Flaw in the BRRRR strategy?

Question

Watched your webinar last night and, perhaps I missed it if you mentioned it @Brandon Turner, but one important consideration for me when I use the BRRRR strategy is price point, not only of the purchase price, but more importantly, of the ARV.

In my model at least, the BRRRR strategy will only work on properties with an ARV of at least $100K because when you go to do the cash-out refi, banks typically aren't interested in doing loans for any less than $70K. There just isn't enough money to be made from loans smaller than that.

Consequently, since most banks only offer a cash-out refi of 70%-75% of the property's ARV, the ARV's going to need to be pretty close to $100K to meet that $70K threshold. So, that limits my acquisitions to properties only in the range of $60-$80K, with a $10K-$30K reno budget + hopefully a small market appreciation to push me to the $100K ARV mark.

This is something I think is important to mention to newbies who may be thinking about buying the cheapest property possible, say $40K, and then sinking $25K into a reno, and now have $65K invested and can't find a bank that will give them a cash-out refi. Now, they're dead in the water and have all their capital tied up and will likely be forced to flip it, unless they go to private lenders or perhaps pay a very high rate at a bank.

Now of course there are plenty of other creative refi options available, but I'm just not experienced enough yet to be able to use them. ;) Gotta watch more webinars!!

BTW-- I also got lucky on my last deal since I was able to find a bank that would give me an immediate cash-out refi, although at a 1/8 point higher rate and at only 70% of ARV rather than the 75% I've achieved on another property. Although that cut slightly into my cash flow and locked-up a bit more cash (as equity) than I wanted, the numbers still worked. I just couldn't wait six months or a year in a rapidly appreciating market like Tampa, FL.

Joe Villeneuve · Answer

I tell REI that "money isn't a noun, it's a verb. When it becomes a noun...you lose"

Joe Villeneuve · Answer

@Mark J. Cash out where I am is 75%. Minimum loan amount is $50k. What you are describing as a "flaw" isn't a flaw...it's a restriction or limitation based on the market you are investing in. BRRRR doesn't work on every property, in every market. What does?

The issue with the BRRRR is that it isn't an entrance strategy...it's an exit strategy, and the problems are the limited number of loans you can get, and depending on the appraisal.

Mark J. · Answer

Thanks @Joe Villeneuve-- agreed it's not a flaw, it's a limitation. But as an important limitation (for many markets & properties), I haven't seen it discussed as prominently as it probably should be. As a freshly minted newbie, I didn't know about this refi limitation until I started shopping around for rates near the end of the renovation project. Not so smart, right?! I called & visited over 25 banks, from small local ones to large chains to get the rate/terms I wanted. Fortunately, the numbers still worked out for me and I met the minimum refi amount, but I think it's something that newbies need to be aware of as part of the BRRR strategy. Perhaps call it the QBRRR model. Q for Quotes. ;) Hah! Doesn't really roll off the tounge now does it?! ;)

Also, would you mind sharing the names of the lenders who do cash-out refis at $50K? That would expand my options for sure. Do they offer rates/terms similar to higher loan amounts? Not sure I understand / agree with your assertion of BRRR as just an exit strategy. The power of BRRR is that it's a total strategy: entrance, process, exit, and next opportunity.

David Faulkner · Answer

The take home message, and it is a good one, is to think through and validate every part of your plan from entrance to exit to make sure it is sound BEFORE entering ... it would be ashame to get through most of the first steps only to find you are pinched in on your planned exit. This still happens from time to time even with sound planning and validation, and that is where having multiple exit strategies becomes important, which I believe a properly executed BRRRR strategy should have.

Also, good point on the low end limitation ... I'd also say there is a high end on the price limitation in that as you go up in price, the cash flow will not support your cash out refinance (at least initially, if you want to stay cash flow positive post refinance, which most do). So the low end price limit (based on ability to refinance) and the high end price limit (based on cash flow) gives you a defined pricing "sweet spot" for BRRRR.

Joe Villeneuve · Answer

@Mark J. BRRRR is only an exit strategy because it is limited as an entrance strategy due to the limits in the number of loans. If your limit is 10 loans, you can exit out of the 10th, but where do you go then.

The key to REI is to never spend your money...use it on an unlimited number of properties, but never spend it.

Mark J. · Answer

Oh, and @Joe Villeneuve - I like how you phrased the difference between "using" your money and "spending" your money. Money as a recyclable, renvenue generating resource is definitely the best strategy (particularly when there's a limited amount of it in my case!) ;)

Account Closed · Answer

@Mark J. that is great information.

Joe Villeneuve · Answer

I know them too. It doesn't help in the end. There are a number of new requirements and restrictions with that "blanket" loan...depending on the source of the loan. One usual problem is that blanket loan ends up having a higher payment than the cumulative payments of all the properties/loans if they were individual loans. You can keep going, but you drop CF more than it's worth.

The better solution is to get a credit partner. When the credit partner runs out of available loans, you get a different credit partner. This also allows you to do a number of simultaneous loans/properties, based on the number of credit partners you have.

Another way is to have a new cash partner buy into the deal's equity. If the deal was originally cash, then you have 100% equity. After the cash partner buys in, you still have 100% equity, so at any time you can refi as well.

Flaw in the BRRRR strategy?

Flaw in the BRRRR strategy?

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