BRRRR method - can it be done indefinitely?

Question

I recently learned about the BRRRR method as an alternative to just getting traditional, conventional mortgages on rental properties, since I heard that there's a limit of something like 4-10 mortgages you can have taken out in your name at a time. It sounds like a good strategy to me, as long as I'm patient enough to save up cash for that first property (assuming I'm not interested in private/hard money), and I'd have the advantage of being able to offer cash on purchases. My question is: is there a limit to the number of properties you can have refinanced or have a heloc (or equity loan) against? I'm evaluating this as a way around being limited to 4 loans, so is this a process that would let me leverage as many properties as I want?

Steve Vaughan · Answer

Just don't forget the true acronym for BRRRR which is BRRSROPS R (if you care to again).S is for seasoning. If you buy with cash and don't lend it to yourself from another entity - wait at least 6 months.RO is for Rip Off fees. $5k. Thank you sir, may I have another.PS is for Pain and Suffering that a refi is. R is for Repeat (if you care to again). The truth!

Alexander Felice · Answer

@Brian Garrett @Nicole A. oh sorry, yes! 1. little to no economies of scale. Meaning, if I have 50 SFR, that's 50 roofs, 50 drives to check on units, 50 loans, 50 closings, etc. Now I can buy one type of paint for all the houses, and some other small things, but having 50 units is 50 separate units. there are just better ways to do things 2a concentrations of geography. My houses are on the east coast, I'm not SUPER worried about hurricanes, but they have affected my personal life and business to a scary degree. One town-wrecking tornado destroys my entire portfolio. As my portfolio increases in that area, my weather risk goes up. I don't self manage, but I have to consider what my PM is required to do2b using separate geographic locations doesn't help as it then reduces my economies of scale and my specific expertise. I can't know 3 markets as well as I can know 1. I have a GREAT PM and contractor but it's unlikely I'll have that in every town, my efficiency reduces if I spread out (with SFR) 3 concentrations of industry. Remember a few years ago when the real estate market took a dive? ;) well if you owned a bunch of SFR in Vegas, you got hit hard. If all my money is pooled into one type of asset, in one or a few small towns, that's risky. As a banker this is risk we talk about all the time, it doesnt' matter when you have 4-5 units, or even 10 maybe, but as your net worth increases and the percentage of it is concentrated into one industry, one asset, and one location, that's risky. 4. inefficiency in procedure. If I had unlimited capital I still couldn't go out and buy 50 units all at once. It's a one at a time gig, almost always. That's 50 times I need to house search, negotiate, underwrite, the refinance (always at changing rates), and more I can't think of right now. Like I said I only have a few and it's already starting to be annoying. There is more, but some quick ones. Scale is important to business and SFR is really hard to scale, maybe some of my risk analysis is over reaching...because it's my job, but I still think it's important to look at the longest term possible. It's unnecessary and inefficient to have 50 SFR, just buy an apartment complex instead. I in no way mean to dissuade use of the BRRRR system. I love it and use it, and it CAN be done indefinitely, but as scale increases other methods become more ideal

Nicole A. · Answer

@Steve Vaughan There are some smaller banks out there that let you cash-out refi as soon as the property is fixed up and rented out.

Andrew Syrios · Answer

The number of Fannie loans you can have maxes out at 10 and you can only have one FHA loan at a time. But you can get pretty much unlimited loans from community banks and others. So yes, the BRRRR method, if done right, can be done pretty much indefinitely.

Redgy Saint-Germain · Answer

@Sam T.I honestly wouldn't start worry about it until your 9th property. There a plenty of creative ways to finance your units :)

Joe Splitrock · Answer

I totally agree. Closing fees can be a significant and are often left out when people run the numbers. Plus the other implication of equity stripping is lower cash flow. Maybe you can scale faster, but you are running a higher debt to equity ratio. There can also be some problems with being able to pulling cash out. People want to put $10,000 into a property and expect to get $50,000 back in equity three months later. Some appraisers will see right through this. They will argue that you only improved the property $10,000 so the value went up $10,000. You really need to buy well under market, taking into account current condition value. Just assuming some new carpet and paint will improve the value 5X your investment may not be realistic. The acronym definitely makes it sound easier than it may turn out to be.

Brian Garrett · Answer

@Alexander Felice Out of curiosity what are those big problems you see by scaling using BRRRR?

Sam T. · Answer

Thanks for the input everyone. I'll just stick with conventional mortgages until I run out and cross that bridge when I get there then. Won't be for a few years anyway.

Alexander Felice · Answer

Much harder to do this on large apartments anyway. BRRRR works when you can buy at significant discounts through distressed properties. That's much harder to do with large apartments, especially to repeat. @Steve Vaughan I feel your pain but can't agree. I LOVE The delayed financing exception, and thanks to the numbers in my market, my cash outlay usually equals 75% LTV anyway. Last one I did took 9 weeks close-to-close. Also, I underwrite for a living, so I enjoy doing loans...treacherous though they certainly are!

Brian Garrett · Answer

@Alexander Felice Yeah I completely understand your points I didn't realize you were strictly talking about SFH's since you can technically scale as big as you you'd like by applying the same overall BRRRR strategy to MFR's, Apartments, etc.