BRRRR Strategy - I don't get it.. what am I missing?
Catonsville, MD · Member since 2014 · 89 posts · 21 votes
Listening to @Brandon Turner's webinar on BRRRR, and his first example looks like this:
So, I think Brandon would still be in the hole after the refinance. Check my logic and figure out what I'm missing:
He's $102,500 in the hole after the rehab. Then he refinances, and has to put 20% down on the $141,000, which is another $28,200. So now he's $130,700 in the hole (102,500 + 28,200). The bank gives him a loan for $112,800, which isn't enough to cover his entire debt; it leaves him $17,900 in the hole (130,700 - 112,800)! Sure, he has 20% equity in the property, which is worth $28,200, but that's not tangible money. What if he borrowed everything and owes people money yesterday?
I don't see the benefit, and I must be missing something. Why not just buy a property already rehabbed at $141,000, put your 20% down, and not owe anybody $17,900? Somebody help a newbie out! Thanks.
@Matt Powell great Q and follow up by you and the community. I think this is one of the areas BP is good for when it is a legit Q from someone who is actually trying to learn (vs someone trying to vette some idea from a guru) You have asked the questions that hundreds of others didn't have the guts to ask but will benefit from reading. Several BPers are paying it forward for you (us) so that someday you (we) can do the same for the newest members. Persevere!
Here's a real world example with rounded numbers for simplicity. I partnered with someone who had extra cash laying around. We bought a house for $63,000 cash, which my partner paid $62,000 and I paid $1,000.
I rehabbed the property for $25,000 which I paid $19,000 and he paid $6,000. Then I placed tenants. Then we got a refinance loan. The appraisal came in at $120,000. We got 70% LTV and cashed out $84,000.
We had $88,000 in and got out $84,000. So we only had $4,000 into a $120,000 house. You can't get a down payment that low on a purchase loan! If we had gotten a higher LTV loan we would have gotten more money out than we put in.
Dawn, dont those numbers only work if you and your partner hold the property together? If you have to give your partner say 10% return on their cash, you wouldn't get all your cash back.
The rent collected is $1,520 per month. The mortgage payment is $803.38 on a 30-year fixed rate term. That includes insurance and property taxes. We put away $175/month for reserves which is for any repairs and future CapEx. We remodeled this property with new almost everything before renting it out, but even so we want to put enough aside. After the mortgage and reserves, we cash flow $541.62 which we split 50/50. So the property cash flows well, even with the mortgage.
@Matt Powell BRRRR is similar to buying stocks on margin. It's a great strategy if rents increase and appraisals are positive, but if the market turns on you it can quickly multiply your losses.
During the trough of the financial crisis, home prices fell so violently in certain locations that odds are the prices would revert to their historical mean which made it an absolute great time to be bullish on BRRRR. However, now that we are out of the recession and home prices have stabilized the BRRRR strategy is not a safe as it once was. Sadly, due to survivorship bias you won't hear about the risks involved because those that have blown up, are no longer around to share their stories of misfortune.
If you're bullish on real estate, can negotiate a good deal, and think rents can cover this amount of leverage go for it, with the caveat that if rents decrease you might be forced to liquidate your asset.
@Matt Powell BRRRR is similar to buying stocks on margin. It's a great strategy if rents increase and appraisals are positive, but if the market turns on you it can quickly multiply your losses.
During the trough of the financial crisis, home prices fell so violently in certain locations that odds are the prices would revert to their historical mean which made it an absolute great time to be bullish on BRRRR. However, now that we are out of the recession and home prices have stabilized the BRRRR strategy is not a safe as it once was. Sadly, due to survivorship bias you won't hear about the risks involved because those that have blown up, are no longer around to share their stories of misfortune.
If you're bullish on real estate, can negotiate a good deal, and think rents can cover this amount of leverage go for it, with the caveat that if rents decrease you might be forced to liquidate your asset.
The BRRRR and margin comparison doesn't make any sense. In no way is a cash flow rental with 25% equity with a long term fixed interest rate similar to buying stocks on margin. BRRRR is a long term hold strategy where you get your downpayment money back. I am not sure how you are doing BRRRR but it cannot be being done correctly.
How exactly do you multiply your losses if you own several cash flow 1% to 2% rule rentals with 25% plus equity?
@Ryland Taniguchi doesn't make any sense? You're increase your debt on property A to purchase property B, if rents decrease (like did in our last recession) rents will no longer cover your new debt burden on property A and B which leads to losses. Essentially you're increasing your leverage on the hopes that rents and values continue to increase, such as when people trade on margin, they are essentially increasing their leverage.
If you didn't leverage property A and the market contracted, your rents would provide you with significant margin of safety so you could still eek out cash flow.
If the RE cycle is in a growth period, you could do great. If you use this strategy on a RE peak, you could lose your shirt.
BP podcast 1 explains what can happen when this strategy is used recklessly.