All Forum Posts by: Robin Simon

Adapted from a twitter thread, thought I  would share here:

The BRRRR method of real estate investing (Buy ➡️Rehab➡️Rent➡️Refinance➡️Repeat) has become a popular strategy in recent years to maximize gains in investment real estate

Popularized by David Greene of BiggerPockets and detailed in the excellent namesake book (https://store.biggerpockets.com/products/buy-rehab-rent-refinance-repeat) it has been utilized by many investors to scale rapidly build great wealth through real estate

What has made BRRRR so popular? Key is the ability to recycle capital quickly (use the same $$ to buy multiple properties per year) and to build up a recurring revenue portfolio that creates income streams every month. However, as we go through a volatile market with lots of uncertainty in real estate, there is a lot of uncertainty around the ? of does BRRRR still make sense. Analysis paralysis is common in RE and to make money, your BRRRR does not NEED to be perfect. Perfect = enemy of good

Here are 5 misconceptions about BRRRR investing that should not be holding you back:

1) You Need to Buy In All Cash to Start

Traditionally BRRRR deals are to be bought in all cash, in order to close quickly and win the deals vs. investors w/funding contingencies and risk. Especially in the super-hot and competitive market of 2020-2021. This is not at all necessary. Using a private bridge lender that can finance the purchase/rehab loan quickly and efficiently will absolutely do the trick. You absolutely don't have to wait until you have every penny saved up in cold hard cash to get started.

2) You Have to Be Committed to Hold (vs. Flip)

To the contrary, the best deals have optionality and ability to unemotionally pick the best strategy once rehab is finished (instead of being locked into holding permanently or flipping into an uncertain market). Particularly in volatile markets like this, its actually the superior strategy to crunch the numbers once rehab is complete, and have the ability to sell or rent/refinance and hold once the property is fixed up. Hold firm on price and keep/refinance if it isn't hit.  This great recent BP podcast https://www.biggerpockets.com/... featuring James Dainard is a good example of this, he mentions some of his most lucrative investments over the years were "failed" flips he decided to hold and BRRRR

3) You Need To Rent It Out Long Term

With property values and interest rates skyrocketing this year, ability to cash flow can be tough, especially with high leverage &in top markets. Many investors think they can't refinance unless rent > PITIA and a lease is signed, a tough ask. However, a long-term lease that cash flows the property is NOT necessary. Savvy investors are utilizing investment properties as short term rentals (airbnb, etc.), which generally generates 2X income as a LTR. Hold as a STR for the "Rent" piece of BRRRR and double cash flow! AirBNBRRRR is the new BRRRR!

4) You Need to MAX Leverage and Leave No Equity in Your Property

Yes, a big draw for the BRRRR method is the seductive prospect of the cash-out refinancing leaving zero basis in your property and having a cash flowing rental for "free". BUT, with interest rates rising, its not absolutely necessary to take max leverage, especially heading into a potential recession - its OK to be conservative. Leaving $ in the property and a lower LTV (70% or 65%) is SMART, not a crime 😉. A cushion and higher DSCR is 100% OK.

5) You Need a Bank to Refinance

A lot of would-be BRRRR investors are hesitant cuz of nerves about the third R - refinance. What if I hit a snag and don't qualify? What if the "seasoning" requirements make me hold for a year? What if the bank stops lending for whatever reason?The Good News? You don't need a traditional bank, there are private lenders that are super flexible and can provide refinancing quickly, efficiently and w/ competitive rates and leverage. BONUS - find a lender that do BOTH the purchase/rehab loan AND the cash-out refi

Feedback, thoughts, questions welcome

Due to the size and nature of the deal, it doesn't look like something that would fit a conventional box. However, non-QM and especially DSCR loans sounds like would be a fit, would qualify on the cash flow and allow for up to a million cash-out (most lenders). DSCR loan rates are much closer to conventional than hard money, typically floating about 75bp premium, but with much much easier qualification (and interest-only options)

Seems like a situation where a partnership through an LLC would be a good choice, especially with someone with experience. Jumping from 0 to a 10-door duplex portfolio with a million dollar loan seems a little much to jump in with alone (my 2 cents) vs starting a bit smaller or having a partner or partner(s). Financing becomes incredibly easier if you have an LLC and an experienced liquid partner

A conventional lender wont give you credit for the ADU. Probably best through a commercial loan

Thanks - great feedback, although I was probably not really wording what I wanted very well.

Really just want a simple understanding of What % of Investment Property deals that start as conventional or non-QM/non-DSCR that end up not qualifying, how many pivot to DSCR vs. how many just die as deals?

Quote from @Bernadette Andrews:

I'm doing a 1031 exchange and just went under contract for the purchase of two villas which are under construction in Kingsland, GA.  They should rent for $2100-$2200 and just a few months ago I would've had pretty good cash flow. Now I'm so disgusted by the interest rates and concerned that they could increase even more by the time the properties are completed in November so I'm considering an extended rate lock with a float down option. I wish I could sit on the sidelines but paying the IRS is the last resort. 

Yesterday, I received the quote below with a 6.625% rate including closing cost of almost $13K for the 150 day rate lock  from a loan officer with Guaranteed Rate. Today she texted, "  Rates dipped slightly today to 6.5%, and the Origination fee decreased from $5,831 to $4,900." Please help me determine whether I need to move forward now or shop around for better? Thank you so much BP community. 

Rates have just unfortunately spiked this year, at brief glance this seems like a pretty competitive quote, definitely not out of whack

There will always be a chance you will be denied financing at the refinance stage of a BRRRR - there is inherent risk in the market changing, things in the project going wrong, etc. Banks are also the most likely to find something wrong and not lend (flip side of offering the best rates). The good news is that there are plenty of options outside of banks for the refinance part, credit unions, private lenders, etc. Ideally, you find a lender that does both pieces (the hard money loan for the purchase AND the refinance loan when rented and complete). That way they are already comfortable with you, have underwritten you and the property and you are much more likely to get a smooth and successful refinance.

For any conventional/non-QM brokers and lenders - if you do a full suite of products for investment properties, I'm curious to know how many deals start as conventional / or non-QM non-DSCR (such as Bank Statement, Asset Depletion, etc.) but then hits a snag in qualification and then moves/qualifies as DSCR (instead of deal getting completely canceled). Do a lot of the borrowers that miss qualifying at underwriting end up switching to a DSCR loan or is that portion just ended up canceling the deal?

Also curious if there have been any changes in the above answers in the current climate vs. last year etc

I would bake in a management fee and separate management agreement where the landlord partner gets basically a salary or preferred return for the management duties, but with the flexibility to change the arrangement to a new manager if needed w/o messing with the ownership structure.  Go 50/50 or pro rata on ownership percentage and capital contribution

Yes but wouldn't the principal paydown be much less on the 30-year fixed option? (similar total payments, but you are paying much more principal on the 5-year balloon option).  Plus there is the refinancing risk at 5 years vs. 30 years

First payment splits I'm seeing: