Do you BRRR all cash?

Question

Hi all, I like the BRRR strategy as a way to grow wealth in REI. In his BRRR article, David Greene makes a point of how much better it is to buy all cash (faster, many SFH not eligible for financing when buying) when following this method.

I'd love to have cash in hand to complete a 250k deal (looking at Phoenix currently) but in reality, it will take some financing to get this amount so I was wandering.. Can BRRR be as successful when buying with bank financing?

Russell Brazil · Answer

The dirty little secret to BRRRR is that it is a capital intensive strategy.

James G. · Answer

Hi Gil, I disagree with @Russell Brazil , you can do the BRRRR strategy with very little money at all - I do it all the time. Build a relationship with a good hard money lender in your market, and simultaneously spend your time finding a solid real estate deal with equity (70% ARV preffered). Some HML's will fund the deal with no money out of your pocket if the numbers make sense, in fact, some will even roll over the interest until the maturity date. I'm not saying this is easy to find and I'm not saying that it's easy to execute, but work at it everyday - it IS possible to do this without money. Find a good deal, find the money.

Andrew Postell · Answer

@Gil Segev while the time that it takes to close a conventional loan is longer, even if you DID have the time to close it....that darn downpayment is just a killer.  That's the main roadblock for most investors. Leaving $30,000 in a property is not sustainable for most people looking to buy lots and lots of properties.

Now, about the ARV, ANY lender will get an appraisal of some type on the property. You should be very good at calculating the ARV...but a Hard Money Lender will calculate it as well based on your rehab bid.  They might order a full appraisal or just do what we call a "desktop appraisal"...which is where they run a program that they have to get to the ARV.  Hope all of that makes sense.

Kevin Sobilo · Answer

@Gil Segev, I do BRRRR with my own cash and it works out well. The properties I buy are cheap to hold (low taxes etc). So, I don't have to rush the rehabs and the properties have seasoned before I am ready to refinance.

As for having $250k in your area to do a deal. The average home in Phoenix might cost that much, but I suspect the kind of deals that would work well for BRRRR do not...

If you spend $250k to buy and rehab, you need it to be worth $335k when you're done to refinance your money back out and you need it to rent for $3500+ per month. I don't know the Phoenix market but that sounds like a big ask. Even if there are deals like that this is probably not the meaty part of the market.

In my area I focus on C class areas and find distressed unlivable properties and make them into hopefully B class properties. Perhaps you can find a similar scenario in your market.

Blake Edwards · Answer

@Gil Segev - We use traditional bank financing every single time on our BRRRRs.  It's a matter (or cliche) of building the relationship with the right lender.  You'll have to kiss a lot of frogs to find your prince.  But even then, your prince may have convoluted processes and not be consistent with each deal.  But it is possible to use "traditional" banks.  We find a smaller local credit union to be more agile and have more options than most of the big boys.

Andrew Postell · Answer

@Gil Segev usually the BRRRR method dictates buying a property "off market" at a deep discount.  Hard Money is a good solution for lending on the BUY step but there are other lending options as well.  The correct loan type to seek is one that will lend up to a certain % based of the ARV.

For example:

• Conventional loans, even their rehab loans, will require a downpayment of 15% minimum no matter what.
• A Hard Money loan should be able to lend up to 75% of the ARV.

Based on the numbers above, if you can BUY and REHAB at 75% or lower....then you can come out of pocket $0 (in theory) with the Hard Money option.  But the conventional loan would still need 15% down.  And that's why we use hard money (that and it can close quickly).

Then you use the conventional type loan on the REFINANCE step to get out of the HML. Most investors that are successful using the BRRRR method are doing it with VERY little money out of pocket.

Hope all of this makes sense but feel free to ask additional questions if you need.  Thanks!

Lee Ripma · Answer

@Gil Segev

Usually deals that will work for BRRRR are not able to be bank financed due to their condition. BRRRR like what you’re talking about are in bad shape. You could go more for the stabilized value add where you buy with financing and increase value through time, say over a few years.

Gil Segev · Answer

@Jim K. you're making very good point there.

I have managed several rehabs locally and one OOS before. The local rehabs were tough, stressful and over budget and the OOS rehab was horrific with a sub par contractor who left me 30k down and ran without completing any of the work. It took me 3 months to find another contractor and another 30k to get back to were I needed to be but the upside is that in that area, I now have a contractor I trust. Problem is, I can't find any deals there :(

I am by no means veteran but I am walking into this eyes wide open. I live in CA where properties are not likely to drop to a level I can afford anytime soon. I can sit and wait for it to happen or I can go out of state, risk a ton of money, fail, curse, almost give up a bunch of times and hopefully recover and come out with a team I can trust.

I'll be very happy to hear from others who are willing to share their experience BRRRRing out of state. from where I am today, it seems the only way forward is OOS.

Jim K. · Answer

@Gil Segev

I've gotta wonder, have you ever run a major OOS rehab on a property in such deep distress it can't be financed? Or is the rehab part just a bunch of theory to you right now and you're pretty sure you have the tools to find a "rockstar contractor" because "rockstars know rockstars" and you're sure you'll get a quality recommendation from the rest of your Core Four.

Because from the perspective of a guy that does this locally and just shivers in cold fear thinking about handling something like this from a few states away, the rehab process may be more complicated than you're giving it credit for. I bought David Greene's book and I've gotta say, the section on how to handle rehabs looks pretty thin on the ground in terms of workable advice on how to get it done the first few times in a new market.

Greene is candid about the fact that he was lucky the first time he pulled off an OOS BRRRR, even as a previously experienced real estate investor with substantial reserves. And nowhere in the book is the notion that BRRRR is, indeed, a capital-intensive endeavor that requires easy access to significant contingency funding (as @Russell Brazil pointed out) questioned.

They call the kind of places you're looking for "money pits" for a reason.

Gil Segev · Answer

Thanks @Andrew Postell. I think I get it now. I'll start working with a HML after I run some properties and numbers in my desired investing location.

Do you BRRR all cash?

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