The BRRRR method is dead

[Adrian Smude]

I believe the BRRR method is dead or at best on life support! The last decade has been easy for investors to use the BRRR method, but now we need to learn other methods. I've been learning these other methods for over a decade because I went through the last recession when banks stopped lending.
Why I believe the BRRR method isn't going to work in the next seasons of investing:

1. Bank rates have gone up which won't allow most properties to cashflow
2. Banks have tightened their lending requirements which aren't allowing most people to qualify.
3. Appreciation has slowed and even flattened in markets which means there isn't free money any more.  

What other reasons do you think the BRRR method is in the past?

[Ke Nan Wang]

More people are doing residential real estate nowadays due to online education, social media promotion and community like BP and deals are harder and harder to come by. 

Need to be creative and think other ways to make this business work. 

There are tons of people need housing, as the cost of doing business is going up, what are ways to still provide affordable housing to people? This is the angle I'm attacking. 

[Chris Seveney]

@Adrian Smude

I would agree the days of buying and getting 100% of your money out so you have infinite returns is not coming back anytime soon but the method still is common you just have more money in the deal if you want it to cash flow.

I do agree BRRR is easy to do with super low rates and increased rents for someone who could value add a property. Now with essentially free money being gone, not only in BRRR is it more challenging but every aspect of real estate is more challenging and we are going to see a lot of people lose a lot because of inexperience of not knowing their risk

[Eliott Elias]

BRRRR is not dead. I don't like this method, even when rates were low. It leaves the investor with no profits and little to no cash flow, but woopty doo they own the property.

[Robin Simon]

to the contrary, you could argue that buying turnkey is "dead" right now because prices remain high and cash flow remains hardly possible - the only solution people are finding right now seems to be BRRRR (outside of getting great, overlooked deals)

[Mike Dymski]

Buying a business, adding value, and pulling that added value out has been around forever and will continue to forever.  It just is harder or easier depending on market conditions (and investor deal flow).

[Adrian Smude]

Quote from @Chris Seveney:

@Adrian Smude

I would agree the days of buying and getting 100% of your money out so you have infinite returns is not coming back anytime soon but the method still is common you just have more money in the deal if you want it to cash flow.

I do agree BRRR is easy to do with super low rates and increased rents for someone who could value add a property. Now with essentially free money being gone, not only in BRRR is it more challenging but every aspect of real estate is more challenging and we are going to see a lot of people lose a lot because of inexperience of not knowing their risk

I totally agree, thanks for the input! 

[Adrian Smude]

Quote from @Eliott Elias:

BRRRR is not dead. I don't like this method, even when rates were low. It leaves the investor with no profits and little to no cash flow, but woopty doo they own the property.

Overall I agree I don’t like the method, with the exception of when starting out with very little. I think it can be a good starting block if there is cashflow. But it needs to stop quickly then save the cashflow to pay a property off or restructure if the person is fortunate enough to have appreciation. 

I think it creates a job that doesn’t pay well. 

I didn’t do the BRRRR method and many of my mentors didn’t so I am bias towards not using it. 

[Adrian Smude]

Quote from @Robin Simon:

to the contrary, you could argue that buying turnkey is "dead" right now because prices remain high and cash flow remains hardly possible - the only solution people are finding right now seems to be BRRRR (outside of getting great, overlooked deals)

I'be been and still am in investments that don't require the BRRRR. One reason I've brought this up is I'm getting more and more phone calls asking for help because their plan was to refi and they can't.

[Adrian Smude]

Quote from @Mike Dymski:

Buying a business, adding value, and pulling that added value out has been around forever and will continue to forever.  It just is harder or easier depending on market conditions (and investor deal flow).

 I love this perspective!  Thanks! 

[John Morgan]

@Adrian Smude

You're 100% right. The BRRRR method doesn't work in most markets anymore like it did in 2017. However, people want to sell books about it and gurus claim it still works in today's environment. Lol. I've found other ways to cash flow like pivoting to renting by the room or sec 8. The days of cash out refis to scale up and make a killing are gone. I've bought 12 rentals from cash out refis by pulling equity out to scale up. But it doesn't make sense anymore with current interest rates. Today's environment will "thin out the herd." Many investors will go away until the numbers work. And many noobs who want to hit a home run right away without "planting that tree" and willing to wait several years will get a hard lesson on the reality of what we're dealing with. I'm ok planting some trees in todays environment and waiting a decade for it to produce. But the impatient ones that need to make a ton of money off their investment quickly will be disappointed.

[Randall Alan]

Quote from @Adrian Smude:

I believe the BRRR method is dead or at best on life support! The last decade has been easy for investors to use the BRRR method, but now we need to learn other methods. I've been learning these other methods for over a decade because I went through the last recession when banks stopped lending.
Why I believe the BRRR method isn't going to work in the next seasons of investing:

1. Bank rates have gone up which won't allow most properties to cashflow
2. Banks have tightened their lending requirements which aren't allowing most people to qualify.
3. Appreciation has slowed and even flattened in markets which means there isn't free money any more.  

What other reasons do you think the BRRR method is in the past?

@Adrian Smude

 Hi Adrian,

I’m right next door to you in Lakeland.  

BRRRR, much like making money in general in real estate, requires certain conditions for it to function. I will give you that those conditions don't really exist right now in the market since prices and rates spiked. But all markets adjust over time. If housing prices remain high over the long term, rents will continue to trend upward until an investor can actually make money renting those higher priced houses. Likewise, the Fed will not hold interest rates high for a prolonged period of time (but the next couple of years will see them elevated I guess)… In the short term they will continue to raise them to continue to combat inflation. Just like the housing crisis of 2008, this is just another adjustment cycle the market is going through (though less severe than 2008 - so far).

Those already in the rentals market are reaping the benefits of getting in before the run-up.   Those looking to get started or to buy their next property financed will likely need to wait out the markets current rates before it makes the most sense to buy.  They could buy now, but they would make less and would have to eat the cost of refinancing down the line.  

If you look at real estate as one of many vehicles to earn income, you simply have to acknowledge that it isn't always going to be the most favored vehicle at all times. The Fed is driving the economy with their policy and is trying their best to slow the economy down. They are still not there yet. But their technique is to make it more profitable to save your money than to spend it on real estate and cars (the two biggest driving forces in consumer spending). Thus everyone moving their money to high yield savings accounts and CDs right now. So to that extent and for BRRRRs, their policy is working. Demand will drop, supply will increase and those that actually want to sell their house will ultimately have to lower their price - so the theory goes. The fact that those same high interest rates are also keeping sellers from listing due to having to buy back into the same market (thus lowering supply) is a bit of a hiccup for the Fed and a case of not being able to have your cake and eat it too. New houses seem to be the best answer there (no old owner that has to buy back into the market). So in the short term RE investors are left on the sidelines… but BRRRR isn't dead… it's just on the sidelines too waiting for conditions to improve to the point where there is cash flow available after the refi. If rates were in the 4's right now there would be people BRRRR-ing because the deals would cash flow.

All the best - and would gladly do a ‘cup of coffee’ with you some day if you wanted to talk shop!

Randy

[Kyle Lukas]

SO what strategy does everyone think will work out well for the next 5-10 years?

[Robin Simon]

Quote from @Adrian Smude:

Quote from @Robin Simon:

to the contrary, you could argue that buying turnkey is "dead" right now because prices remain high and cash flow remains hardly possible - the only solution people are finding right now seems to be BRRRR (outside of getting great, overlooked deals)

I'be been and still am in investments that don't require the BRRRR. One reason I've brought this up is I'm getting more and more phone calls asking for help because their plan was to refi and they can't.

Whats the issues on the refis, mainly cash flow?

[Randall Alan]

Quote from @Kyle Lukas:

SO what strategy does everyone think will work out well for the next 5-10 years?

@Kyle Lukas

 I don’t think you can extrapolate out nearly that far.  Your $200 monthly return on a $200,000 house you invested $40,000 to buy is a 6% return.  Today you can make 5.25% on that same money with ZERO risk and zero hassle by putting it into a cd at your bank.  There is no appreciation beyond that like you have in real estate, but it is the easy answer to your question at the moment… and inversely related to real estate, so as interest rates go down on savings, real estate affordability will go up by the same measure (more or less). 

As to real estate itself, because interest rates and housing prices are so integral to the process I’m not sure there is a great answer.  You could skew towards higher returns by looking at short term rentals and renting by the room, perhaps, but most all of real estate is going to flow together impacted by the economy.  Our saying is that you do what the markets tell you to do.  For us, right now, that isn’t new real estate.   We’re always watching for  a deal though.

All the best!

Randy   

[Nicholas L.]

@Adrian Smude

it's a good topic to discuss.  i'd argue that the key point is that cash flowing from BRRRR is much tougher.  it's still very possible to force significant equity, and then break even. it's just not a good cash flow strategy.   

so new investors looking to cash flow = as difficult as ever

experienced investors looking to build wealth via equity = still possible

[Julien Jeannot]

I'd say it depends on a bunch of variable. I see BRRRR it as tool in my kit, rather then my go to strategy.

[Timothy W.]

It never really was a good method. It relied on everything going right and nothing bad ever happening. One hurricane, one downturn, one localized series of job losses, and the house of cards falls. You need to buy, rehab, rent, manage, refinance if the numbers make sense, don't if they don't, repeat if you identify the right property and if you have the capacity to properly manage, and maintain external sources of cashflow to really get it going. Those who preached BRRR the most made their money off of the preaching, not the doing.

[Dave Vona]

@Adrian Smude Thanks for topic. It's interesting to hear everyone's opinion on this. I'm in the process of refinancing my second BRRRR. I completed the first one last year with a rate just over 6%. It cash flows about $300 after PITI, PM, and reserves. However, it is an older home and requires more maintenance.

The one I'm about to refinance will have a rate of ~7.5%.  I expect the cash flow to be $0, and I will have to set aside some of the reserves out-of-pocket for the first year or two until the rents increase.  But, the property is in a much nicer neighborhood.

I still see BRRRR as a to way acquire a property while also forcing some appreciation. Even if there is no cash flow immediately, I'm satisfied if I can purchase a property with less than 20% of my money left in it, which is what I can still do with BRRRR. It does take some time and understanding of your numbers to find the right property.

I realize appreciation across most markets isn't as good as it has been over the past 10 years, so I feel it's important to buy in areas where appreciation is more likely.  And, I plan to follow a strategy that includes buying higher quality, rather than just looking for high cash flow. Over the long-term, I believe these are the properties that will continue to see rent increases and appreciation.

[Bob Stevens]

Quote from @Adrian Smude:

I believe the BRRR method is dead or at best on life support! The last decade has been easy for investors to use the BRRR method, but now we need to learn other methods. I've been learning these other methods for over a decade because I went through the last recession when banks stopped lending.
Why I believe the BRRR method isn't going to work in the next seasons of investing:

1. Bank rates have gone up which won't allow most properties to cashflow
2. Banks have tightened their lending requirements which aren't allowing most people to qualify.
3. Appreciation has slowed and even flattened in markets which means there isn't free money any more.  

What other reasons do you think the BRRR method is in the past?

There not, it's all about getting good deals. All my purchases are 20% net caps. So even if I did refi, which I never do, it would still be a great COC return. Just get better deals,

All the best 

[Bob Stevens]

Quote from @Kyle Lukas:

SO what strategy does everyoBune think will work out well for the next 5-10 years?

Buy cash, :) 

[Jay Hinrichs]

Quote from @Robin Simon:

to the contrary, you could argue that buying turnkey is "dead" right now because prices remain high and cash flow remains hardly possible - the only solution people are finding right now seems to be BRRRR (outside of getting great, overlooked deals)

I personally fund quite a few BRRR deals for my clients and have been since I started doing this in 2002 in Detroit. Turn key actually started as a BRRR method the turnkey resellers on the west coast hooked up with mortgage lenders and marketed the brrr what they needed was HML like us. to put the Brrr buyer into title so they could refi.. I would do 2 to 4 at a time for each borrower.. I would require 2k cash up front for each loan that I made.. the team in Detoit or the other 7 markets i funded would do the rehab.. and the mortgage brokers on the west coast along with the west coast markeing companies would bring the borrowers in.. Most deals the end buyer got 3 to 8k cash out at close so if they did 4 they would get enough to get the 8k they put down to get my loan and pocket 20k or so. that was intended for reserves well we know what happened the cash out went to jet skis or trips or what have U.. And the pitch in those days was 100.00 cash flow per house.. so put up 8k Jay puts you into title with my loan Detroit turnkey guys find and fix up home West coast mortgage broker refis you and pays me off.. OH and by the way when i put my HML on the property the Detroit flipper made his profit on that closing as well as the turnkey brokers .. I charged 5 points and 15% for this service on a 120 day loan. Our average deals cycled in about 95 days. So my funds were out at greater than 30% apr. and i did a few thousand of these loans before 07 08 when refi's stopped. so thats the history of how turnkey started they were all BRRRs lets talk about how it works today.

Today the companies I fund are Turnkey providers who again hook up with turn key marketing companies we pretty much know who those marketing companies are. Then they sell the Turnkey property with the standard mortgage loan or DSCR loan.. At that time the turnkey provider and marketer and Myself get paid when it closes.

AS the market has tightened all of my turnkey providers who were basically never keeping any of these homes have started to keep them.. So they are highly experienced in the market.. Get by far the best deals  better than any one off investor is going to get generally speaking.. And we are back to putting them into a equitable interest so they can refi.. These guys and gals are getting infinite returns in todays market some are getting some pretty nice cash outs.. I did one last month were my client got 25k or so cash out and was 300 a month positive according to what he told me. I closed  two of these on Friday same clients.. they had to leave 3200 of their money in on one and 3500 in on another.. and cash flow is north of 250.00 a month and I have helped them amass almost 150 doors in the last 24 months.. I have not done all the deals but more than half.

I have another client in a rust belt city that goes for 2 to 4 units and same thing he will sell if he can but if they dont sell during rehab he keeps them.. so bought 60% of his deals he keeps and the rest are sold. He rarely brings or has any cash in the ones he keeps.

And i could go on I have 7 clients that all do this and are still doing brrr with no money in the deals or a little cash back or having to put a tad of money into them.. they all use DSCR loans. So to me its dead for the one off or investor that cant compete with local guys like these that really know the market have all the contacts and frankly they have me who closes deals within a matter of a few days so they beat many of their competition to the deals.. As we dont require these clients to get appraisals or any other things that bog down closings.. We are a capital partner and move like no Lender can move. thats where the great deals are going or at least what i see as its my day job LOL

PS  in the old days  the west coast buyer had to get pre approved by the west coast mortgage lender and that included an appraisal up front so we knew the numbers would work then when rehab was done the mortgage brokers simply had the appraiser do a 442 update and the file closed.  thats how we turned these deals so quick.  Plus our turnkey vendors in the cities had very good rehab crews in those days and could really get through the jobs . 

[JD Martin]

Quote from @Timothy W.:

It never really was a good method. It relied on everything going right and nothing bad ever happening. One hurricane, one downturn, one localized series of job losses, and the house of cards falls. You need to buy, rehab, rent, manage, refinance if the numbers make sense, don't if they don't, repeat if you identify the right property and if you have the capacity to properly manage, and maintain external sources of cashflow to really get it going. Those who preached BRRR the most made their money off of the preaching, not the doing.

I don't agree with that. At it's essence all BRRRRR (I add the 5th R for "Reserves") is, is purchasing a rental property using financing. That's it. People have been renting out financed properties forever. The "method" is nothing new and indeed the term is completely unknown outside of BP. The problem, if there is one, is the perception that one should get all of your money back out of a property. That rarely happens and is an unreasonable expectation. When you can refinance and how much you can take out is largely dependent on market and economic forces that are out of one's control. That doesn't mean the method doesn't work.

[Anthony King]

@Adrian Smude I just bought a SFH for 20k, put 38k into it, got a renter in for $900/month and it appraised for 105k. I'm doing a cash out refi at 8.25% and getting 23k cash out. It breaks even, I have $0 in the deal and I have 23k cash out. Another SFH I am in the middle of refi...purchased for 57k, put 20k into it, appraised for 120k, rented for $1,250, 8.25% rate, breaks even and pulling 13k out. Another one in the middle of rehab right now...

Seems to be working for me.

[Alecia Loveless]

@Randall Alan Obviously you can get close to the same return at the bank right now with a CD but you’re not getting an asset that’s being paid for by your tenants that will be worth several hundred thousand dollars one day, you’re getting no tax benefits, and your money is being eaten away by inflation.

[Cory King]

BRRRR works in any market. There's always deals to be found. Working on a duplex right now that'll refi out just fine.