paid-off properties for themselves or their kids when they retire than having an extra $150 per month right now.

If your question is "how can you do this and not work a regular job", then see @Alexander Felice's post above. That comes with multiplication. And you have to be comfortable with a lot of leverage. People who are not comfortable with leverage should not try that strategy. 

Debt is love, Debt is life

Originally posted by @Erik Whiting :

@JD Martin... I understand everything you've said. but the topic of this post is not "How do BRRRR investors create equity via rapid principal pay down." The title is "How do you guys eat?" My concern is how they are producing bread on the table, today, not some future retirement strategy. Equity is nice, but it tastes like saw dust. ;-) My apologies if my intentions were not clear in the OP.

 OK :)

Based on the scenario you posted, they are either doing that lots of times or they are lying to you. People who are netting $50 per door, per month, need however many doors it takes to live on the cash flow. If you need $5000 per month to live in your area you need 100 doors, based on this scenario. 

I would suspect that the numbers are off somewhere. Either you are mistaken about them taking 15 year notes, or they are getting more in rent than you believe, or they are not putting anything aside to cover any incidentals and are "winging it". In any case, I'm curious why the hypothetical scenario here matters - what are you trying to achieve from this exercise? Are you considering cashing out one of your own properties? Do you not yet own any properties and are trying to decide if leveraging makes sense? Do you want to quit your job tomorrow and live off the cash flow from your properties?

What is your goal here? 

@JD Martin ,my goal is the same as it was when originally stated and reiterated in my last post: I want to know how these people are putting bread on the table.  You said, "they are either doing that lots of times or they are lying to you".... I suspect the latter perhaps.  Or maybe their spouse is a Doctor.  I don't know.

The numbers are as stated: I made no error in reporting what I have been given.  Now if someone gave me FAKE numbers....I can't control that.

I truly have no goal beyond understanding the numbers.  I'm a cash-only investor (Dave Ramsey, yo, yo!), so BRRRR isn't viable for me.  That's a personal decision that I don't care to hash over in this post.   I "understand" leverage.  I choose not to use it, regardless.

However, even if I'm not going to do BRRRR, understanding how someone figures value and analyzes cash flow impacts investors like me too. Maybe we can call this post "sharpening my B.S. detection meter" in regards to people who claim deals with the numbers I gave out work well, but to be fair I figured to give someone a fair chance to explain how it works before I called Baloney Slices.   I know some folks do BRRRR successfully, I am not arguing otherwise.  I just don't think deals like the one I posted work.  Anyone is welcome to confirm or deny THOSE numbers.

@Erik Whiting  I agree with what others have stated regarding why your cash flow is so low and it doesn't look like a good investment.

  1. Your length of the loan is too short.  It's harder to cash flow on shorter lengths of a loan.
  2. Your monthly rent is too low
  3. Also, if your ARV is at what you purchased it for plus what you put into the rehab then it was not a very good deal. Usually investors try to have equity when they buy and fix up a property

Let me share how it would work with real numbers for us.  Here is an example using the numbers for one of our average deals this past year.

Purchase price 62k

Rehab, holding costs, closing costs 19k

All in 81k

ARV 90k

Bank Loan 67,500

2nd position investor 10,000.

We sold property for 99,900 on a 5 year option with an option fee of 3900.

Our total into the property about 2,000.

Rent 895

Bank loan 434

Taxes and Insurance 81

Services 34

Maintenance 0 (The property is renovated and the tenant is in charge of fixes)

Vacancy 0 (The tenant has a 5 year lease with option to buy)

Cash flow to investor 92

Cash flow to us 254

We don't budget for maintenance or vacancy because we use the lease option model and if the tenant does break the lease early we will just fix up the property with our own money and we will replace the money used with the new option fee from a new lease option tenant.  

Cash flow over the next 5 years - 15240

Net profit when we sell in 5 years - 46,954

Total profit over the next 5 years - 62,194

Originally posted by @Erik Whiting :

@JD Martin,my goal is the same as it was when originally stated and reiterated in my last post: I want to know how these people are putting bread on the table.  You said, "they are either doing that lots of times or they are lying to you".... I suspect the latter perhaps.  Or maybe their spouse is a Doctor.  I don't know.

The numbers are as stated: I made no error in reporting what I have been given.  Now if someone gave me FAKE numbers....I can't control that.

I truly have no goal beyond understanding the numbers.  I'm a cash-only investor (Dave Ramsey, yo, yo!), so BRRRR isn't viable for me.  That's a personal decision that I don't care to hash over in this post.   I "understand" leverage.  I choose not to use it, regardless.

However, even if I'm not going to do BRRRR, understanding how someone figures value and analyzes cash flow impacts investors like me too. Maybe we can call this post "sharpening my B.S. detection meter" in regards to people who claim deals with the numbers I gave out work well, but to be fair I figured to give someone a fair chance to explain how it works before I called Baloney Slices.   I know some folks do BRRRR successfully, I am not arguing otherwise.  I just don't think deals like the one I posted work.  Anyone is welcome to confirm or deny THOSE numbers.

 Okie dokie. In that case, I already answered that part. But most of the time, these types of posts are really backdoor attempts to demonstrate how leverage people are "wrong" and cash people are "right". For the record, I am pretty much a "cash people", since I have very little leverage, but that is not because I think the leverage people are wrong - it's just not the approach I want to follow, for the most part. I have leveraged some properties, but not using the kind of numbers you listed. 

In any case, I have found life is a lot simpler when I don't really worry about what other people are doing :)  Does it matter if the people who are telling you this are full of it? If you want a simple answer, it is this - leveraging can, and does, work. Thousands of people - maybe tens of thousands - are living proof. I have leveraged a few properties and the numbers have been great. Want an example?

Purchase price: $37k - rehab costs - $12k (fully rehabbed when I was done, new roof, everything - previous LL had done some rehab already). Plus my costs to close, my all-in was $50k. 

ARV: $80k. Cash out @75% = $57k ($3k in closing). Cash to me in deal ~$7k

Monthly rent: $750. Mortgage = $310 Taxes+insurance = $100 Vacancy = $60 Capex= $60 Maint = $60 Self manage =$0, but if not =$75

Cash w/o management = $220, with management = $145. 

I have room to raise the rent on this unit but I have an excellent, trouble-free tenant, and I don't need to "eat" my cash flow, so I'm more interested in easy than maximum return. I could pay management and still make excellent money, considering the bank paid me $7k to collect this $220/month. Also the CAPEX is imaginary, since the house has all new systems - new roof, new HVAC, new plumbing, new WH, new wiring, new floors, new kitchen, new bath - but I tossed it in there just so you'd have a number. Maintenance is also (virtually) imaginary, since the tenant is responsible for virtually everything in the house, but I tossed that in there as well so you'd have a number. And, in my case, vacancy is virtually imaginary, since this house has not been vacant more than a week since I've owned it, but I also tossed that in there so you'd have a number. Will I eventually have to put on a new roof? Sure. In 25 years (30 year roof), let's say it costs me $10k. That's only $33/month if I start saving now, but in reality I will either sell the property by then (and collect the appreciation) or the house will be worth so much more I can pull that cash back out - that the tenant put in - and take nothing from my pocket.

The answer to your question is very simple.... If those are the numbers, and the numbers help you get to your goal, then it's a deal for you. How you "eat" is by doing that deal 100 times. The other answer is that those are the numbers, they DONT align with your goal, so you move on. I'm not sure what you are trying to accomplish with the question? If you don't understand how this deal is done, ask the person that made the deal and maybe they can help you go through the exercise of analyzing it and you can see it through their eyes.

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