Making BRRRR truly work in 2024

[David Martoyan]

For those focused on the BRRRR strategy, I'd love to hear about how you're adapting to current market conditions. With rising interest rates and fluctuating property values, what strategies are you using to find deals that still meet the numbers for this model?

Are you having more success sourcing off-market properties, or do you focus on distressed opportunities through agents or wholesalers? Additionally, how are you navigating the refinance stage, with lenders tightening up are you still Able to generate your desired profit by refi? or have you found various creative solutions to secure favorable terms?

[River Sava]

Hey David - 

Networking with investor friendly agents can be a game changer for sourcing deals, especially when it comes to distressed properties and/or pocket listings. Building relationships with wholesalers and staying active in local REI groups has also helped investors I know find opportunities that still pencil out.

On the refi side, DSCR loans have been a solid option, especially for staying cash flow positive. They're less restrictive since they don't rely on personal income or DTI, making them a great fit for BRRRR. Check out this BP article about how they come into play with the BRRRR method. Also, happy to connect with you!

https://www.biggerpockets.com/blog/brrrr-loans-what-are-the-...

[Mike H.]

I stopped buying sfh's as long term rentals here in illinois. I just couldn't find deals that allowed me to be all in after purchase and rehab for no money out of pocket like I used to. 

What I did find is that as a builder in eastern tennessee, I could build STR cabins for less than 70% LTV so that I could effectively BRRR my way into growth without coming out of pocket for a down payment.

Now it does take a lot more cash to do because as a builder I have to front a lot of money at times (land, permits, each stage of construction while I'm waiting on the draw).  So its not as easy as it was before with sfh's where you could get 100% of the purchase and rehab as long as the ltv was 70% or better.  But in terms of being able to grow a portfolio with a ton of equity and solid cash flow, being a builder in this area really works.

I think the STR part of it also helps as well. I can build a 1,000 sq ft cabin including land  and holding costs for about 350k or so and the cabin will appraise out for about 500k to 525k and will produce gross rents in year 2 between 50k to 60k. With a loan of say 350k, and paying property management, it should still provide net profit of about 4k to 7k a year in year 2. And go up from there.  

But what I like about it the most is that I don't have "find" any deals to BRRR. Every single cabin I build is a deal I'm going to add 150k or more in equity (I've done a couple of larger ones that have 200k to 300k in equity) and anywhere from 5k to 10k a year in net profit by year 2.  Year 1 is probably a loss though so that is something to consider. Just the way the str thing works because rents seem to take about a year or so to stabilize.

My goal is to get 20 cabins in the next 5 years.   I say that but my goal for sfh rentals here in illinois was to get to 20 houses in 10 years and I ended up getting to 83 in 15 years (I've since sold half though so I don't own that many now). 

[Jake Baker]

@David Martoyan

Great question—it's a challenging time for BRRRR, but there are still opportunities with the right approach.

Prepayment Penalties: 
I plan to keep my BRRRRs for 5 years or more. I have added pre-payment penalties on my refinance loans to decrease my rate substantially. This reduces my rate without buying it down. Essentially, I am betting that rates won't go low enough where it makes sense to refinance. The lower rate decreases my monthly expenses, increases cash flow, or gives me a higher LTV.

Increasing Rents with Co-Living:
I have changed my rental strategy to Co-Living (rent by the room). I don't use padsplit (weekly rentals); I rent on long-term leases in B Class neighborhoods. This plays into the affordability issues for tenants by allowing them to live in nicer neighborhoods for less money. 

[Alex Bekeza]

There's nothing wrong with having some money left in a deal in my opinion. What part of the refinance stage do you see as "tightening up"? It feels like DSCR lenders are catering to BRRRR investors more now than ever with short seasoning guidelines, air tight DSCR requirements (1.0), etc.

[David Martoyan]

@River Sava 

Thanks for sharing your insights! I networking with investor-friendly agents and wholesalers is a game changer, especially for finding those hidden deals like pocket listings or off-market deals. I'm working on building strong relationships in the local REI community and learning what experienced investors are looking for.

DSCR loans definitely seem like a good tool for scaling, especially with strategies like BRRRR where cash flow is critical since it doesn't rely on personal income or DTI, making it easier to qualify while keeping cash flow positive. As DSCR loans focus on the property's income to cover debt payments, they're perfect for refinancing after rehabbing and renting. This flexibility lets investors scale their portfolios without being tied down by traditional income verification, which is a huge advantage for those actively building wealth through real estate.

I’ll check out that BP article, thanks for the recommendation!

[David Martoyan]

@Alex Bekeza 

leaving some money in a deal can still make sense if the cash flow is solid. Some DSCR lenders are stepping up for BRRRR investors with lenient seasoning periods and the 1.0 DSCR minimum, making refinancing much more accessible. But the entire atmosphere seems like to tighten up with the general rise in interest rates and a little bit of uncertainty in the housing market.

[David Martoyan]

@Mike H.

Your pivot to building STR cabins in Tennessee is impressive! The ability to create equity and cash flow without "finding" deals is beyond amazing even with the upfront cash challenges. Hearing your story It is definitely worth to risk some cash for a much greater return in the future.Thanks for giving this insightful response.

[David Martoyan]

@Jake Baker 

Locking in a lower rate with prepayment penalties makes sense if you’re holding long-term, and co-living is a smart way to boost cash flow while addressing affordability. Innovative approaches like these are key, you always have to move, adapt and think to figure out a smart approach and make it work for you in today’s market, your case is a great example. There is always money to be made and opportunities to explore in any market. 

[Dan H.]

My problem in my market is the opposite of that expressed by @Mike H.. I can find properties that likely can result in a full investment extraction, but after the max LTV refi the property is large cash flow negative.

In my market most of the experienced investors are not buying to buy and hold due to the cash flow issue.  Flipping and other value adds is where the experienced investors are or if they are holding it likely is a development effort (such as adding a dozen ADUs).

Good luck

[David Martoyan]

@Dan H. Interesting perspective, Dan! How do you see the cash flow issue evolving in your market? What Are there creative strategies investors are using to offset those negative cash flows? 

[Dan H.]

Quote from @David Martoyan:

@Dan H. Interesting perspective, Dan! How do you see the cash flow issue evolving in your market? What Are there creative strategies investors are using to offset those negative cash flows? 

3 recent national studies show that the rent to value ratio is at an all time worse (what they really studied was cheaper to rent than buy, but there is strong correlation).  Combine that with rates that are near high for this century.  3 things could solve this 1) RE prices fall (that would be bad for me) 2) rents increase a lot without RE prices increasing similarly (this would be bad for tenants) 3) rates fall a lot.  This likely means at least a recession (and would be bad for most).  I do not see any of those scenarios as likely and therefore see poor/negative cash flow at max LTV refi continuing for some time.  I view this as a brrrr hurdle and why i have not purchased for brrrr since Dec 2021.

so what can be done about it?   I will answer as it relates to traditional BRRRR, in the general case there are additional options.  1) Do not perform maximum cash extract.  This equates to purchasing the cash flow.  To me the cost of purchasing cash flow is too high, better off being cash negative 2) alternate rent models: mtr, str, rent by room.  Note all these require more effort than traditional LTR.  

the rates increases have really impacted BRRRR.  recognize this.  Possibly pivot to other investment strategies or use alternate rent models.  By the way my last purchase to rehab was a quad that 2 units are STR.  Seems promising but it is not.  The STRs after all associated costs (including PM) are underperforming LTR at market rent.   So my cash flow is poor for my equity position (it would be poor even if they were all LTRs, but better than it is with 2 STR and 2 LTR).  My equity position is up ~$1m above cost in 3 years (so i did fine even with poor cash flow, it was not negative beyond year 1).  I point this out to point out that alternate rent models will not always out produce LTR rent model.

Good luck

[Bonnie Low]

Quote from @David Martoyan:

For those focused on the BRRRR strategy, I'd love to hear about how you're adapting to current market conditions. With rising interest rates and fluctuating property values, what strategies are you using to find deals that still meet the numbers for this model?

Are you having more success sourcing off-market properties, or do you focus on distressed opportunities through agents or wholesalers? Additionally, how are you navigating the refinance stage, with lenders tightening up are you still Able to generate your desired profit by refi? or have you found various creative solutions to secure favorable terms?

This is a great and timely question. My husband and I started out flipping houses in 2016 but quickly pivoted to BRRRR as we realized we want to keep those properties rather than sell. At the time it was fairly easy to find properties that needed enough rehab that you could really force up the ARV. Now the issue in my markets at least is that it's harder to find distressed properties and the ones you do fine are going for too much to make the BRRRR strategy work. You can certainly leave money in your BRRRR - it doesn't have to be the "perfect" BRRRR that so often is talked about where you pull all of your investment out and then some and therefore have infinite returns. My metrics around this have changed. Now my expectation is that I won't leave more than 12-15% of my investment in the property after the refi. I just look at it like a 12-15% down payment, which I can stomach. And it still has to meet my cash flow expectations.

[David Martoyan]

@Dan H. 

This makes sense, especially regarding the impact of rate increases on BRRRR and the importance of pivoting strategies. Alternate rent models can work in specific situations, but as you said, they aren't always superior to traditional LTR, especially after the costs and effort.

In my experience, finding deals with strong potential for cash flow, often means digging deeper into off-market opportunities or unique property types that traditional models overlook. It’s a little challenging but I think there’s still room to uncover creative solutions that work.

[David Martoyan]

Quote from @Bonnie Low:

Quote from @David Martoyan:

For those focused on the BRRRR strategy, I'd love to hear about how you're adapting to current market conditions. With rising interest rates and fluctuating property values, what strategies are you using to find deals that still meet the numbers for this model?

Are you having more success sourcing off-market properties, or do you focus on distressed opportunities through agents or wholesalers? Additionally, how are you navigating the refinance stage, with lenders tightening up are you still Able to generate your desired profit by refi? or have you found various creative solutions to secure favorable terms?

This is a great and timely question. My husband and I started out flipping houses in 2016 but quickly pivoted to BRRRR as we realized we want to keep those properties rather than sell. At the time it was fairly easy to find properties that needed enough rehab that you could really force up the ARV. Now the issue in my markets at least is that it's harder to find distressed properties and the ones you do fine are going for too much to make the BRRRR strategy work. You can certainly leave money in your BRRRR - it doesn't have to be the "perfect" BRRRR that so often is talked about where you pull all of your investment out and then some and therefore have infinite returns. My metrics around this have changed. Now my expectation is that I won't leave more than 12-15% of my investment in the property after the refi. I just look at it like a 12-15% down payment, which I can stomach. And it still has to meet my cash flow expectations.

Thanks for sharing your insights Bonnie, I love the approach that you take! 

[Alan Asriants]

Some of the best BRRRR deals I have seen play out this way:

You buy a home cheap enough that when you do a renovation and pull out 75-80% LTV, your rent covers your mortgage and you have returned most of your investment

This is for A-B class areas. 

It is very hard to find deals that can cash flow and generate a cash bonus in todays market with the current rents.

To give you perspective: I bought a home for 200k or so, renovating for another 240k. It will be worth around 650-700k. But when I pull that money out and try to get back my investment, I am cash flow negative. Even with all that equity, it makes more sense to sell. 

A big part of why this deal doesn't work as a BRRRR is because it is a single family (you can only get so much rent for one unit). If you have a mulit family property, you usually get more rent per sqft. In my market there is only so much you can charge for a house. No one is going to pay more than 4-5k, and even then finding that tenant is very challenging. However, if you have a solid mulit family unit, you can have higher overall rent due to your unit count. BRRRR usually makes more sense with more units today.

In order to make your numbers work in today's market you have to buy extremely cheap... You can afford to pay a bit more if rates cool down.

We need to also remember that BRRRR become a really hot topic in a low interest environment. This is when i was telling all my friends to buy duplexes - even at higher prices (at the time), because anything you bought made sense with a 2.75% rate. Even if you were putting 3.5% down.

A deal in 2020 with 3.5% down works better than a deal today with 25% down... This is the real problem

[David Martoyan]

@Alan Asriants A lot of insight, appreciate it! and I cannot agree more that BRRRR works extremely well with multifamily real estate most of the time, when you start buying distressed multifamily buildings with 10+ units, especially with a discounted price, that is when you truly start making money with BRRRR! But unfortunately those types of deals are not really available for a lot of real estate investors.