Is BRRRR overhyped in the current market?
Jordan MoorheadBusiness Member
Real Estate Agent · Austin, TX · Member since 2015 · 5k+ posts · 3k+ votes
The Moorhead Team5140 Reviews
Is BRRRR overhyped in the current market?
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
7yMy issue with people trying to implement this strategy is they have no money. Buy, Renovate....it is a capital intensive strategy, that those with a few hundred grand liquid can implement. People come to me week in and week out that are broke...Thats simply not a strategy they are adequately funded to implement. No money, but a primary residence with 3% down instead.
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167 Replies
- 7yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Originally posted by @Mark Sewell:
Jay, yes I hear you, this resonates. I came from equipment lending (think big yellow iron) and I get the concepts, and even ran into it. We never did blanket liens, but we would quite often find clients that had them, having financing some trucks or iron or something at some point with their banks. And sure enough, these guys had no idea. And worse, they would never remove the liens, even after the debts were paid off... I never could get how they could ever explain that to any client in a way that could make sense.
We had to rewrite a ton of debt from 2009 onward … man, that was not a fun time to be in that line of work. The big banks were there to lend them the cheap money in the good times, but they had zero problems leaving them to twist in the wind when things go south.
Yup always amazed how you could make a call and a brand new dozer or excavator was delivered in a few days. kind of like buying RV;s
and Airplanes have great leverage I bought mine with 5% down and 5% 20 years.. but we did have to qualify.. And we did have to send in annual financial statements. the US runs on Credit in all forms and fashion NO doubt..
- Investor · Houston, TX · Member since 2017 · 1k+ posts · 871 votes7y
@Jay Hinrichs in a lot of ways, that flavor of the finance business was simpler -- the iron was a work tool that helped you earn more money. It is just more capacity... dig more, earn more. As long as the credit folks understood what it is you were doing (and generally they did), then it was pretty straightforward. Nobody knew the value of the collateral better than we did, because we sold it, fixed it, and resold it. Our valuations team was pretty dialed in.
We didn't touch anything that didn't generate dollars in a business we knew something about. In fact, it was strange in that we would not finance people that were just buying toys, weekend warriors with their little ranchitos… no income involved, we weren't interested. I once financed three units for a certain NFL draft pick (#1 overall) down here, and that was like pulling teeth. All he wanted to do was build his credit for later, when his playing days were over. He had gotten a $27 mln rookie signing bonus a couple years before, so we knew he had the money, but still. In the end we got it done.
- Real Estate Investor · Saint Paul, MN · Member since 2017 · 543 posts · 474 votes7y
@Jordan Moorhead This is extremely difficult to do in the Twin Cities right now if you want to get 100% of your money out. There are opportunities but they are few and far between, and those that do exist tend to be in C type of neighborhoods. I personally have one right now that I am finishing up but may have to dig up the main water line, which will change the picture entirely! A friend who has been having solid and consistent results in flipping in the 400-600k range has recently decided to take a hiatus from the business due to a lack of inventory in the Twin Cities.
- Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes7y
I would say in part. The market has got too cool fairly soon and you don't want to buy right before that obviously. But you also don't want to just sit in the sideline. I think you just need to increase your criiteria now and be more conservative with your numbers.
- 7yRyan RomingerBusiness MemberReal Estate Broker · Indianapolis, IN · Member since 2018 · 340 posts · 144 votes
@Jordan Moorhead
I'm a RE broker and Property Manager in Indianapolis and I've actually helped a few investors do the BRRRR method here in the Indy market.
Since a few of them have already reached the “Repeat” step I have to say I think it’s something that works. That said, I think you can definitely go wrong if you don’t know what you’re doing (make a bad investment) or don’t have enough liquid capital in the beginning to rehab and maintain the property for it to continue cash flowing.
I also think it is important to find investment opportunities that are right in the “sweet-spot”:
1. Fixer upper that you could add value too (without overspending due to major flaws)
2. In a strong rental market so that your monthly ROI % is high (goal is typically 2% here)
3. In an appreciating/semi-developed area that will yield a marginally higher ARV that will allow you to refi once you reach that point
Hope this helps! The other important thing to have in place is a team on the ground (PM, agent, contractor, lender, etc.) that can help you hit all the important milestones.
Intrigue Real Estate & Property Management4.6285 Reviews - Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes7y
We're definitely entering a market where I would want a larger margin for any BRRRR deal.
- 7yAlexander FelicePro MemberGuy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
It's getting harder for certain.
Real estate is in vogue again! There is more competition, home values are rising, foreclosures are fewer, rates are up, etc. Everything is going to make it harder and my estimation is that it will continue to tighten until margins come down and probably overcorrect.
It can obviously still be done, and not all markets are the same, and I can't speak for everywhere.
Also, the risks of BRRRR are greatly under considered I think which adds to overconfidence and drives prices and competition up. BRRRR is a super long play so the income is not fast, the debt burden requires large reserves, it's hard to scale mortgages one at a time, high transactional costs, high property taxes (relative to other investments), and they are a bit too easy to get.
I think the only thing left to do is decide who we should blame for it.
- Member since 2019 · 8 posts · 3 votes7y
Everyone's a genius in a rising market. When rents drop 25%, and at some point they will, those BRRR experts will be gone like a foreclosure notice in the wind.
- Rental Property Investor · Triangle, VA · Member since 2019 · 29 posts · 18 votes7y
Originally posted by @Melissa Nash:
@Jordan Moorhead hi. I totally get what you are saying. But it depends on the market. I’ve been doing brrr in Alabama and I see some decent returns. I think partly because taxes are so low there, and I have a great team I can trust. I live in California—but invest out of state. I hold, flip, wholesale, etc.
Melissa, you mentioned trust. How did you go about building a "great team" you can trust from such a great distance? Did you meet all these people face to face? I can't seem to get great teams established from a distance.
- WOODBURY, MN · Member since 2018 · 22 posts · 5 votes7y
Jordan- you bring up a great topic. I’m in MN and you are correct that the Brrrr strategy is very difficult right now. I tend to buy a property for cash flow, but we also must realize that equity sitting in a property earns zero percent. It’s like putting money in a coffee can and burying it in the backyard. Also remember that the only way to access that equity down the road require either a refinance or the sale of the property. So I would argue having liquidity, use and control of that money would put you in a safer position than having it buried in equity in the house.
- Investor · Salt Lake City, UT · Member since 2018 · 63 posts · 45 votes7y
I think the BRRRR method is definitely market/location dependent. Here in Cleveland, the numbers really work. A 100k house here can get you $1,000-1,400/mo in rent. If you keep your total cost of entry below $65k(Which is really easy here), you've got good cash flow and your money back on the refinance.
Cleveland is the land of milk and honey right now...
- Real Estate Broker · Indianapolis, IN · Member since 2014 · 3k+ posts · 2k+ votes7y
I would also focus on BRRRR ing properties with largest pool of interested parties.
Ex: You don't want a 2/1 in a rental neighborhood that you're making the numbers squeak by on.
If you're getting properties built in the past 20 years, 3/2+ with an attached two car, in great school districts, at a healthy discount, that actually cash flow... You're doing this the right way.
A membe earlier posted that he bought at less than a 10% discount off of ARV and was hoping appreciation would take care of it in the coming years. I would not be playing with that startegy right now.
In the midwest we invest for cashflow and appreciation is an added bonus, not what we're chasing. Just my $0.02 - East Texas · Member since 2018 · 205 posts · 138 votes7y
I guess I don't understand the hate for using a HELOC. I don't over leverage and use the full amount on the line of credit I was given, not even close.
Without it, I wouldn't have been able to do my BRRRR and I would still be stuck in the same rut of assets vs liabilities. I'm taking this all very slow and using the walk, crawl, run mentality and waiting on the down turn to find better deals.
- East Texas · Member since 2018 · 205 posts · 138 votes7y
Originally posted by @Ryan Dossey:
I would also focus on BRRRR ing properties with largest pool of interested parties.
Ex: You don't want a 2/1 in a rental neighborhood that you're making the numbers squeak by on.
If you're getting properties built in the past 20 years, 3/2+ with an attached two car, in great school districts, at a healthy discount, that actually cash flow... You're doing this the right way.
A membe earlier posted that he bought at less than a 10% discount off of ARV and was hoping appreciation would take care of it in the coming years. I would not be playing with that startegy right now.
In the midwest we invest for cashflow and appreciation is an added bonus, not what we're chasing. Just my $0.02I agree. I purchase 100% on cash flow and appreciation is and extra perk. My market is very steady and has been for a number of years. Seen some minor ups and downs but my area is very blue collar and the recession proved to be a small blip and not catastrophic like some other areas. Housing took a slight downturn but not like some places I saw.
- Real Estate Agent · Philadelphia, PA · Member since 2018 · 428 posts · 484 votes7y
@Jordan Moorhead I LOVE THIS QUESTION. This honestly may be the best forum post I have seen in a long time!
I've thought about this so often and I have a couple of stances-
Stance 1- Location dependent
The BRRR is so dependent if you can pick up a property in the perfect location that allows you to have a low purchase price and easy rehab so you can be cash flowing and back in the black ASAP. So what you are looking for are markets and then neighborhoods INSIDE of markets (my best reference is Philadelphia which is a market comprised of micromarkets) that are in that weird transition are between hot-neighborhoods that people are flipping left and right to neighborhoods that are strictly for rentals and long term buy and holds (without refinance) since those areas don't have the inventory for flips. Choosing this weird gradient area allows you to get the higher refi from the appraisal pulling comps from the better area while still getting to make up your capital from the lower purchase price of the investment property.
Stance 2- TOO MANY PEOPLE ARE MARRIED TO THIS STRATEGY
The acronym BRRR(RRRRRR.....) is such a sexy term that everyone and their mom wants to do it. They view it as the end all be all for REI and get stuck on doing this strategy and only applying it to multi families. As a result, sooo many of my investors ( particularly my newer investors) look for such a specific house like a needles in a haystack (cliche and don't care). As a result they see single family buy and hold opportunities that could be in the black without a refi within 5 years. Obviously everyone wants to build a portfolio as quickly as possible but the issue with BRRR is that people go "buy crazy" and just look to spiderman from deal to deal since they are essentially getting a reset on their money asssuming that they have a steady flow of tenants that pay at or above their mortgage per refinanced house.
Stance 3- I f***ing love BRRR (sometimes)
If you have access to either a good wholesaler, are good at marketing direct to selling yourself, or are an auction genius you can pick up some insanely good deals that allow you to make more money each year than spending all of your efforts doing full flip rehabs (flipping which can be risky and INSANELY STRESSFUL). BRRR is great for the exact reason that you CAN pull your money out and if you hire a property manager worth their salt, you can recieve a steady flow of checks as you look to augment your already performing portfolio.
AGAIN- BRRR is not overrated, but perhaps misused. It is a play that you CAN use in any market, but that does not mean you should. If you are picking up the one distressed property in the "IT" neighborhood then YOU BETTER FLIP IT. Your purchase price will be high but you can be damn sure that rehab will be worth its weight in gold (both figuratively and literally). If you invest in the "hood," buy and hold and if it happens to appreciate, bully for you! If you can find a property with a low entry point that has some promise and development going on a few blocks over- BRRR IT UP!
Had a lot of fun writing this one! Thanks for the topic!
- Real Estate Agent · Souderton, PA · Member since 2016 · 591 posts · 414 votes7y
Originally posted by @Jack May:
I'm closing on one in Louisville Ky area this week. Purchase price 45k. Rehab costs 20k. Should appraise for 110k. Refinance should let me walk away with 20k or so with a 75% LTV. It should cash flow about $100 a month. Definitely one of my better ones.
Can you PLEASE report back when the refinance is done with the actual numbers. Would love to see where the numbers land when the dust settles. "Should" is the exact reason BRRRR's fall flat on their face for some people. Real estate deals never go the way they should. It appears that you will be walking away with some money even if you were a good 10-15% off on you ARV, so good for you. One of my BRRRRs should have appraised for $500k, it came back at $300k, and the cashflow should have been netting me $2500/month but the actual is $1500. Needless to say I have a little bit of cash tied up in that one but the cashflow is really what I was after anyway.
I wish you the best of luck though and I hope you it appraises higher and your cashflow is more!
- Rental Property Investor · Orange County, CA · Member since 2016 · 740 posts · 529 votes7y
@Ronnie Fielder Great question. I have a few great people that a met through other people/groups/investors in Alabama, and then just jumped in and gave it a go. If your looking for people in AL, I am more than happy to send you my contacts. This forum is a great place to get started, and talk to other investors that are buying in the markets you want to buy in. Most markets don't make sense-- the south is always going to cashflow high where this system works well.
- Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes7y
Thoughts:
1. BRRRR does work but there are caveats:
- It is market specific. There has to be enough of a spread to cover the "refinance" portion of the deal, plus your put-asides (vacancy, capex, PM, etc) PLUS enough spread to cover most market corrections. If you are cash flowing $100/month, with virtually no reserves, and have underestimated (or worse, ignored) capital costs, you are going to be in a lot of trouble at some point.
- It doesn't guarantee you get all of your money back. Someone else already mentioned it, but the "refinance" portion depends on the appraisal. I've done a few of these on homes I owned outright for cash, and on a couple of them I had to leave cash behind because I got low-balled on the appraisal. No big deal, as it's all my money any way you look at it, and I didn't need the cash, but if you were seriously depending on that appraisal to get your 20% (or even less on some loans) back, and it doesn't come in right, that's the end of your strategy until you pool money from some other source.
- The "rehab" portion of this has to be strictly controlled and budgeted, especially if you are going from one position to another (i.e., you borrowed from a HML and are refi'ng into a traditional loan). You have a $60k house that you have 20% in ($15k), and you borrow $30k from a HML, with your hope that you ARV at $120k, so you can pay back your ~$85k (with closing costs), and you appraise at $100k, not only do you need to bring $5k to the table, your $15k of equity is locked in the house. No BRRRR for you.
My own personal opinion is that BRRRR works best if you are moving from an all-cash position to a partial equity position. Meaning you buy a house for $50k, spend $30k on rehab, all of it your own money, and you ARV at $100k, leaving $20k of equity behind and getting your original $80k back. People who are financing both sides of this PLUS financing the rehab, those are very difficult numbers to make work unless you got a screaming deal, are in some extremely rapid increase market, or can wait out the market. A lot of people that want to go BRRRR start with virtually nothing and think they can turn that nothing into big dollars in a very short period of time. I don't think that's realistic. RE is a long-term play. You need reserves; you need to be able to leave equity behind; you need to be able to survive market shifts.
Maybe the acronym should be "Buy, Rehab, Rent, Reserves, Refinance, Repeat".
Skyline Properties - Real Estate Agent · Souderton, PA · Member since 2016 · 591 posts · 414 votes7y
Originally posted by @Jim Schneck:
Everyone's a genius in a rising market. When rents drop 25%, and at some point they will, those BRRR experts will be gone like a foreclosure notice in the wind.
Please elaborate, I'd like to hear more about this theory of a 25% rent drop. We are in the midst of a housing shortage. Barring an act of congress that required rents to be lowered by 25%, I cannot think of a situation where that would happen in my market. Some specific, over saturated markets might see something like this happen. But where the land is all used up, and more and more people try to move into the the area, I don't see it happening. A housing crash will only make the rental market stronger.
- Investor · New York, NY · Member since 2017 · 263 posts · 118 votes7y
A few things to note.
1) BRRRR or any value-creating strategy can 'a priori' target a property that cash flows high at its target ARV, take rehabbing a 4-unit rather than a 1-3 unit say.
BRRRR is geared towards earning an infinite return (relative) where the absolute return may nevertheless be low. This is the core of @Jordan Moorhead's question.
2) BRRRR is not overleveraging per se as it achieves 70-75% LTV (the typical LTV for cash out refinance). This is assuming ARV/appraisal is genuine and not artificially inflated. The "leverage" aspect of it may come from targetting (in your property selection process) the highest possible upside (instant gratification) that is not balanced against cash flow.
3) That for a given BRRRR property there is a cash flow/refinance-to-high-appraisal trade-off is more trivial. Assuming you are comfortable with the 70-75% LTV, the decision to take cash out is merely determined by anticipated return on the capital to invest vs interest rate on the cash out refinance loan.
- Mattoon, IL · Member since 2017 · 42 posts · 27 votes7y
A common issue I find with BRRRR is people spend too much on rehab. I have a friend from High School who is also investing in my local market and we talk about our investments, we buy properties for roughly the same amount but he spends 3x as much as I do on rehab. When we are both finished with the rehabs his properties are worth only 10%-15% more than mine and his rents are only 10% more. While I have a contractor as a partner that works for less we also don't do high end replacements like my friend does. We use vinyl plank not real wood, cheap counter tops, repaint tubs rather than install new, minimal outside work. In our market a 1000 sq ft 2 bed apartment can only rent for so high.
Example: we both bought a triplex
Mine: $37,000
Rehab cost: $30,000
Value when done: $103,000
Rents: $1485/m
cash flow: $150 a door
His: $32,000
Rehab cost: $75,000
Value when done: $121,000
Rents: $1,680
Cash flow under: $100 a door - Member since 2019 · 8 posts · 3 votes7y
You raise some valid questions. I don't know anything about the Pennsylvania market. My own Denver market has experienced such dips several times within recent memory. In the 1980s it was an oil bust. Apartment owners suddenly were facing occupancy rates of 70% or less. In the early 2000s it was easy money that allowed many tenants to buy houses with little or nothing down. The 2009 bust did increase demand for rentals, but the rental pool was filled with marginal, previously foreclosed tenants. Lots of demands for rent or possession. Many landlords during each of these eras experienced a 25%, or more, loss of gross rents.
I can't predict the future, but our next major decline could be due to overbuilding of apartments, a continued trend of cost of living exceeding wage increases, a fracking industry that suddenly gets legislated out of existence, institutional owners of single family portfolios suddenly choosing to liquidate their holdings or even, as you'd said, governmental intervention in the form of rent control. This idea is already being floated within city hall.
BRRRR can work, but my advice to any newbie long-term investor who asks is; keep your LTV low so you can ride out the tough times. I appreciate your good comments.
- Investor · New York, NY · Member since 2017 · 263 posts · 118 votes7y
One more comment:
4) Successful BRRRR that doesn't cash flow yields "free" money/equity subject to levered market fluctuations and the risk of a levered "downside" (such as a major repair on the property). It is a decent proposition with some market/liquidity risks.
- Round Rock, TX · Member since 2017 · 86 posts · 45 votes7y
Originally posted by @Stefan Tsvetkov:
A few things to note.
1) BRRRR or any value-creating strategy can 'a priori' target a property that cash flows high at its target ARV, take rehabbing a 4-unit rather than a 1-3 unit say.
BRRRR is geared towards earning an infinite return (relative) where the absolute return may nevertheless be low. This is the core of @Jordan Moorhead's question.
2) BRRRR is not overleveraging per se as it achieves 70-75% LTV (the typical LTV for cash out refinance). This is assuming ARV/appraisal is genuine and not artificially inflated. The "leverage" aspect of it may come from targetting (in your property selection process) the highest possible upside (instant gratification) that is not balanced against cash flow.
3) That for a given BRRRR property there is a cash flow/refinance-to-high-appraisal trade-off is more trivial. Assuming you are comfortable with the 70-75% LTV, the decision to take cash out is merely determined by anticipated return on the capital to invest vs interest rate on the cash out refinance loan.
I'm more referring to the encouragement of going a million miles wide and an inch deep. John McNellis, talking about risk in his book, asks a simple question: Would you rather be worth $1 million by having $1 million in property and zero debt, or would you rather be worth the same $1 million by having $1 billion in property and having $999 million in debt? It's a rhetorical question because the answer is obvious to him (and to me). But many people on BP advocate for the latter example. The guy with $1M free and clear is a fool for having so much "dead money"!
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