Curious about the 3rd R in the BRRRR strategy. Theory vs Reality

[Eric Veronica]

I am a bit curious about investor's real world experiences in the refinance portion of the buy, renovate, rent, refinance, repeat process. In theory this is a great model. Buy a slightly distressed property for $100,000 with $20,000 down. Spend $10,000 in updates. Painting, minor repair, new carpeting, updating lighting fixtures, etc. Wait 6 months and then do a 75% LTV cash out refinance based on an assumed value of $150,000. This gives you a loan amount of $112,500 which leaves you with $30,000 in your pocket (assuming $2,500 closing costs). You have completely reimbursed your $20,000 in initial down payment and $10,000 in renovations and now leaves you with money for next down payment and renovations..... Yay!!!!

The success of this process is based on a very big assumption that your "great deal" and your $10,000 in renovations is going to equal a $50,000 increase in value.  Expecting an appraiser to increase value by 50% from a sale 6 months prior is a pretty big ask.  Sure this was not as difficult 5-6 years ago when you could buy foreclosures at a heck of a discount but that market doesn't really exist today.  Also I am sure this was not as difficult in the last couple years when values nationwide have risen at a pretty rapid pace.  Now we are in a market where values seem to be stagnating in most markets.  

Interested in hearing investors who have been burned by a low appraisal and also those who have successfully used this method  to turn a relatively small amount of money into a large number of investment properties.  

[Michael Noto]

@Eric Veronica We have done 6 total BRRRR deals recently (within the last 2 years). 3 of them we have gotten all of our cash out, but 3 of them we were into for $3,000, $5,000 and $8,000 approximately. We will be able to get all of our money back out within 18 months on those deals.

The way we look at it is we are way ahead of the game if we own a property where we have taken care of all of the deferred maintenance and all of the cap ex during the rehab phase and in 6-18 months will have $0 into the deal out of pocket. 

From what I see with people trying to get into BRRRR is they go into it expecting that full refinance payoff on every deal. Sometimes because of low appraisals or budget overages (both have happened to us) that doesn't happen. Just the nature of the business.