BRRRR method issues. What's your experience with this method?

[Alejandro Saenz]

Hi, I am new here and new to real estate investment.  I just wanted to say hello and introduce myself.  My wife and I decided to start studying and learning about real estate investment after our jobs were highly affected by the pandemic.   She has a real estate license in California that she got right before COVID started.  She has successfully sold 4 properties in her first 6 months.  This inspired us both to pursue real estate investment and for me to get a real estate license as well.  

We have been studying a lot on the BRRRR method: listening to podcasts, reading books, articles, etc. We have used the tools and analysis calculators here in BP but keep hitting a wall with the BRRRR method....finding discounted and/or distressed properties that could work using this method. Following the BP 30-day Real Estate QuickStarter Guide we selected a niche, market and strategy. Before contacting people in the markets we are looking at and trying to build a team (as David Greene suggests in his podcasts and book) we started doing "test" analysis of different neighborhoods and areas in these markets.

However, we found different problems to be able to apply the BRRRR method:

1) Discounted/distressed properties with a great price however in a neighborhood that the rent kills the analysis numbers (we wouldn't be able to have a higher rent based on comparable of the area being analyzed) With the rehab and all expenses into the project we would end up with a no-cash flow property or even negative. 

2) Properties that need a lot of fixing/rehab, however in an area that the ARV would be much higher to the comparables of the neighborhood. For example, we found a $55K SF that needs around $25K of rehab but then the houses on the area are valued at a range of $70K to $80K. This from our point of view, makes it difficult to follow the rule that states that "no bid price at the beginning of a project should exceed 70% of the ARV minus estimated repair costs." Which makes it a very difficult project. If the houses in the neighborhood were listed higher then it would be something to consider but we have not been able to find this.

3) Overpriced properties in good neighborhoods with potential low vacancy and with potential good/better tenants (the "no headache" type of area). The listing price is so high that any upgrade that could possibly increase the value of the property would put it higher against other properties or at the same level, making refinancing difficult or the BRRRR method not as profitable as it should be.

We would love to hear comments from people here about what we are experiencing and obviously on their personal experiences and help each other (advise, research, experiences, etc.) 

Thank you and excited to be part of the BP fam.

[Zach Westerfield]

@Alejandro Saenz First off, there is a tradeoff in BRRR and BRRR calculators to consider. They higher the ARV, the higher the potential loan amount at Refi. At some point, the Refi loan my kill the cash flow. Dont let this kill your interest in the deal, you can take a lower loan amount to make the property cash flow, and tap the equity in other ways. Or you could sell the property as a flip.

What you are touching on is the key issue for almost all real estate investors - finding good deals. Keep in mind, many books were written and many "experts" were made after 2009 - in a market where deals fell out of the sky. That market doesnt exist anymore, but you can find deals. However, the competition is stronger than in the last decade by far. If its an easy deal to find, someone else has already found it. In fact, if you find a deal, go ahead and ask why someone else hasnt bought it. I have found deals in this market, and several of them on the MLS. However, they were major rehab projects which I wasnt afraid to tackle.

Once your research and learning gives you the basics, focus on a niche that set you apart. for me its old houses, and houses in really bad shape. The other option is start your own direct marketing, but this is competitive as well, and involves learning a whole new business. The secret on real estate is out, and nearly every market is saturated with buyers. The good thing is, unlike the stock market real estate is local, and there is no national exchange. Look for properties in less crowded areas. I have been finding properties in small towns where i grew up, where i intimately know the area. 

Finally, remember a deal doesnt have to be a perfect BRRR to be a good BRRR. The goal is to limit you capital investment, to maximize your return on capital. That doesnt mean eliminate your investment. In the standard way of buying rental properties, you have to put 25% cash down. So any deal you do that allows you to put less than 25% is better than the norm. If you leave $10,000 in a deal that cash flows $150 per month, thats still an 18% cash on cash return. Try getting that in the stock market.