How Fast Can You Scale the BRRRR Strategy?

[Ben Morand]

Hey guys! My name is Ben Morand and I am a 20 year old college student interested in buy and hold investing. So over the past few months, I have researched various investing niches/strategies such as small multifamily properties, large multifamily apartments, MHP's, etc. and now I am exploring the world of single family home BRRRR investing.

So I like the strategy a lot due to its relatively low barrier to entry financially and it’s lasting sustainability. What I am wondering is just how powerful is this strategy in real life? I’ve read all about it in the various BP books and on the blogs and podcast and forums, etc., but it almost seems too good to be true.

I've seen people such as Ryan Dossey on social media who have scaled the BRRRR strategy to buying 150+ single family houses in just 2 years. While I don't plan on acquiring THIS many properties in 2 years (I am a full time college student so I don't have quite this amount of time or resources), I am wondering what the real life pros and cons are to the strategy. Is it really a virtually "free" cycle where investors can repeat over and over again, building a massive portfolio of homes? How long does the entire process generally take? Is it common for people to find lenders for the refi that don't require a seasoning period? How difficult is it to take on so many loans? How hard is it and how fast can someone potentially acquire 15-20 properties this way? Any information that people can provide on this subject would be greatly appreciated!

Thanks so much to everyone willing to help!

[Neil Henderson]

Ok, there's a lot in here but I'll address the questions I feel qualified to answer. Mostly, the answer is, it depends. 

The BRRRR strategy, or value-add in general, is a very powerful strategy. It's what Warren Buffet has used to build his fortune. Find a temporarily distressed asset that can be turned around, add value to force the appreciation, and increase cash flow. Rinse, repeat.

The BRRRR strategy is not too good to be true, but it often doesn't work "by the book."

The financial barrier to entry is not quite as low as many would lead you to believe. 

In order to acquire a property, you are often going to need to act like a cash buyer, which means you either have the funds to purchase a property for cash, or you have access to funds that allow you to purchase a property like a cash buyer. If you are borrowing those funds, there is going to be a cost of capital. In order to refinance into a longer-term loan, the end lender is very often going to require you have reserves equal to six months of PITI (Principal, Interest, Taxes, and Insurance) on each mortgage. Depending on the size of the mortgage payment, that can be significant. If you have a portfolio of 7 properties with an average monthly PITI of $650/month, that means the banks are going to want to see about $27,000 sitting in a bank account somewhere as a reserve.

A BRRRR rarely goes by the book. A rehab could go over budget. An appraisal could come in low. A lender might see the market changing and require you to keep more money in the deal to protect their downside. A property might take longer to rent.

Achieving scale is the hard part and it's why we have transitioned away from building a huge portfolio of single-family BRRRRs and into self-storage. 

Traditionally, banks will let you, as an individual, acquire up to 10 Fannie Mae, Freddie Mac loans under your name. After that, you'll be looking at portfolio or commercial loans via cross collateralizing. Those loans are not going to be cheap, and they often won't have the traditional 30-year amortization schedules or terms of the agency debt (Fannie and Freddie).

I would not proceed unless I had the capital reserves to handle the unexpected, a good relationship with a lender who knew exactly what I was planning to do, and a rock star contractor who I trusted. A good lender and especially a good contractor will make or break your BRRRR.

None of the above should discourage you, but you should go in with your eyes open.