\n<\/p>\n
For years, the BRRRR method<\/strong><\/a> (buy, rehab, rent, refinance, repeat)<\/strong> was every real estate investor\u2019s favorite strategy. And it\u2019s easy to see why. Using this simple formula, you can buy an outdated property, fix it up, lock in some solid equity, and then refinance, having the bank pay you back all the money you put into a deal<\/strong>. It sounds foolproof in theory, and up until 2020\u2019s hot housing market, it essentially was.<\/p>\n But things have changed. Home prices<\/strong><\/a> are higher<\/strong> than ever, mortgage rates <\/strong>are still double what they were during 2021, and everyone and their grandma now wants to invest in real estate, making more competition for these outdated homes. So, one big question presents itself: Does the BRRRR method still work in 2024?<\/strong> And, if it does, what are some ways to beat the competition<\/strong> and score a seriously good deal, no matter the mortgage rate?<\/p>\n Well, we\u2019ve got the man who literally wrote the <\/strong>BRRRR book<\/strong><\/a> on the show\u2014our very own David Greene<\/strong>! David is giving his time-tested insider tips on how to build wealth<\/strong><\/a> with BRRRR<\/strong>, create more equity on your next home rehab, which new loans make BRRRR much better<\/strong> in 2024, and why you CAN\u2019T rely on cash flow anymore, but you can rely on something MUCH more beneficial. Ready to get your first (or next) BRRRR done in 2024<\/strong>? This is the episode for you!<\/p>\n David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: David: Rob: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n Interested in learning more about today\u2019s sponsors or becoming a BiggerPockets partner yourself? Email <\/em>[email\u00a0protected]<\/span><\/em><\/a>.<\/em><\/p>\n Note By BiggerPockets:<\/b> These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.<\/p>\n
This is the BiggerPockets Podcast show 904. What\u2019s going on, everyone? I am David Greene, your host of the BiggerPockets Real Estate Podcast, joined today by my co-host, Rob Abasolo, and if this is your first time listening, well, we are super glad to have you. We\u2019ve got an awesome show in place, and Rob is here to help me bring it to you. Rob, how\u2019s it going over there?<\/p>\n
It\u2019s good. I\u2019m coming to you from a hotel conference room where I had to kick everyone out. They were running over on the schedule. I was like, \u201cHey guys, I\u2019m doing a podcast.\u201d And so they\u2019re all standing outside of here and it is very important for this podcast to happen because, David, I feel like this podcast was made for you. We\u2019re calling it The BRRRR in 2024. Does it Still work? Do we need to make tweaks to the strategy? We\u2019re here to give you the inside scoop.<\/p>\n
That\u2019s right, I know a thing or two about BRRRR after doing about 50 of them in my career, and I even wrote a book on it which you can find at the BiggerPockets Bookstore. So we\u2019re here today to give you an update on the strategy and how we are applying it in today\u2019s market, and this is so important that Rob, who\u2019s actually extremely conflict diverse, did kick a bunch of people out of a hotel room. Rob, I\u2019m very proud of you and thank you for doing that.<\/p>\n
It was awkward. It was really, I was like, \u201cGuys, I\u2019m so sorry. You said I could use this and it\u2019s 1:00 PM and I got to go.\u201d And then they\u2019re like, \u201cOh, we\u2019re so sorry.\u201d So I have to bring it. I have to hold my end of the bargain. So let\u2019s get into today\u2019s episode and talk about the BRRRR.<\/p>\n
All right, let\u2019s do it.<\/p>\n
Let\u2019s set the stage first. So let\u2019s talk about what BRRRR is. We talk about it a lot and a lot of people are like, \u201cAre you cold? Are you talking about the nemesis to Alexander Hamilton?\u201d So David, tell us what the BRRRR is and why is it such a popular real estate strategy?<\/p>\n
BRRRR is an acronym. It stands for buy, rehab, rent, refinance, and repeat, and it\u2019s a popular strategy because it is a way that kind of forces you to become what I call a black belt investor in the book. You have to be good at the fundamental components of real estate investing to be able to pull off a BRRRR. That\u2019s why I like it because it forces you to improve your skills. You got to buy a property below market value. You have to be able to rehab that property and add value to it. You have to understand the financing of the property so that you can refinance your capital out. It has to cash flow when you rent it out. And then you have to build systems which allow you to repeat this process.
It grew in popularity because it was a way of acquiring property without running out of cash. So the main benefit of the strategy is that you get capital out of the deal to put into your next deal, but it\u2019s not capital that you had to take out of the bank. It is capital that you pulled out of a property that was pulled from equity that you created through good investing.<\/p>\n
Yeah, let\u2019s contextualize this a little bit and let\u2019s help people understand the basic premise by putting some numbers here. So let\u2019s say that you buy a property for $50,000. Let\u2019s pretend like, yeah, this is a market where you can buy one for $50,000. You put $25,000 of rehab and work into it, and as a result that property is now worth $100,000. You would then go to the bank and say, \u201cHey, I would like to do a cash-out refi because this property is now more valuable than when I bought it.\u201d If it does appraise for $100,000, the bank in general will give you around 75% of that equity in a new 30-year amortized loan, meaning in a perfect case scenario, you\u2019re able to get that $75,000 back to pay back your initial investment and rehab budget. Did I explain that correctly?<\/p>\n
That is perfectly well said, and sometimes it\u2019s not perfect. Sometimes you bought it for 50 and you thought you were going to put 25 into it but you put 45 into it, so you\u2019re actually all in for 85,000, and in that case, when you go to refinance it and the bank gives you 75,000 but you are all in for 85,000, you leave $10,000 in the deal. But that\u2019s still better than if you had to take the whole $25,000 down payment and put that towards the house, and then even more on top of that for the rehab.<\/p>\n
Right, right. So this has been a huge strategy really for a very, very long time. The acronym BRRRR was something that was coined, I believe, by the BiggerPockets community. That\u2019s right, right?<\/p>\n
Brandon Turner himself.<\/p>\n
Yeah, okay. That\u2019s what I thought. And so, yeah, it\u2019s a strategy that\u2019s been utilized for a long time, but has there been a moment in time in which the BRRRR strategy worked best?<\/p>\n
Well, yeah. The BRRRR strategy allows you to get money out of your deal to put it back into real estate again which means as long as you\u2019ve got new deals coming along, it works great because you\u2019re amplifying how quickly you can acquire real estate. Now it\u2019s also a buy and hold strategy. This is a strategy that you use to keep a property. It\u2019s kind of like flipping, but instead of selling it to somebody else you refinance it and you keep it yourself. That means that it is susceptible to the same challenges that all buy and hold real estate has. So if you can\u2019t find cash-flowing properties, you can\u2019t find BRRRR properties because they have to cash flow when you\u2019re done. And if you can\u2019t find properties to add value to, it\u2019s hard to find BRRRR properties because you can\u2019t add value to the property. And if you can\u2019t find great deals because there\u2019s a lot of competition, it\u2019s hard to find BRRRR properties because you can\u2019t buy below market value. So it really trends with buy and hold real estate.
Now one of the ways that people have sort of adapted along is they\u2019ve said, \u201cHey, well, buy and hold real estate is really tough, but I\u2019m going to get into short-term rentals.\u201d So they\u2019ve used the BRRRR strategy and combine it with a short-term rental instead of a traditional rental. So when you\u2019re analyzing for rent, you just use short-term rental analytics instead of traditional model analytics, and then people call that the AirbnBRRRR or the BRRRRSTR but really the strategy is a part of it the entire time.<\/p>\n
It\u2019s been a strategy that\u2019s worked for a long time, but I think a lot of people on the podcast are probably like, \u201cHey, I\u2019m on board with this strategy, but it\u2019s 2024 and things are a little bit tougher now.\u201d So do you think you could provide a little bit of context or clarity as to how the current market is making the BRRRR much harder than it was in the last, let\u2019s say, 10 years or so?<\/p>\n
Yeah, absolutely. It\u2019s harder to find cash-flowing deals because rates went up. So as interest rates have increased, cash flow has gone down but prices have not gone down. So that makes BRRRR tougher, just like all buy and hold real estate is tougher. Another thing is that it used to be that there was tons of fixer-uppers on the market. When I was cranking these things out, doing five a month, I could just go on the MLS, find a bunch of ugly houses that had been sitting there for a long time, write really low offers, put them into contract, and then once I got back my inspection report, figure out if I wanted to move forward with the deal. Well, construction costs are much higher than they used to be, it\u2019s harder to find contractors because everybody wants them, and there\u2019s less inventory to actually pick from because less houses are hitting the market.<\/p>\n
It really does feel like contractor and rehab\u2026 Contractor in the labor force already is hard enough to find, and as a result, rehab costs seem to be much higher than they have been, and then if you\u2019ve been around the BRRRR world for the last couple of years, there was that moment over the last few years where lumber was shooting up as well. It seemed to be shooting up at the same time as interest rates. And so, yeah, all of that just kind of created this weird standstill with constricting the housing supply. So there\u2019s a lot of reasons why the BRRRR has been a little bit more difficult, whereas I think maybe entering now it feels like now the interest rates are starting to go down, so at least we\u2019re trending in the right direction, right?<\/p>\n
Yeah, the interest rates are going down which makes it a little bit easier to find a property that could cash flow, but the price of the properties aren\u2019t going down. They\u2019re probably going to start ticking back up again, right? All of the costs of things that go into real estate, like you mentioned the lumber, the materials themselves, the price you pay for the labor to get the person to put the material into the house, that\u2019s all going up with inflation which means that the price of the house is going to keep going up with inflation.
The odd dynamic that I\u2019m noticing is that rents are not keeping up with all those other things because rents have an artificial ceiling put on them. They can only go as high as what people get paid at their job. So as everything we buy becomes more expensive but wages aren\u2019t keeping up with that, downstream of it we find that rents can\u2019t keep up as well, and so that means that even though the prices of these deals are going up, the rents aren\u2019t quite keeping up with it which makes the cash flow harder, and that becomes one of the constrictions acquiring buy and hold real estate and slows you down, and BRRRR\u2019s really meant to speed you up.<\/p>\n
Yeah. So let\u2019s talk about this a little bit. I want to talk about the inventory or I guess the lack thereof and what kind of major issues that\u2019s presenting for investors today. Can you tell us, is there a specific correlation as to how inventory sort of affects the BRRRR strategy?<\/p>\n
Yeah, because inventory affects pricing. The less houses there are, if we\u2019re assuming that demand is constant but supply goes down, the more expensive something\u2019s going to get. There\u2019s also less options for you to choose from because investors forget that they\u2019re competing with other investors. Everybody listening to this podcast, you and me, everyone who reads these books, everyone who\u2019s listening to the other podcasts and the other people that are internet influencers, they\u2019re all teaching people how to go find real estate. So you have more people that are all trying to buy these properties that have quit their jobs or quit pursuing their jobs and now they want real estate to be their full-time hustle that are all going after the same inventory that\u2019s on the market.
In addition to that, you now have stuff that used to hit the MLS that everybody could buy that gets bought before it hits the MLS. You\u2019ve got wholesalers that are sending out direct mail campaigns, text messaging campaigns, cold calling campaigns that are all trying to buy properties before they get to the MLS, before a real estate agent puts them on there. You\u2019ve got big hedge funds like Blackstone that are scooping up a lot of properties and they\u2019re trying to keep it inside their portfolio. That all used to be inventory that hit the MLS and now it doesn\u2019t. So even though on the surface it looks like real estate\u2019s the same as it\u2019s always been, it\u2019s actually very competitive to where it used to be, and that\u2019s why we see so much less supply making its way down to the market that we could buy.<\/p>\n
Yeah, but what can investors actually do about this? Because everyone wants to break into this. It\u2019s more competitive than ever. Do you have any tips for anyone at home that may be struggling with the onslaught of crazy competition, even in 2024 when, I don\u2019t know, it seems like less people would want to get into this, but the competition still seems pretty high?<\/p>\n
Well, there\u2019s two ways. You got to fight your way to the front of the funnel, okay? You can\u2019t just show up and look at houses on Zillow and think that you\u2019re going to get it when everyone else is too. You also have to be spreading the word amongst your specific sphere of influence that you\u2019re looking to buy houses. You got to work just as hard as the other people are that are sending these letters and looking for ways to create funnels to buy off-market deals. You kind of have to make that a part of your everyday life is that everywhere you go and you meet somebody, you say, \u201cHey, I\u2019m looking to buy houses. If you know anyone that has one to sell, let me know.\u201d That\u2019s a bit of a nuisance. People don\u2019t like doing it. But if you don\u2019t do it, it just means that house is going to go to the person that did. So acknowledging you\u2019re in a competition, even though it\u2019s uncomfortable, is a healthy way to start.
The other way that I\u2019ve incorporated into my investing is that I don\u2019t just look for the low-hanging fruit. We used to be like, \u201cOh man, look, ugly carpets, ugly cabinets, ugly kitchen. I could buy that thing, switch out that stall shower, make a tile shower, boom, I\u2019ve added equity, I\u2019ve got a flip or a BRRRR if I want to keep it.\u201d Now you got to think a little more creatively. You have to think about different ways to add value to the real estate that you are acquiring, even if you can\u2019t buy it at cheaper prices.<\/p>\n
So now with all that said, David, let\u2019s ask, I think the main question of the podcast here, the thing that people actually want to know, what they came here for, which is it actually still possible to do a successful BRRRR in 2024. We\u2019re going to answer that question in detail, including strategies investors can use to BRRRR, right after the break.
Welcome back. I\u2019m here with Sir BRRRR himself, David Greene, and right before the break I asked him the question we\u2019re here to answer. Is it still possible to BRRRR in 2024? So let\u2019s jump back in.<\/p>\n
It is possible, just like it\u2019s possible to buy a successful buy and hold real estate deal. But are you seeing as many of them, Rob? Are they overflowing with abundance like they may have been five or six years ago?<\/p>\n
Probably not. No.<\/p>\n
Yeah, it\u2019s just going to be harder, right?<\/p>\n
Yeah.<\/p>\n
But it\u2019s harder because it\u2019s a better asset to get into. Everybody\u2019s looking to buy these assets. The price of them is going up. That means that they will be a more solid, long-term buy and hold strategy because it\u2019s going to hold its value, but it\u2019s just going to be harder for you to find these deals. That\u2019s why I\u2019m advising people to start taking the road that other people are skipping. You actually have to treat this like a business as opposed to just looking for something that would be easy and automated and money just flows to you without any work.<\/p>\n
Yeah, so let me put you into this a little bit from a tactical standpoint, because over the last few years we discuss how the labor force has been such a\u2026 It\u2019s been brutal in the real estate world, and that has also been paired with a crazy supply chain shortage which just I think has really made things complicated. So have you seen any in your personal rehab that you\u2019ve done or within your network, do you feel like there\u2019s been any relief at all in the supply chain to open up the goods for the renovation process?<\/p>\n
You know, that\u2019s a great question. What I\u2019ve found as the market that was steaming along and crushing it, and every property was gaining equity, and transactions were taking place all the time, and my real estate team was crushing it, my loan team and company was crushing it, and my properties themselves were crushing it, it all kind of came to a grinding halt when those rates went up. It was scary how fast the whole market turned. And so what I found is I had to pay more attention to my portfolio and to the businesses. I couldn\u2019t just let the leader of the business run it because they were not being careful enough with the money they spent, the training that they gave, or the way that the employees were performing. We had to really tighten up on everything.
So I started hiring people to manage my own properties as opposed to outsourcing that to third party property management. The same thing has been true with the deals that I have going on, like for some of the short-term rentals that I have. If you let somebody else buy the materials, they\u2019re going to go buy a brand new pool table for $5,000. But if I put somebody looking on Facebook Marketplace every day for two weeks, we find someone that needs to sell a pool table for $1,800 and negotiate it down to 1,200, right?<\/p>\n
Yeah.<\/p>\n
That\u2019s the principle that I found you have to put into the deals you\u2019re doing. So if you\u2019ve already got a place under contract, it used to be a contractor gave me a bid, I reviewed the bid, I said, \u201cOkay, sounds good.\u201d I put a timeline in when I needed it done by, and that was that. Now I need to be involved in the process. Okay? I\u2019d rather have our team buy the materials and pay them the labor to do it because then we can shop for the cheapest materials or we can look for really good opportunities. James Dainard has done a couple of these shows and he\u2019s talked about the level of detail that he knows in every flip he\u2019s doing and what things cost. That\u2019s the level of attention that you\u2019re going to have to pay to keep your rehab costs reasonable, and for people that aren\u2019t doing that, they\u2019re just going to be frustrated.<\/p>\n
Sure.<\/p>\n
It\u2019s like, where\u2019s all my money going? Well, it\u2019s going to the contractor.<\/p>\n
For sure, and because they mark up the materials too and their time which rightfully so in many instances. So let\u2019s talk about that. Let\u2019s say, yeah, you bought the property, you\u2019re in this rehab process, it\u2019s the first R in BRRRR. Are there any other tips or tricks for keeping your rehab down? Is there anything else you can do to cut costs, especially if you\u2019re a first timer doing this?<\/p>\n
If you\u2019re a first timer doing it, your goal is to learn. So you need to be involved in as much of the project as you can, learning what a contractor does. Once you have a basic idea, you can keep your costs low by managing some of your own subs, and for knowing when you buy a property, what type of stuff you need highly skilled labor to do and what type of stuff can be done from less skilled labor that you can pay less. You really want to avoid getting into the projects that have complicated electrical issues or complicated plumbing issues or have really complicated permit stuff. We\u2019re going to have holding costs that skyrocket because you\u2019re waiting a long time with the deal. You want to get into the kind of projects that need a lot of drywall work, sheetrock work, flooring that\u2019s going to be done, paint, dry rot issues perhaps. That type of stuff can be done by lower skilled labor so that you can save money on materials and then not get hammered when you have to go pay someone a ton of money to do the work.<\/p>\n
Yeah, I\u2019m a big advocate for maybe taking on some of the DIY aspect on your first BRRRR or your first rehab, simply because I think there\u2019s an intangible skill that you learn from that which could be the actual craft of doing a skill like, I don\u2019t know, drywall or anything like that, but what I think you actually learn is how difficult it is to do something and how much it\u2019s worth to you to pay that kind of thing. Because for me, for the first house that I ever bought, I did a lot of my DIY projects. I knew what was hard, I knew what wasn\u2019t hard. That way anytime I actually worked with the contractor, I was like, \u201cHey, this $10,000 bid should be more like $2,000 and I\u2019m not too dumb here.\u201d So I think a little experience goes a long way. Are you an advocate for DIY-ing a BRRRR or your first rehab in any capacity?<\/p>\n
Well, I\u2019m an advocate for doing whatever you can to reduce your risk when the market\u2019s tough. So for instance, maybe you can\u2019t find a flip property, but can you do a live-in flip?<\/p>\n
Absolutely.<\/p>\n
Right. That reduces your risk a ton. Maybe it\u2019s really tough to find a big BRRRR property where you can get a hundred percent of the money out, but can you find a BRRRR property where you leave some money in but it\u2019s significantly less than if you had bought it and you buy in a great location where it\u2019s going to appreciate, and then three years, you\u2019re going to take all that equity and you\u2019re going to roll it into the next opportunity. You have to compare the opportunities that you\u2019re looking at today with the other opportunities you have today, not the opportunities that you heard about five or six years ago from people that are on podcasts talk about this great portfolio they have when they bought when the market was different.<\/p>\n
David, something you mentioned that I don\u2019t want to gloss over because I think this is super important, but it seems like the time horizon for a BRRRR has changed, whereas when the market was more flexible, we had a little bit more flexibility with how quickly or how slowly we could do that BRRRR. But do you feel like the timeline has shifted in 2024 with how long one should take during this entire process?<\/p>\n
Yeah, and for investing in general, I do think that. In fact, that\u2019s the next book that I have coming out with BiggerPockets Publishing is on this exact topic that we sort of need to change our expectations for real estate and therefore change our strategy. Now there\u2019s less to buy, there\u2019s less meat on the bone, and it\u2019s harder to get cash flow. The whole thing is trickier. Does that mean don\u2019t do it? No. It means to adjust your expectations. So this book that I\u2019m writing is about breaking our addiction to understanding that cash flow is the only reason you buy real estate. Cash flow is one of 10 ways that you make money in real estate, and several of these ways involve long-term delayed gratification.
It\u2019s buying property in the best areas, adding value to those properties, doing what you can to buy beneath market value and incorporating other strategies like reducing your tax burden and buying in areas where the cash flow itself is going to increase because the rents are going to go up more than surrounding areas. When you put all these strategies together in the same deal and then you wait, what you find is you still get incredibly good returns, you\u2019re just not getting them right away.
So I\u2019m trying to get people to stop looking at real estate as the magic pill to help them escape the job they hate or the life that they hate or the fact that they\u2019re struggling with things and look at real estate as being the carrot that you pursue that gets you to step up your game when it comes to the effort you\u2019re putting into work, the skills that you\u2019re building, the education that you\u2019re acquiring, because, Rob, you\u2019ve seen this too, the wealthiest people that we know bought real estate in good locations and they waited a really long time. All the strategies that we talk about here are just designed to get you to that point safely.<\/p>\n
Yeah. Yeah, yeah, it\u2019s all about also being adaptive and being nimble which is why you\u2019re titling that book Pillars of Stealth, right?<\/p>\n
That\u2019s really nice. I like that.<\/p>\n
All right, so let\u2019s talk about sort of the next R here which is rental, which there\u2019s some parallel pathing that\u2019s going on during the rehab and the rental side of things because when you\u2019re rehabbing you have to sort of know, hey, how nice should I make this rehab or how standard can I make it. I\u2019d imagine there\u2019s a level of analysis that one should do by looking at the rentals in your area or in your neighborhood to see how nice they are and ask yourself, \u201cAm I matching them or is there a delta in actually being a nicer quality BRRRR and will that delta yield me more profit?\u201d<\/p>\n
It\u2019s a great question, and the answer is sometimes. There\u2019s three main reasons that I see people rehabbing a house. You\u2019re either rehabbing it to sell to someone else which is a flip, you\u2019re rehabbing it to keep it as a long-term rental, or you\u2019re rehabbing it to keep it as a short-term rental. Okay? So if you\u2019re trying to flip it, you don\u2019t want to make it nicer than the surrounding areas because then you\u2019ll have a more expensive property that the appraiser won\u2019t give extra value to and you won\u2019t be able to sell it for as much as you thought because it won\u2019t appraise. So in that circumstance, no, make your property as nice or maybe a tiny bit nicer than not only the other properties in the neighborhood but you want to compare it to the other properties that buyers have available for sale. You actually want to look at the existing inventory that you\u2019re competing with when your house goes on the market and be a little bit nicer than them, but not a ton nicer.<\/p>\n
But has this changed though, over the past years? Because I agree that is an underlying principle of the BRRRR, but do you feel like today, nowadays, renters are more demanding? Do they want more out of their rentals? Because I can tell you from an Airbnb or a short-term rental standpoint, the guests are definitely more demanding. I feel like they want this five-star resort kind of thing, and I\u2019m curious if that also transcends over to the long-term rental side of things.<\/p>\n
What I\u2019m trying to get at here is that the renter or the guest on Airbnb or the buyer of the flip, whoever your end product person\u2019s going to be is going to compare your property to their other options, and you want to be a little bit better than those options. You don\u2019t want to be too much better than those options because then you wasted money. You don\u2019t want to be not as good as those options because then they won\u2019t choose your property, and you don\u2019t want to be exactly the same as those options because then you\u2019ll be slightly competitive until your competitors do a little bit better. So you have to understand the reason you\u2019re rehabbing it. If you\u2019re rehabbing it to flip, you want to compare it to the other properties available for sale as well as the other properties in the area.<\/p>\n
Got it, got it.<\/p>\n
If you\u2019re doing it for a standard renter, it doesn\u2019t matter if it\u2019s really nice or not that nice. What matters is what their other options look like. If they have a ton of inventory to choose from, yours has to be nicer, but in most markets there\u2019s not enough rental inventory. So if this is just a standard buy and hold rental on a year-long lease, you don\u2019t need to make it super nice. You need to make it super durable so that things don\u2019t break all the time. But to your point, Rob, if this is a short-term rental in a highly competitive market, yes, you need to over-rehab. You need to make it extra nice. You need to make it nicer than the other competition and so much nicer than the rest of the competition that you buy yourself a couple years for everybody to catch up to you.<\/p>\n
Makes complete sense.<\/p>\n
All right, now that we\u2019ve covered a few tactics that investors can use to give themselves an edge to make BRRRR work in 2024, we\u2019re going to get into some good news about how financing options have changed and improved. So stick around and we\u2019re going to get into that soon.
Welcome back everyone. Rob and I are here talking about how the BRRRR has changed and how they can still work in today\u2019s market. So let\u2019s get into the good stuff.<\/p>\n
I want to get into the next R here which is refinance, and this to me seems like what feels like the biggest crapshoot in the entire system of BRRRR because lots of things are changing. Interest rates are changing. Appraisals are always finicky. You never know what you\u2019re going to get when appraisal. You can have a pretty good idea, and then market conditions and corrections are happening. So tell us a little bit about what the financing options are for people doing the BRRRR strategy today in 2024. Are rates any better? Is there a more positive outlook than there has been over the last year?<\/p>\n
Rates are higher than they used to be, but lower than they were recently. So they\u2019re sort of trending in a better direction right now. They\u2019re still historically low, and you actually have more financing options available now than I ever saw before. So you had a couple options. You could pay cash for stuff, which is what I was doing and what most people were doing. You could pay cash with somebody else\u2019s money, like private money which you kind of had to be an experienced operator to get people to trust you with their cash. You could get a hard money loan, which was not very flexible and very expensive, or you could get a conventional type loan and then refinance out of it once you were done, but that was expensive because you had a lot of closing costs.
Now there\u2019s a lot of products like bridge products that we offer where you can go in and you can borrow the money for the purchase and the rehab. Right? You put 15% down on the purchase and 15% down on the rehab and not having to pay for a hundred percent of your rehab is a significant savings in how much money you\u2019re having to come out of pocket for. Those are usually loans that last for a year, sometimes two years. So once you\u2019re done with that project, 3, 4, 6 months later, whatever it is, you can refinance out of it into a conventional loan or into a DSCR loan.
Since the point of buying these properties is to keep them, they\u2019re supposed to cash flow, you can use DSCR loans to help make sure that you qualify for a loan even if you have more than five properties, even if you have more than 10 properties, even if your own debt to income ratio can\u2019t support continuing to acquire properties, which was one of the old throttles of BRRRR is like, yeah, I got deals and I got money and I got contractors, but I can\u2019t keep refinancing out of them because my DTI can\u2019t keep up. Well, now you\u2019ve got a lot more lending options that will allow you to do it. So even though the rates haven\u2019t been as favorable as they were eight years ago, the lending flexibility is much more favorable.<\/p>\n
Yeah, and for everyone that may not know what a DSCR loan is, they\u2019re a very powerful and beautiful tool. It stands for debt service coverage ratio. Basically what that means is the bank will use the projected rents of a property to approve you for that to underwrite you on that loan. And so, yes, David was talking about the DTI or debt to income ratio. When that maxes out, it\u2019s very hard to get a loan conventionally, but a DSCR loan is really looking more at the actual projection of that rent. So it\u2019s a really powerful tool. It\u2019s a little bit more expensive usually than a conventional loan.<\/p>\n
Yeah, it\u2019s usually a point higher on the rate usually.<\/p>\n
Yeah. But still worth consideration. I wanted to ask because there\u2019s sort of this idea of this concept being tossed around where should we replace the R to an H and pull HELOCs instead of refinancing with the interest rates as they are right now, the BRRRR?<\/p>\n
Yeah, that can make sense if you think rates are coming down in the future. If you think they\u2019re going to go down, you can get a HELOC. It\u2019s a lot less expensive as far as the closing costs go, and you can still get your money out of the deal to put into the next one. So HELOCs will make it easier to continue to acquire more properties if instead of refinancing the entire note, you just put a HELOC on the equity, but they increase your risk because most of the rates on HELOCs are going to be adjustable. If rates go up instead of down, well then when you do have to refinance out of the HELOC you\u2019re going to get a higher rate than if you had just done it in the beginning.<\/p>\n
Yeah, and just one quick caveat here. HELOC stands for home equity line of credit. You\u2019re basically taking a line of credit on the equity of your house which I guess makes sense, that\u2019s why they call it a HELOC. But one thing that\u2019s not talked about enough is the fact that when you take a HELOC on a property, that is a loan in a sense because it\u2019s like a line of credit. So there is a note, a monthly note that you have to pay. So you just want to make sure that you are accounting for that in your analytics, in your analysis of a property. Every HELOC is structured a little differently. I\u2019ve seen five different ways that HELOC payments are calculated. So just make sure that you understand the mechanics of how the HELOC works for your personal bank.<\/p>\n
That is right. I guess sometimes we forget to mention that when you take out a loan, it usually involves some kind of repayment. But yes, that\u2019s exactly the case.<\/p>\n
Yeah, because HELOCs are really powerful and they\u2019re really cool things. In a perfect scenario they can get you out of a bind, but yeah, we don\u2019t ever talk about the possible downsides, one of them also being that if you\u2019re taking a HELOC out on a primary residence, that also adds to your DTI. So just keep that type of stuff in mind as you explore that option.<\/p>\n
That\u2019s right. So to sum that up, rates are higher and they\u2019re less favorable than they were in real estate\u2019s heyday, but options and flexibility is better than it\u2019s ever been when it comes to getting loans on properties. You can literally get a really good bridge loan to acquire the property and fix it up, borrow most of the money to do that. If you do the things that we\u2019re talking about now, you focus on adding value to the property, you add square footage, you add bathrooms if it doesn\u2019t have enough, you do a really good job on that remodel, you create a lot of equity, then you refinance out of that into a conventional 30-year fixed rate or a DSCR 30-year fixed rate. It\u2019s actually pretty smooth to the financing where that used to be a big area of concern when you\u2019re trying to scale a portfolio.<\/p>\n
Sure. And before we wrap today, I did want to ask you, considering that BRRRRs are different today than they were five years ago, than they were 10 years ago, what metrics actually make a successful BRRRR today and how is that different from previous market cycles?<\/p>\n
In the previous market cycle, we told everybody get as much cash flow as you can, and that\u2019s the reason that you invest. Well, as cash flow has somewhat dried up, it leaves people with the questions of should I invest in real estate at all because the reason I was told to do it is gone, and I would still say yes, but you\u2019re not going to get the immediate gratification that cash flow provides. You\u2019re going to have to shift to delayed gratification. Now the good news is when you compare the money that you make over a 20-year period of time in appreciation and loan pay down, especially if there\u2019s a value-add component to your real estate, it dwarfs however much cash flow you think you could have made. Okay? Take the biggest, buffest guy that you\u2019ve ever seen, that\u2019s cash flow, and this appreciation is like Godzilla. You can\u2019t really compare it, right?
You have to take that longer-term horizon outlook which is why BiggerPockets has been doing a great job of providing overall financial education. Okay? It\u2019s not about just let me get a couple houses and I\u2019m out of the game and I\u2019ve retired, I\u2019m on the beach with a Mai Tai. It\u2019s about building up your skills. It\u2019s about delaying gratification. It\u2019s about making wise investments that will grow over time. It\u2019s about taking advantage of the tax benefits you get, or about starting a business within real estate and sheltering some of that money with real estate. Look at real estate as an amazingly crucial piece, a cornerstone of an overall financial strategy that you need to put together, and you\u2019ll fall in love with it. If you look at real estate as an individual brick that you can just stand on and have your entire building based on, it\u2019s going to let you down.<\/p>\n
Absolutely. I think we talk about it often on the show that real estate has several levers, cash flow, appreciation, tax benefits, debt pay down, and depending on the market cycle you\u2019re in, the levers are going to be a little different. So understand that going into it because I always tell people, going back to what you were saying, I don\u2019t know, sometimes people see breaking even on a BRRRR like not a good thing. I\u2019m like, \u201cGuys, in Vegas, they say a push is a win.\u201d That\u2019s great. Breaking even on a house that you got for free, come on.<\/p>\n
Well, not only that, they don\u2019t see it as a good thing if they didn\u2019t get more money out of it or if it doesn\u2019t cash flow right away. But if I said to you, Rob, hey, you\u2019re going to do a deal, you\u2019re going to get all of your money out or a little bit of it out and it\u2019s going to break even on cash flow, but you\u2019re going to have created $75,000 of equity. You\u2019re going to be paying off a loan every single month with the renter\u2019s money. The rents are going to go up every single year from where they are today. The value\u2019s going to go up every single year from where it is today, and this is going to save you $50,000 in taxes that you were going to have to pay. Oh, and by the way, if you want to add an ADU to it or another component of it, this deal would work for that. When you finish the basement, that\u2019s going to add square footage, more value, and it\u2019s going to increase a whole new income stream which is going to be going up every single year like the others, and maybe you even short-term rental part of it and you do the other part traditionally. Can you tell me how that\u2019s a loss for you?<\/p>\n
No, I can\u2019t. I was taking furious notes as you said all of that, and I just, I can\u2019t argue with any of that, David. I would like that YouTube video if I was watching that on the YouTube video. So if you\u2019re watching this on YouTube, hit the like button, hit the subscribe button, leave us a comment down below. And I think that wraps up today\u2019s episode of BRRRR in 2024. Is it still a viable option? The answer\u2019s yes.<\/p>\n
Nicely done, brother. You just got to adapt with the times like we always had. I remember at one point, BRRRR was an adaptation, right? When we were talking about it, it was like, what? You could get your money out of a deal? At one point, long-distance investing was an adaptation, right? Well, that\u2019s crazy, you could buy in a different market that\u2019s not your backyard, and there were so many podcasts done on how to do it. We\u2019re still going to have to be adapting, and that\u2019s why you listen to podcasts like this. So thanks for that. Rob, you want to take a shot at my nickname today?<\/p>\n
Oh, yeah, yeah, yeah. This is Rob for David Sir BRRRR Greene.<\/p>\n
Signing off.<\/p>\n
Signing off, signing off. End scene.<\/p>\n