BRRRR - Why does that seem so easy?

[Simon Stahl]

Hi everyone

I'm just starting out and looking into BRRRR as a strategy. From what I read so far, his should be really easy. Too easy actually. I feel like I am missing something.

This is how I imagine it would work for me. FYI, I got a management company at hand that would help me find the right property, do the rehab and screen tenants. 

Buy

It looks like I could get 100% of the funds from a hard money lender. They are all over the internet and I think you cannot get much better deals from private lenders. I found some with 1 or 2 points at the beginning and then about 10% to 12% rate per year. I think that is pretty decent.

Rehab

As I mentioned before, the management company would handle the rehab. I would finance it with the initial loan from the hard money lender.

Rent

Also handled by the management company. They even guarantee to find a tenant.

Refinance

Should be no problem. I now got a property that is worth more than it was in the beginning, so I should be able to get enough money out of the refinance to pay off the hard money lender. Only problem that I see here is if it gets appraised lower than what I was hoping for. In worst case, I think I would still be able to pay off at least most of the initial loan.

Repeat

Yay, that was fun, let's do it again :-)

Am I being too naive here? Is there anything that I got wrong? 

Thanks

Simon

[Mike H.]

As always I have always loved Joe's mantra. :-)

If you're looking to grow a portfolio, everything you do has to be put together with the effect of preserving every dollar of your capital.

In terms of the post though, somehow you have defined some magical management company that will do all these beautiful things - find deals at 70% LTV, find the contractors, manage the rehab, and get the homes rented. NOBODY does that.

The reality is that each of those things is a separate person

1) Wholesalers would find deals. Some good some not so good. How do you know which one is which? There's definitely some risk there.

2) Contractors and manage the rehab - thats called a GC - General Contractor. Add 15% to your rehab budget. Once you do, now try to hit the 70% number.

3) Getting them rented. Thats called a property management firm. They charge 10% of the rent plus one month's rent to lease them up. Not cheap.

By the time you add in all those costs, good luck finding any that make the numbers work.

The closest thing to this magical management company that you suggested is called a turnkey operator. And guess what,  turnkey operators charge you full on retail for those types of deals. So a 100k house will cost you 100k and when you get a loan you'll only be able to get 75k for that 100k. It'll cost you 25k out of your pocket for every deal. And there won't be a way to refi that back out and get anything back.

So how much money would it take to buy 10 homes? 250k. 50 homes. 1.25 mil

BRRR doesn't work from a numbers standpoint if you're parceling out all the effort. Thats where the investor comes in. They need to find the deal, manage the rehab, lease the place up. If not, they won't make money. Or they'll need to put in large sums of money to build a portfolio.

And even when you do all that, you're still going to end up coming out of pocket 6 to 8k per deal. On a 100% financing deal at 70% LTV - which is extremely tough to find these days, you are still going to come out of pocket 6k to 8k per deal. Point, closing costs, holding costs - all come out of your pocket and are NOT included in the hard money loan.

So how many houses do want to add a year? 5? You're going to need 30k to 40k to do it. At some point your rental income should grow enough to where you it will start feeding some of that growth and then hopefully all of it.

But on a typical deal where you're financing 100% of the 70% deal, you're looking at having a gross profit of about 450/mo and a net profit of about 225/mo (150k homes that you're all in at 100k and rent for 1400).

So if you want to do 10 houses a year, you're going to need 60k to 80k in rental income a year or else you're going to have to dip into your pocket. And to make that, you're going to need 25 to 30 houses......

So if you really want to grow a portfolio fast, I hope you have a lot of money...... The early years are incredibly tough. And you'll need to put every penny you make back into the business if you really want to scale some point in the future. Its not easy.....