What are your challenges in applying the BRRR method?

Question

Most of my properties I buy cash and do the rehab myself.  I recently bought a property with owner financing then I applied the BRRR method.  The banks have the upper hand in my opinion when doing this.  This is because they know they have you where they want you.  The lenders can jack up the rates, take you through it when attempting to pull out your renovation funds and have you on the hook when it's time for another property.  In my personal opinion, I see the benefit but in some cases I don't.  Now I know we don't have an unlimited supply of money, however in my opinion, it's better to pay cash then get a portfolio loan.  What are your thoughts on this.

Doug Smith · Answer

Hey @Stephanie Ford, You're smart. This is coming from a lender who loves to do loans for real estate investors...I think a lot of investors over-leverage and get themselves into a jam. They tend to borrow until there is no cash flow left over counting on appreciation to carry them, but as soon as a tenant gets squirrelly and stops paying or there is some other hiccup, they find themselves in trouble. The other item that I see a lot is that for the first 6-months, we have to use the lesser of the the purchase price/amount you have in the deal or the Appraised Value. After that, we can use the appraised value, which allows for a much better BRRRRRR (or however many R's you want to add). We don't arbitrarily jack updates. Those fluctuate with the 10-Year Treasury primarily. You seem like you know your stuff. I wish you well in growing your practice.

Stephanie Ford · Answer

Thank you.  I recently met an investor with loans all over the place.  He was hurting bad since things didn't go his way.  I don't ever want to be in that situation. I know I'll be needing another option when I decide to pull cash out one of my properties so I'll keep you in mind.

Stephanie Ford · Answer

In my opinion I would rather still purchase cash and leave the option open to refinance if needed.  It's a lot easier not paying a mortgage if the tenant gets a little flakey than having the pressure.

Eliott Elias · Answer

I stay away from using my own money as much as possible. You can scale at a faster rate if you leverage other peoples money. Know how to use it and stop playing the conservative game with cash.