Why BRRRR is dead....

[Marcus Auerbach]

Every time someone calls me and says: hey, I am an OOS investor and want to BRRRR in Milwaukee, I cringe. An investor friendly agent is supposed to be excited and send them a list of deals, right? Or tell the truth??

The great days of BRRRR are gone. 

The compression of inventory over the last 10 years has gradually restricted the discounts on the buying side. If inventory is low and competition is high, properties in poor condition will sell for almost as much as properties in great condition. For a good BRRRR you need at least half off ARV, that means buying a 200k home for 100k and fixing it for under 50, that is just not realistic anymore. It will sell for 185k as is to a first time home buyer with a handy family, who has no idea how much time and money it will eventually cost him to complete a full gut rehab.

I know, because I have been BRRRR-ing in Milwaukee since before Brandon Turner coined the term. Deals (by text book standards, full cash recycle) have gone from almost everywhere to complete unicorns. The days of "free-vesting" are gone, we are back to in-vesting, which requires capital.

People are still telling me it works, but when you look closer, they cheat themselves by patching a roof instead of replacing it, installing a new kitchen, but not the replacing plumbing, to save on expenses. Or you go into D neighborhoods and tell yourself it is a class C. 

Rehab and value add will always be a thing, I have 2 projects in the works now and rents will be higher after, but you can pretty much strike the last R in BRRRR: a full repeat with the same cash is not going to happen, especially if home prices start going sideways.

[JD Martin]

I've always had two problems with the acronym (Buy, Rehab, Rent, Refinance, Repeat for those unfamiliar):

1. "Refinance, Repeat" does not necessarily mean you get everything back you started with. That's going to depend on a lot of things that may not even be in your control - market timing, appraisals, interest rates, material & labor cost changes, etc. The most important letter in the acronym standing that way is "B", because your "buy" strategy and level has to change in accordance with other factors in order to make the strategy work. 

2. There *always* should have been another "R" in the acronym: "Reserve", as in keeping liquid assets available in order to successfully operate in all markets. It should have said Buy, Rehab, Rent, Reserve, Refinance, Repeat, because any change from the situation that existed when you bought & rehabbed might require reserves once you refinance, as that step typically increases your return but decreases your actual cash yield. The people who lose their assets in a down market almost universally have little to no reserves. 

[Jared Hottle]

I have not been in it as long as you have but I have been BRRRing with great success in my market the last few years. Maybe it did use to be easier but I enjoy the finding and underwriting of deals. Looking to improve our systems and procedures to decrease the rehab and decreases costs etc. If it is getting harder I do like that as many may exit the space. Maybe we have been helped by higher ARVs and rents in the last big run up but I enjoy getting up everyday and working on the B or any of the Rs. lol

[Marcus Auerbach]

Quote from @Sam Bhattacharya:

The thing I don't understand about this is that you can easily find properties in the Milwaukee area for less than $100,000 on zillow and other web sites.  I've seen some for as low as $40,000.

Do real estate agents just not consider these properties?

Sam, if you have never been to Milwaukee this does not seem to make sense. I don't enjoy spending 154k or 211k on a gut job property, I would happily buy 100k deals and 40k deals if it would make sense. The ARV is just not there.

Pay attention to DOM (days on market), they are cheap, but they are not moving - meanwhile you have to compete with other investors on a 200k deal..

[Marcus Auerbach]

Quote from @Sam Bhattacharya:

You can still beat out flippers with your offer for a BRRRR, because you don't need to make an immediate profit, or can accept less than 25%. BRRRR is also more forgiving, because you can make your money over time, allow appreciation and rent growth to help. Flipping is brutal in that may, your profit IS the margin for error!

[Carlos Ptriawan]

Quote from @Marcus Auerbach:

Every time someone calls me and says: hey, I am an OOS investor and want to BRRRR in Milwaukee, I cringe. An investor friendly agent is supposed to be excited and send them a list of deals, right? Or tell the truth??

The great days of BRRRR are gone. 

You are very honest. Honestly BRRR reward/risk ratio is still there, but only in low-cap rate markets like Denver or CA city. That's also if the purchase price is "right".
But, I would never do BRRRR in Milwaukee LOL

[Kevin Hart]

depends how you define a successful BRRRR. Yes, at this point in the market I am not pulling out a large lump sum of money on my refinances, but If I am only leaving a couple thousand dollars in the deal, I think that is still a successful brrrr.

I just closed a refi last week in Louisville on a brrrr deal and I had to leave 2.5k in the deal. There are not many other methods of investing that allow me to now own a fully renovated rental property for only 3k of my own money. 

[Jordan Moorhead]

@Marcus Auerbach I've done 35 BRRRR's in the last 2 years. It's not easy but is by no means dead. We bought a lot off the MLS and a lot off market.

The trick for us was finding a good class C area where we could make them nice and get good rent. We know our numbers extremely well because we stay focused.

[Andrew West]

While I love a good clickbaity title (kudos @Marcus Auerbach), I'm going to have to go with the folks who've clarified that BRRR is not dead, but rather harder than it used to be.

I'm holding one right now (rehab almost complete), and rates skyrocketing atm is not building a lot a confidence for an immediate refinance. But the keyword there is "immediate". In addition to folks assuming that BRRRs are a failure if you don't get 100% of your money back, I'd add to that another misconception which is that "you need to do the refinance immediately" (or at least ASAP). I'm honestly in no hurry. I don't need to pull my money our right away, and I'll probably sit on it a while, knowing I have a cash-flowing property with solid tenants. I've added some solid sweat equity (maybe not 25% of ARV, but a good chunk of change), and sure, I'd love to be able to dump that equity into other investments, but real estate is about DELAYED GRATIFICATION, and if you're not patient in this game you WILL fail. I'm gonna chill out with 50% equity in my property and wait for rates to come down.

Lots more to be said, and I love what's already been shared. Peace & love!

[Alex Bekeza]

Even with rates having essentially doubled in less than a year's time we still have dozens of cash out refis in process on BRRRRs for clients in a handful of markets (primarily the mid west and south in markets like MO, OH, GA, and TN but with plenty of exceptions elsewhere). If anything, I anticipate BRRRR opportunities to increase 10x in the near future as foreclosures increase, buyers continue to gain negotiation leverage due to rates, and the recession puts more people out of work and into default or into a scenario where they need a lifesaver to downsize. At the same time, the moment rates even so much as creep back downwards within the next few years we'll see another unhealthy surge of appreciation due to limited supply (which does not seem to be getting solved anytime soon).

It comes down to the same principals as always, however, now more than ever, you need to be extremely conservative with your numbers. Put a huge haircut on your rents and ARV, pad your expected long term interest rate, inflate your projected rehab costs, and you should be okay.

I'm personally mid refi on one BRRRR and mid rehab on another and I bought each of them in a way that allowed a large margin for error.

[Marcus Auerbach]

Quote from @Carlos Ptriawan:

You are very honest. Honestly BRRR reward/risk ratio is still there, but only in low-cap rate markets like Denver or CA city. That's also if the purchase price is "right".

But, I would never do BRRRR in Milwaukee LOL

Thank you Carlos. But now I am curious, what is your perception of Milwaukee? 

[Marcus Auerbach]

Quote from @Andrew West:

While I love a good clickbaity title (kudos @Marcus Auerbach), I'm going to have to go with the folks who've clarified that BRRR is not dead, but rather harder than it used to be.

I'm holding one right now (rehab almost complete), and rates skyrocketing atm is not building a lot a confidence for an immediate refinance. But the keyword there is "immediate". In addition to folks assuming that BRRRs are a failure if you don't get 100% of your money back, I'd add to that another misconception which is that "you need to do the refinance immediately" (or at least ASAP). I'm honestly in no hurry. I don't need to pull my money our right away, and I'll probably sit on it a while, knowing I have a cash-flowing property with solid tenants. I've added some solid sweat equity (maybe not 25% of ARV, but a good chunk of change), and sure, I'd love to be able to dump that equity into other investments, but real estate is about DELAYED GRATIFICATION, and if you're not patient in this game you WILL fail. I'm gonna chill out with 50% equity in my property and wait for rates to come down.

Lots more to be said, and I love what's already been shared. Peace & love!

Yeah, I had to ;-) What prompted my post is young investors subscribed to the FIRE movement and the idea to buy a couple duplxes and then travel the world. I always try to encourage people, because I do remember how hard it was getting started, but when you tell them its not that easy, not everyone wants to hear that. And I know what happens, they hang up the phone and try to find an agent who will tell them that's a great idea (and has never bought a property in their own name).

You hit it on the head - REI it is about delayed gratification! And got GRQ. And you will actually need some money to invest, that's why it's called "investor"!

[Carlos Ptriawan]

Quote from @Marcus Auerbach:

Quote from @Carlos Ptriawan:

You are very honest. Honestly BRRR reward/risk ratio is still there, but only in low-cap rate markets like Denver or CA city. That's also if the purchase price is "right".

But, I would never do BRRRR in Milwaukee LOL

Thank you Carlos. But now I am curious, what is your perception of Milwaukee? 

The DNS in Milwaukee is too strict. But when I do BRRR, I check reward risk ratio. BRRRR is perfect to do in low cap market like CA,WA,HI,etc. But not so much in high cap rate market. For every $1 for rehab project in low cap market, I can make $3-$4 return.

[Michael Evans]

great discussion everyone, thanks!

[Jay Hinrichs]

Quote from @Jon Kelly:

@Marcus Auerbach I appreciate where you're coming from. It's likely more frustrating for you because you're dealing with new investors expecting a massive list of deals with infinite returns. 

However, BRRRR days are not gone. The idea of buying a distressed property, rehabbing, renting, refinancing is a strategy that will never go away. What should change in this market is the ROI expectations. Some people think the only way to BRRRR is by refinancing all of your capital out of the deal. Your return in that scenario is infinite. However, even leaving 5-10% of cash in the deal still makes it very attractive and you can achieve 30%+ CoC ROI.

For example: purchase for $150k, rehab for $50k, ARV is $250k. At 75% cashout you pull out $187.5k. You only have $12.5k left in the deal. Assuming it cashflows $300/mo then you're making dont financing costs erode into the money you net.. if you refi or pull cash at 75% it cost something for the loan NO ? so maybe you have more like 20k left in the deal? still OK but in this market

[Chris John]

I just read this thread and I was so frustrated for @Marcus Auerbach!  haha.  He literally stated:

"Rehab and value add will always be a thing, I have 2 projects in the
works now and rents will be higher after, but you can pretty much strike
the last R in BRRRR: a full repeat with the same cash is not going to happen, especially if home prices start going sideways."

Then, there are dozens of posts that basically say, "you're wrong.  You just won't be able to get your money out quickly..."  haha.

Marcus, you're a good sport!

[Andrew Syrios]

It's not dead, it's just hibernating right now

[Bruce Woodruff]

Quote from @Andrew Syrios:

It's not dead, it's just hibernating right now

Yeah, it's not dead because it is a poor policy or business mindset.....

Everything is a bit off right now......

[Marcus Auerbach]

@Andrew Syrios possibly, but a critical component to BRRRR is a market with at least 4 to 6 months of inventory. In such a market buyers have choices and will buy nice places, which forces sellers of dilapidated properties to accept a discount. There are no discounts for condition anymore! We have about half a month of inventory in Milwaukee and literally everything is seller with multiple offers.

"Fix and rent" will never be dead, but the days of 25% equity gain and infinite cash recycle are gone I am afraid, at lease until we are caught up with the housing shortage.

[Carlos Ptriawan]

Quote from @Marcus Auerbach:

@Andrew Syrios possibly, but a critical component to BRRRR is a market with at least 4 to 6 months of inventory. In such a market buyers have choices and will buy nice places, which forces sellers of dilapidated properties to accept a discount. There are no discounts for condition anymore! We have about half a month of inventory in Milwaukee and literally everything is seller with multiple offers.

"Fix and rent" will never be dead, but the days of 25% equity gain and infinite cash recycle are gone I am afraid, at lease until we are caught up with the housing shortage.

 I still surprise the reason why MIlwaukee suddenly becoming the highest appreciation city in USA in the last year from appreciation standpoint.
I guess everyone is re-investing into Midwest market.

[Travis Hill]

I do not think BRRRR are dead in Milwaukee. I just finished a rehab on a duplex on 61st. I fully expect to get all my money back out of it for an infinite return. What I think is more important is the amount of money an investor may or may not leave in a deal. Is 5 percent ok, 10? To each their own for sure. Where the BRRRR method is going to get messy is with the new seasoning period from six months to a year with conventional financing and how that will drive investors to look at DSCR loans and their level of comparison.

[Andrew Syrios]

Quote from @Marcus Auerbach:

@Andrew Syrios possibly, but a critical component to BRRRR is a market with at least 4 to 6 months of inventory. In such a market buyers have choices and will buy nice places, which forces sellers of dilapidated properties to accept a discount. There are no discounts for condition anymore! We have about half a month of inventory in Milwaukee and literally everything is seller with multiple offers.

"Fix and rent" will never be dead, but the days of 25% equity gain and infinite cash recycle are gone I am afraid, at lease until we are caught up with the housing shortage.

 I don't really agree with that. Even in low inventory market, there are good deals to be had. It's the same with flipping. Even tight markets have flipping opportunities. And both are aided by prices appreciating. 

Of course, in this market there's no appreciation (a bit of the opposite in fact), relatively low inventory and terrible interest rates, so it doesn't work now (at least not very often) but it will be back sooner or later

[Andrew Syrios]

Quote from @Bruce Woodruff:

Quote from @Andrew Syrios:

It's not dead, it's just hibernating right now

Yeah, it's not dead because it is a poor policy or business mindset.....

Everything is a bit off right now......

What is a poor policy? BRRRR as a strategy?

[Bruce Woodruff]

Quote from @Andrew Syrios:

Yeah, it's not dead because it is a poor policy or business mindset.....

Everything is a bit off right now......

What is a poor policy? BRRRR as a strategy?

No...I meant - it is not because of it's policies, it's the market....

[Michael Wyatt]

I think it's also worth mentioning that the Refinance and Repeat do not have to be immediate.  Or if you do refinance, you can do so again at a later date and pull out more cash.  If you hold for 1 - 2 years, you are gaining free equity essentially paid for by your tenant and also hopefully some appreciation and maybe a couple bucks in positive cash flow that will all add up over time.  

[Marcus Auerbach]

Quote from @Andrew Syrios:

Quote from @Marcus Auerbach:

@Andrew Syrios possibly, but a critical component to BRRRR is a market with at least 4 to 6 months of inventory. In such a market buyers have choices and will buy nice places, which forces sellers of dilapidated properties to accept a discount. There are no discounts for condition anymore! We have about half a month of inventory in Milwaukee and literally everything is seller with multiple offers.

"Fix and rent" will never be dead, but the days of 25% equity gain and infinite cash recycle are gone I am afraid, at lease until we are caught up with the housing shortage.

 I don't really agree with that. Even in low inventory market, there are good deals to be had. It's the same with flipping. Even tight markets have flipping opportunities. And both are aided by prices appreciating. 

Of course, in this market there's no appreciation (a bit of the opposite in fact), relatively low inventory and terrible interest rates, so it doesn't work now (at least not very often) but it will be back sooner or later

Nothing is impossible, we are speaking in general terms. With what specifically do you not agree? That low inventory makes junk sell for too much money? Or the notion that in a normal market buyers will choose move in ready properties over project houses? 

Or let me ask you this: how many BRRRR's have you found for 50% of ARV in the last years? Because the best I see is about 20%, so with 30% rehab you are 10% over ARV. I can see that you have somewhat of a different perspective: KC has currently a list to sale ratio of 97.1% while Milwaukee is at 101.7%, so you have a slightly better market there.