Is it me or are more investors against the BRRRRR method?
Most Popular Reply
Ryan MurdockPro Member
Rental Property Investor · Austin, TX · Member since 2016 · 1k+ posts · 1k+ votesI've done plenty of BRRRR's at 75-80% LTV and still been able to pull 100%+ of my original money back out. I've also had deals where I've had to leave some money in too but it was still a great return on a cash flowing property.
Maybe in an ultra-hot market you could just sell outright (flip) and collect the extra cash but now you're looking at significant tax implications and there's no long term residual income.
Whatever works best for you, your goals, and your situation.
79 Replies
- 4yJonathan GreeneBusiness MemberReal Estate Consultant · Madison, NJ · Member since 2016 · 6k+ posts · 7k+ votes
Everyone loves every shiny new object that passes by. When BRRRR was coined, everyone thought it was sliced bread with rosemary, not realizing many of us had been doing that for years and it was just called investing. What are people saying about being against the BRRRR model? You can't really be again it, you can just choose not do it. You can adjust and do what I call reverse BRRRR which is buy with tenants, rent, and wait for it to marinate and then rehab, refinance, but that's leaving more money in the property. I don't really know what you are referring to in terms of people against BRRRR. Investing is evaluating properties and the methods you can use to get them at the best price and make the most money. You use all the strategies over your career.
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Nadir M.:
What's everyone take on the BRRRRR method? I think it's a fantastic idea but I'm beginning to hear more and more investors against it. Shouldn't be leaving money in your property. 75% LTV or even 80% isn't enough. Losing more money in long run. I disagree
Nope. You're losing money with it exponentially.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes4y
Originally posted by @Nadir M.:
What's everyone take on the BRRRRR method? I think it's a fantastic idea but I'm beginning to hear more and more investors against it. Shouldn't be leaving money in your property. 75% LTV or even 80% isn't enough. Losing more money in long run. I disagree
Not 'against' a process that's hundreds of years old as long as there is full disclosure.
Hard money risks aren't emphasized enough. These are expense and risky. The HML will take your house if you don't refi on their timeline.
Seasoning. Wait, what? You mean I can't refi with the most favorable conventional terms right away? While your property is seasoning for 6-12 months, the clock on your HML is winding down.
Finance costs. These aren't discussed enough either. Refinancing isn't free. Financing x2 can cost $10k. Just disclose all the costs and time.
- 4yRyan MurdockPro MemberRental Property Investor · Austin, TX · Member since 2016 · 1k+ posts · 1k+ votes
I've done plenty of BRRRR's at 75-80% LTV and still been able to pull 100%+ of my original money back out. I've also had deals where I've had to leave some money in too but it was still a great return on a cash flowing property.
Maybe in an ultra-hot market you could just sell outright (flip) and collect the extra cash but now you're looking at significant tax implications and there's no long term residual income.
Whatever works best for you, your goals, and your situation.
- 4yJoe S.Pro MemberInvestor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes
Originally posted by @Nadir M.:
What's everyone take on the BRRRRR method? I think it's a fantastic idea but I'm beginning to hear more and more investors against it. Shouldn't be leaving money in your property. 75% LTV or even 80% isn't enough. Losing more money in long run. I disagree
As has been pointed out above the Finance and refinance fees can add up into the tens of thousands of dollars. If you cannot get your refinance done the lender can swipe your freshly rehab house. And yes before it was called BRRRR it was simply called investing LOL. As far as people being against it I have not actually heard a lot of people against it so I'm not sure where that's coming from. I have used it quite a number of times in my investing, but as with any invest model use it when and where it fits the best.
- Investor · Member since 2020 · 201 posts · 92 votes4y
They are either afraid of this concept because they lack understanding, or they don't want competition. I believe that BRRRR investing is the best way to scale and build your portfolio. It's not easy, but you just have to work on finding the right deals and be patient, yet aggressive.
- 4yTheresa HarrisPro MemberMember since 2019 · 15k+ posts · 11k+ votes
I think it depends on the person. There is a cost to refinancing as well as a max on how much you can borrow.
- Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes4y
Originally posted by @Nadir M.:
What's everyone take on the BRRRRR method? I think it's a fantastic idea but I'm beginning to hear more and more investors against it. Shouldn't be leaving money in your property. 75% LTV or even 80% isn't enough. Losing more money in long run. I disagree
I don't think there is anything wrong with it. Syndicators and well established professionals do it all the time....they make their investors happy when they return all their money and continue to earn coupon payments....and the sponsors ern a boatload of incentive fees. The market has been perfectly conducive to this strategy for the past ten years.
I think what some people caution against is when someone new to RE attempts to BRRR without any experience...especially long distance BRRR.
- 4yKenneth GarrettPro MemberInvestor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
The BRRRR concept works great. You just need to know all the rules before you start. I was BRRRR'g before I new it was called that. In today's market finding deals that work are definitely more difficult. Leaving a few thousand in a deal is no big deal provided you are prepared to do so. I've always thought if I can get all my money back in the first 12-18 months that's a total win. No money in and cash flow while tenants are paying my mortgage, insurance, taxes, etc and I get mortgage pay down, depreciation of my asset and appreciation. What's not to like. Like any investment you need to be prepared for the unexpected. Surprises in rehab costs, waiting time to refinance, etc. First and foremost it needs to be a good deal.
- Member since 2020 · 10 posts · 6 votes4y
@Nadir M. It's funny you asked this, I just typed in BRRR on tik tok and the top posts were all negative about BRRR. The idea is that after you fix it up you should sell and put your money into a bigger/better property, so prettt much flip until you get to your goal. I personally love the idea of BRRR being a firefighter I don't have too much extra capital so it's nice to recoup some $ for the next property I buy while still receiving income from the BRRR property
- Asheville, NC · Member since 2017 · 385 posts · 274 votes4y
@Joe Villeneuve I have read a lot of your posts and respect your opinion. Can you expand on how you lose money exponentially? If you are pulling all your cash out at the refinance how are you losing money?
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Jon A.:
@Joe Villeneuve I have read a lot of your posts and respect your opinion. Can you expand on how you lose money exponentially? If you are pulling all your cash out at the refinance how are you losing money?
First, you're not pulling your cash out in a refi. If it was your money, you wouldn't be paying for it. It's still the bank's money, and they are selling it to you as usual...just after the fact instead of upfront.
Second, when you refi you're still leaving money available in the property..the remaining equity. Look at it this way, the value of the equity in any property isn't set at the face value of the equity...it's actually the value of the property. Those two numbers represent a ratio of equity to PV. The higher the ratio, the more valuable the equity is. For example: If you have a PV of $100k, and the equity is 20% (where most start at), the ratio is 1 to 5. However, when that same property gains equity (appreciation and rent paydown) equal to 40% (mostly through appreciation), and the PV would then be around $120k, that ratio goes down (yes, down) to 1 to 3, and is then less valuable.
Third, while all this is happening, your rent in the original property (being refinanced) goes down.
Four, if you sold the property instead of refinancing it, that equity would go back to 1 to 5 and, you should be able to double your CF.
- Realtor · Rochester Hills, MI · Member since 2018 · 27 posts · 18 votes4y
@Joe Villeneuve
And yet there are still tons of investors using this strategy and have great success with it.
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Johnathon Sesi:
@Joe Villeneuve
And yet there are still tons of investors using this strategy and have great success with it.
Correct. Measure the differences and the success using the BRRRR method is limited and minimal compared to the alternatives. It's a poor use of cash and leverage, but it does have gains...just much smaller and slower gains than the alternatives. To me, and many others, leaving money on the table...and lost opportunities is still a form of losing.
- Asheville, NC · Member since 2017 · 385 posts · 274 votes4y
@Joe Villeneuve I understand number 1. Number 2 just sent me down the rabbit hole of trying to understand PV which I am assuming means present value. I think I understand number 3 as it relates to number 2 but with number 4 you don't have the assett anymore. I was thinking the whole point would be to hold the assett with as little money in it as possible and continue to paydownn the mortgage and cash flow in the meantime. So doesn't that just mean you are flipping homes? Nothing wrong with that but aren't you missing out on the long term accumulation of wealth? I also don't understand why you would consider 75-80% LTV to be a position of leaving money on the table. The only other way to hold the property would be to pay cash and then rent which I would think would be a horrible ROI. Maybe I am missing something. Or maybe it is just that some investors don't need the banks? Thanks for your response.
- Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes4y
Originally posted by @Jon A.:
@Joe Villeneuve I understand number 1. Number 2 just sent me down the rabbit hole of trying to understand PV which I am assuming means present value. I think I understand number 3 as it relates to number 2 but with number 4 you don't have the assett anymore. I was thinking the whole point would be to hold the assett with as little money in it as possible and continue to paydownn the mortgage and cash flow in the meantime. So doesn't that just mean you are flipping homes? Nothing wrong with that but aren't you missing out on the long term accumulation of wealth? I also don't understand why you would consider 75-80% LTV to be a position of leaving money on the table. The only other way to hold the property would be to pay cash and then rent which I would think would be a horrible ROI. Maybe I am missing something. Or maybe it is just that some investors don't need the banks? Thanks for your response.
For Number 2, he's basically saying that if your property appreciates 20K, then you have some dead equity on your hands. Instead of having a 1 to 5 equity to property value ratio, you now have a 1 to 3 ratio. Assuming your periodic cash-flow hasn't changed, that equity isn't as valuable on a per-dollar basis as back when you had a 1 to 5 ratio.
- Rental Property Investor · Philadelphia · Member since 2020 · 4 posts · 3 votes4y
@Steve Vaughan Thank you. Seasoning. Why don't they ever talk about seasoning!
- Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes4y
@Nadir M. Who cares. Focus on YOU and EXECUTE!
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Jon A.:
@Joe Villeneuve I understand number 1. Number 2 just sent me down the rabbit hole of trying to understand PV which I am assuming means present value. I think I understand number 3 as it relates to number 2 but with number 4 you don't have the assett anymore. I was thinking the whole point would be to hold the assett with as little money in it as possible and continue to paydownn the mortgage and cash flow in the meantime. So doesn't that just mean you are flipping homes? Nothing wrong with that but aren't you missing out on the long term accumulation of wealth? I also don't understand why you would consider 75-80% LTV to be a position of leaving money on the table. The only other way to hold the property would be to pay cash and then rent which I would think would be a horrible ROI. Maybe I am missing something. Or maybe it is just that some investors don't need the banks? Thanks for your response.
The property isn't the asset. Your equity is. The property is just the vehicle your asset is riding at that time. When you sell, you retain the asset...you just moved it to a different location. When you refi, you're paying for the use of that asset. You're using that asset as collateral, and you are paying for new money that the bank is selling you.
- 4yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
Originally posted by @Tony Kim:
Originally posted by @Jon A.:
@Joe Villeneuve I understand number 1. Number 2 just sent me down the rabbit hole of trying to understand PV which I am assuming means present value. I think I understand number 3 as it relates to number 2 but with number 4 you don't have the assett anymore. I was thinking the whole point would be to hold the assett with as little money in it as possible and continue to paydownn the mortgage and cash flow in the meantime. So doesn't that just mean you are flipping homes? Nothing wrong with that but aren't you missing out on the long term accumulation of wealth? I also don't understand why you would consider 75-80% LTV to be a position of leaving money on the table. The only other way to hold the property would be to pay cash and then rent which I would think would be a horrible ROI. Maybe I am missing something. Or maybe it is just that some investors don't need the banks? Thanks for your response.
For Number 2, he's basically saying that if your property appreciates 20K, then you have some dead equity on your hands. Instead of having a 1 to 5 equity to property value ratio, you now have a 1 to 3 ratio. Assuming your periodic cash-flow hasn't changed, that equity isn't as valuable on a per-dollar basis as back when you had a 1 to 5 ratio.
Correct. When you refi though, your CF will change...it will go down since you are getting a larger loan.
- 4yJoe S.Pro MemberInvestor · San Antonio · Member since 2020 · 3k+ posts · 3k+ votes
Originally posted by @Joe Villeneuve:
Originally posted by @Jon A.:
@Joe Villeneuve I have read a lot of your posts and respect your opinion. Can you expand on how you lose money exponentially? If you are pulling all your cash out at the refinance how are you losing money?
First, you're not pulling your cash out in a refi. If it was your money, you wouldn't be paying for it. It's still the bank's money, and they are selling it to you as usual...just after the fact instead of upfront.
Second, when you refi you're still leaving money available in the property..the remaining equity. Look at it this way, the value of the equity in any property isn't set at the face value of the equity...it's actually the value of the property. Those two numbers represent a ratio of equity to PV. The higher the ratio, the more valuable the equity is. For example: If you have a PV of $100k, and the equity is 20% (where most start at), the ratio is 1 to 5. However, when that same property gains equity (appreciation and rent paydown) equal to 40% (mostly through appreciation), and the PV would then be around $120k, that ratio goes down (yes, down) to 1 to 3, and is then less valuable.
Third, while all this is happening, your rent in the original property (being refinanced) goes down.
Four, if you sold the property instead of refinancing it, that equity would go back to 1 to 5 and, you should be able to double your CF.
Does your calculations cover capital gains, realtor fees, closing costs?
- Asheville, NC · Member since 2017 · 385 posts · 274 votes4y
@Tony Kim and @Joe Villeneuve thank you for the clarification. I understand the explanation now.
But I have to add that a lot of your posts mention letting your tenants pay the operating costs and the paydown of the loans you are using. Therefore, it seems contradictory to me that this is your viewpoint on the BRRRR process, although I understand it. I suppose it really just comes down to your goals and intentions. Maybe the framing of the original question is too broad.
- Real Estate Agent · Fort Walton Beach, FL · Member since 2018 · 219 posts · 275 votes4y
@Nadir M. As a concept and an investment strategy, I have nothing bad to say about BRRRR. Where is becomes a little hairy is the actual execution or how plausible it is to follow the strategy successfully in real life. As a real estate agent I work mostly with investors (many buying "blind") on the Gulf Coast of FL. A lot of they would LOVE to BRRRR, but realistically cannot do so given the circumstances. I'll take the "rehab" part, as an example. You will definitely get a way better deal if you buy and rehab, rather than buy "turn-key". But unless you actually live on the Gulf Coast of FL and have time and the resources to rehab efficiently, it is not as easy as just going out and "hiring a crew". So you either end up paying a huge premium to someone who will supervise and organize your rehab (spending $$ in the process) or you may have to forego the "rehab part", which in turn means that you pay higher price for the purchase up front.
The refinance part is not as clear cut as the model suggests either. If you are looking at condos, vacation properties, etc (the type I deal in and that investors also like), you run into non-warrantable properties more often than not. Rates are higher, many lenders don't touch them or only offer portfolio loans, etc. That doesn't mean those properties do not cash flow or will make bad investments. To me it just means that the BRRRR model is not a "one-size-fits-all" and may need to be tailored to the circumstances and the specific needs of each investor. Personal example: I love studio-type vacation rental condos and have two. I bought both with all cash. Yes, my cash is tied up in them. I cannot refinance them (I did rehab) because they are both under 500 sq ft and non-warrantable and banks won't touch them. That said, both have appreciated in value a lot (one of them over 100% in 2 years) and I get 30%+ cash on cash return (I manage them myself). I am making a conscious decision to proceed that way, not because I disagree with BRRRR, but because there are other factors involved. I also really like owning both units and the amenities that come with them, which I use.
Last year I did a rehab (just buy-fix-sell) and did not rent it. Again, not because I disagree with the BRRRR strategy but because it just wasn't practical to apply is fully in that case.
If you have an opportunity where the strategy is fully applicable the way it is intended, good for you and definitely go for it :-).
- Contractor · San Diego · Member since 2018 · 34 posts · 32 votes4y
IMO BRRR is a long term investment to build wealth. You need to have equity in most properties to get cashflow, and banks want you to have some equity. If you are flipping, you're not investing, you're doing a deal...more like a business.
I envy you folks doing this in affordable areas. I live in San Diego CA. Beautiful weather, a vacation mecca. But a basic 3/2 in a decent neighborhood is a million dollars nowadays. You want to buy, rehab and flip, it takes a ton of coin. And thanks to HGTV there's way too many people doing it. And many of them overpay. Luckily a rising market makes them look like geniuses.
Back in the last couple RE crashes when foreclosures were rampant I picked up houses, duplexes and triplexes for bargain prices. I'd buy them, rehab them, get tenants and refi back out to 75% LTV. I still own several of these places. Over time I have huge cashflow, and the values have jumped up 7x over what I paid for them. This is an investment, and will create a legacy of cashflow for generational wealth. You don't get that with flipping.
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