This question is for the folks who Buy cheap, Rehab fully, Rent, Refi, and Repeat (BRRRR strategy). I want to know how you make it work. Here's an example of what I'm talking about:

Purchase price: $10,000

Rehab (everything new): $40,000

Total "all in": $50,000 (fully financed, 15 year note, 5%)

Rent: $650/month.

If I apply my normal formulas to it....

10% maintenance (-$65)

10% management (-$65)

Taxes and Insurance (-$70)

5% CapEx (-$35)

NOI: $415

Less debt service (-$395)

Profit: $20/month.

We haven't factored in vacancy.

These are real numbers I'm getting from some investors in my market. Their rent to "all in" ratio is much lower than what I want, but somehow they use this strategy to get up to 100 houses. Interesting strategy, and in spite of my debt-averse nature I am simply curious about how they make it work.

No cash flow, or very little.

Let's say no maintenance at first and self-managers get to keep the management fee, leaving $150/month ($1,800/year) profit on a $50,000 asset. That's 3.6% return on capital and leaves no room for error. One vacancy every 2-3 years would devour most, if not all, of the profits.

If a person owned 20 of these houses, yearly income ($36,000) is about as as much as the manager of the local Video Rental store, but it comes with $1,000,000 in debt.

15 years is loooooong time to carry around a deal that is essentially all equity and bare minimum cash flow. How do these folks eat?

Are my numbers wrong? Investors who follow a similar path to this example, what's missing in this picture? What am I not understanding about this model?

I am genuinely curious to understand this model. I've asked some of the local investors who claim they do this, but answers are vague.

I have done BRRR since I started and only really heard that term last week when an investor buddy of mine sent me some YouTube videos.

My $8,500 house is a perfect example of this. Bought for $8,500. Fixed and refi'd for $30,000 for 20 years.

Monthly rent is $715, mortgage is $195. Taxes are around $1,000 a year, insurance maybe $40-$50 a month. Maintenance is LOW due to the fact that the whole unit is totally remodeled. That's a big factor there.

The BRRR paid back my investor with interest for the $8,500 purchase and the capital was moved to my $3,500 3 unit. I am 2/3rds of the way done with that and already started the refi for 55k.

When I read the Pockets website, many investors are happy with a barely cash flowing property. They are counting on appreciation to be the payout.

What's missing in this picture? Sweat equity. PM's and everything hired out will crush or significantly wound the BRRR method.

Velocity is also missing, you have to keep moving and shaking.

It should be SRRR: Steal, repair, refi, repeat.

Also, looking at your numbers, your rent is too low for the $50,000 investment.

I can tell you this is how we did ours. We only purchased *A foreclosed homes (60+) except for 6 HUD foreclosures in one week. My wife and I usually paid 90% of appraised price (asking) and usually had 100% financing. Our Broker was paid 1K no matter what the commission. He kept 1K and returned the rest (5%)to us to help with rehab cost. He never saw one house we purchased. He would pick up closing package bring to us - we signed and he brought back to *A. Interest was 6 to 7%. Our ROI was over 100% because we got 100% financing and commission back to offset expenses. NOI was low (very) but we were accumulating SFH's. Not many people could do this and in fact our insurance agent told us a few years ago everyone else has folded up. We were the only ones left. The head of *A told us he couldn't stand dealing with us because we knew more about *A foreclosures than the people in his office. (that was a proud moment)

We sacrificed a lot. I worked 2nd shift (i would bring my work clothes and shower at the rental) so i could do the property's in the morning work until 3pm and than head to my regular job getting off at 11:30pm. Since I can and could fix anything we never needed to call repairman and my wife did the books and court filings. My 2 sons who also sacrificed by working when they were in their teens at the rentals are now reaping the rewards that we promised them. New trucks/cars vacations and tons of time off and exceptional pay. My oldest put himself through college as the dorm repair person on site.

We are now down to 6 mortgages so really good cash flow now and in the past 10+yrs.

Sid, if you're looking for percentages, my average unit costs $25,000 and my average rent is $665. Whatever that means for you in regards to BRRR.

Like MYOB, when I started, I would work for another investor during the daytime and at my units until 1-2am then do it all over again the next day.

Ken NY -- you hit it right on the head-- hiring out-- without knowing the job yourself is disaster waiting to happen.

When I didn't know much about AC (35 yrs ago) work I took a class. Why? because I had to call and AC guy to look at a compressor and saw him take a screwdriver and arc 2 terminals on the compressor-- right in front of me. I didn't know much about AC's but I sure knew enough about electricity.

Ken NY -- you hit it right on the head-- hiring out-- without knowing the job yourself is disaster waiting to happen.

When I didn't know much about AC (35 yrs ago) work I took a class. Why? because I had to call and AC guy to look at a compressor and saw him take a screwdriver and arc 2 terminals on the compressor-- right in front of me. I didn't know much about AC's but I sure knew enough about electricity.

Our first two purchases were disasters. Mortgaged to the hilt, huge down payments that were more than we pay for houses in full these days, did not cash flow, bad tenants, blah blah blah. Then the crash hit and couldn't sell for what we owed. After years of dealing we let the bank have them both in the same year. Luckily they sold them well so we got out bruised and bloodied, but alive. Never again.

I'm missing an R, because I don't refinance... I just work with the money I have on hand.

The way we made it work was that we did everything ourselves that we possibly could do. DH would come home from the day job; he would eat dinner; and then he'd go put in another four hours down the street. Yeah, we hired out the skilled stuff, like "we need to replace the gas line" or "let's install central heat & air" or "I'd like to run a 220 for the stove". But hanging drywall, sanding drywall, painting, installing light fixtures, laying flooring, replacing windows, tearing out kitchens, putting kitchens back in... that was all DH, sometimes with help, and sometimes without help.

So, apart from the skilled stuff, and the costs of materials, we were able to keep our up-front costs down by plugging in our own time and labor. Because it's more of a delayed compensation... we'll put in 100 hours working on this house renovation today, with the expectation of getting several hundred from this house in a few years from now when we've met our goal and can step back from aggressive growth, and get to a point where we renovate a house because we want to, not because we need to.

It wasn't until we got to the 10th house that we were really able to start hiring out more of the rough work-- pull out stinky carpet, take this pile of junk to the dump, that sort of thing. Or things like ongoing routine maintenance-- getting a handyguy to look at a toilet, rather than DH.

The general problem occurs when the end value is too low. In the houses that are only worth 25-35K, it's all cash flow and little appreciation. If you do the rehab yourself to save money then the cash flow can be ok.

These other guys want houses of 85-125K value, then they hire all repairs out and refi. Their rents are higher 850-1350 so their numbers work, but like you said lots of debt for the amount of cash flow.

What I'd recommend is buy cheap, fix yourself and rent for cash flow until you get enough cash flow (maybe 10K a month). Then start selling off the worst ones and buying new ones, fix them Wyourself and flip those. Once you're in for 30K on a 35K house, there's nothing left but cash flow. Take the profits you earned from your work and move to the next one.

After a while, you've got the 10 or so best of the group, good cash flow and the flips for extra cash.

Richard MI there was a real estate investor back in late 80's early 90's who made a fortune writing a book doing that exact technique. Wade something was his name (Cook)? Friend of Robert Allen the nothing down king.

Deanne TX great life now-- but you earned it.

Increasing rents help make brrr a viable strategy.

First, you cannot repeat that formula to get 100 houses because after ten or so you will never get a bank to lend to you and hard money rates will crush you.

Our approach was very different. Our criteria: quality of neighborhood to attract better qualified tenants, value over cost. would only require cosmetic fixes, projected appreciation, and had to produce the same growth as our stocks. Most, not all, were 2 yo properties in foreclosure. As a broker I took the 5% comm. from HUD which in some instances paid for the cosmetic fixes. Several were financed with 401k funds converted to alt. investments and the rest were bank financed at 65% @7.25 interest 30 year mtg.

We refinanced all of the mortgages through HARP which brought us down to an avg. 4.7 rate

Today they net 42% which would be 49.5% if not for the HOA's on the TH. The starter homes have appreciated an average of 62% while the older homes have appreciated between 175 to 250% depending on location.

We bought one cheap property @ $47,000 that has not appreciated one single cent but has only been vacant 1 month in almost 12 years and has netted more than double what we paid for it.

All the houses were inspected before making offers and we contracted everything out. My wife was a GC so no worries about overseeing the quality of the work.

It doesn't seem like you are really wanting to know how BRRR works. It seems like what you are really asking is why do a deal that has break-even cash flow.

How BRRR works is very straight forward. You buy a house, rehab it, rent it out, and refinance. That's how it works, period. It's been going on for decades, it just hasn't always been called BRRR.

DON: It depends on how they do it. They can discount their commission or contribute to closing costs but in either event it needs to show up on the HUD-1. Kickbacks and referrals fees to a non-licensed party is illegal.

Sid, the manager of the video store will have 0 in assets. He probably won’t have a job that good either as those new-fangeled streaming service closed the store in 2010.

The BRRR guy has, after 15 years, a real estate portfolio worth 1, 2, maybe 4 million bucks. More than enough to retire to Boca.

NC, the seller pays commission. The deal would have to be that the seller contributes x dollars towards the buyer's closing costs, or reduces the price by x, and t seller's agent decreases the commission by x because the buyer's agent is willing to forego x amount of the commission that would have otherwise gone to him.

Sid,

I don't think you should consider BRRR bad based on this one set of numbers. In your case, I would challenge that you have over improved the house based on the rent you can get.

If you could get $950/mo it might make sense to rehab everything for $40k. $650, you need to cut this in half, you have to find ways to reduce the remodel. Save the cabinets, keep the tub, do more of the work yourself. The other option is to look at different neighborhoods where the after repair value and rents will be higher.

I have a friend that told me I was crazy to own a bunch of single family homes and lots of units via smaller properties. (Duplex, Triplex, 4-units, 5 units, 8 units, 16 units and so on).

Don [PA]: The scenario you describe isn’t uncommon, but your suggestion that everyone is making concessions to facilitate the sale simply isn’t reality. Yes, the seller pays the commission. But they are only contractually obligated to the LA. LA's are only obligated to split the commission under two conditions: it is listed on MLS and /or they are affiliated with a firm.

Myob’s broker was obviously not affiliated otherwise he could not have possibly “refunded” 5%. I also think it was a pocket listing, so no MLS. Perfect setup with no interested parties complaining.

The broker actually violated the Law of Agency three times in each transaction: not disclosing dual agency to his principle (the bank); the failure to disclose concessions and funds to a non-licensed party.

While completely unethical and illegal from a distance it might appear that no one was harmed; banks only cared about selling FC and will never be accused of being concerned about ethics, myob got numerous great deals and the broker was happy feeding the FC’s at $1k per. When you factor in that myob lost 25 properties you do have to wonder if the broker had been providing some modicum of honest and professional advice perhaps he wouldn’t have had to buy the same houses twice.

Ken NY-- you got it.

Don PA yes it could be considered illegal. However there was a place on the purchase offer that stated the usual disclaimer: I have not received any assistance except for? we always placed what the broker was giving back in that spot. The first realtor we used didn't wwant it disclosed and we fired her. (thats when you get in real trouble hidding it) Our broker only had us as clients. He was a mortgage broker by trade but had a real estate brokers license.

The loans were from the gov't not a bank. They were eventually packaged and sold into other portfolios the gov't did not hold um. At one time we had over 70 loans.

The *A man told us as long as I kept a steady job and our credit remained good he would give us as many property's as we won the bid on.

NC investor.

I wanted to respond that We didn't lose the 25 property's. they were foreclosed on and sold at the courtsteps. 6 had such high starting bids we didn't make an offer. 9 the bank holding the mortages called us and before it went to the steps asked if we would buy them without the courthouse involved. Those 9 we got for .08 on the dollar. The other 10 we repurchased for about .10 on the dollar.

Keep in mind the people in these property's were OUR tenants and continued to pay rent-- never skipped a beat.

Staying on topic.........the whole idea of BRRRR -

Be able to refinance out all the money you put into the place so that you can that money and repeat the process.

It sounds real good, but from a practical stand point, it is tough nut to crack. You are using a maintenance figure and a capital expense number, I am wondering why these numbers are being factored out upfront?

You just dumped $40,000 into a place so I am thinking most of the systems are new. Under traditional thought process - you do indeed keep a reserve fund to pay for capital expenses. BRRRR doesn't do that. They assume that your huge infusion of capital funds will cover the upgrades until the note is paid off.

Thank you to everyone who commented. I've been reading and delaying responding to when I think the bulk of comments have weighed in. First, I read them all. Second, there's no way I can comment on them all. So in general, a few things:

1) Several posters sound like they think I am the one doing this and these are my numbers. False. Re-read my first post. This is data from investors in my town. These are their numbers, their strategy, their 15-year notes, their "all in", their rents. I don't understand how they stay afloat. Based on many responses, some of you are as perplexed as I am. Maybe the investors I talk to are liars or really bad at math, or somehow "feeding" it using day-job income. Dunno.

2) I get it that the rent to "all in" ratio is bad. As I said previously, I wouldn't go anywhere near these kinds of "deals" unless someone can explain to be how it all works out in the end. So far....crickets.

3) The analogy with the video store owner isn't perfect. No analogy is. Yes, I know the investor would have the houses and video store owner would not. That's not the point. Let's stay away from that rabbit trail. The point is I don't think anyone could do this strategy using these numbers for 15 years and have a reasonable chance to survive unless there are other funds coming in from elsewhere.

4) I know longer mortgage terms would lower the cash outflow. Again, these are NOT MY NUMBERS: these are numbers I'm getting from other people.

So....basically what I'm hearing from the group here is probably there is more than meets the eye with the BRRRR folks in my area. There could be some untruthitudes being told and/or other numbers not reflecting in their story. I'm hoping to get eyes on some actual projects (Thank you, Dave[MO]) soon so I can learn from someone who is really doing it.

"Be able to refinance out all the money you put into the place so that you can that money and repeat the process."

You need to have gained equity as lenders will want 70-75% LTV when doing refi.

Say you buy a house for $50k, put in $25k,and now it appraises $100k. The lender will lend you $75k which is everything you put in so far.

Sid's original post does not reveal what that house is now worth, presumably its significantly more than $50k

"you have to find ways to reduce the remodel. Save the cabinets, keep the tub," That is basically my business model for renting class C houses in class B hoods to class A tenants. For functional but dated kitchens, the most I will do is clean everything and put down allure

If I had done this 7-8 years ago when prices and rents were significantly less than they are now... it would have worked out very well IF I had screened reasonably well.

Vacancies were low, and rents are up significantly since 2011 (as well as housing prices).

Now, I would be making quite a bit of good money on no money down! Just like the TV ads!

However, if I had bought when prices were at a peak, and vacancies were relatively high, I would have been cash flow negative.

In a nutshell, this method works when rents/housing prices are rising. But... how is your crystal ball functioning?

That was a really good point. When I was doing my response, I was kind of wondering why someone had a $40k rehab on a $10k house. Yeah, sometimes, you need to totally rewire, or put on a new roof, or rerun the plumbing, or level the house, or replace every window in the structure, or whatever... and when you get into that structural stuff, it can add up really fast.

But I do like how people caught on that it was a $40k total-remodel (in the sense of everything new, as in your original post) rather than a $40k-total remodel (fixing what's not clean/safe/functional).

If someone could get $1,000/month or more in rent with a new kitchen or a new bath, then the expense of a true total remodel-- rip it all down to studs, even if the old kitchen and bath were perfectly serviceable-- would make sense. Because (and all real estate is local) you've shifted your tenant pool, and now you're catering to the expectations of your demographic, and your house is unlikely to rent at your price point if you don't meet or exceed those expectations. But when you're still in that $500-$600-$700 range, it's likely that the house will rent as-is, and that any extra rent you might get for a total new kitchen or bath is just unnecessary expenditure, presuming the preexisting kitchen/bath are clean/safe/functional, but just a bit dated, like, maybe avocado-green flowers on the kitchen counters, or 1960's metal cabinetry.

Sid sorry got off point. The big problem for this deal is the rehab of 40K will have to be cost based unless the items had been purchased and billed to other properties? That could cause an audit and severe penalties. Hard to hide 40K to other properties.

When we first started we did the total rehab purchases but soon realized it was better to purchase those with just minimal fix up. we could then shelter those costs without triggering an audit. using 40 to 50K out of pocket on each purchase when we first started out would have done us in.

Our case was hold for about 10 yrs and then refied them for 50 to 60K over 1st mort debt. Took all the cash and paid down the property's with the highest interest rates FIRST. (the ones still in our portfolio)

We calculated 25% to future costs of operation (repairs etc.). I know it doesn't mean much the first years of debt service but once the loans get seasoned the pay down of principle can be awesome.

myob, can you explain more about the first half of your post at 11:31am?

What do you mean "the rehab of 40K will have to be cost based"?

Sure. I'll try. When you have a property up and running and THEN incur fix up-- since it's already an investment property you can deduct the expenses as incurred on your tax return.

If your just purchasing the property (and its not been your rental before) any fix up you do must be added to the cost of the property to make a "COST BASIS". So in effect the out of pocket can't be deducted from your taxes now but over 27.5 years. It's packaged together. 10K purchase +40K fix up = $50K cost/ divided by 27.5 years or $1818.18 per year off the taxes in depreciation.

I don't know about you but I don't want to get the cost back over 27.5 years-- but right away.

Second part. I'm going to give the "OJ" here and say "I've never done this myself just heard about it".

I wish I could tell you one way or the other but we only have SFH's.

It sounds right since the units has now been placed into service. Would love to know that answer myself NE? Someone here knows.

You know NE what if you had a 100 unit building? Rent out the first unit and then finish up the other 99? That would have to trigger some type of audit with those type number-- my gosh!!! never thought of that.

I do everything but the R part on the end, I am happy leaving equity in my rentals. My end game is to take the construction business out back and shoot it when I am fed up enough with it, than live on the cash flow from the rentals. Paid off or nearly paid off rentals cash flow the best!

A lot of land lords and posters on the site you are referring to are not making the money they should be making. But a lot of them are in super hot markets or are buying properties in those markets so as they say a raising tide lifts all boats.

MYOB's post can be misleading. When you buy a property and do work on it before renting it out for the first time, all costs are amortized rather than being deducted in that tax year as repairs---even things that would normally be considered repairs.

DON PA I said if its not a rental all work and funds used to purchase are added together to create a cost base that's depreciated 27.5 years. After it's a rental and you do work I never insinuated to add that to the cost basis? Once it's a rental replacement items are depreciated as per the tax code-- 5 6 7 years but not 27.5 as is what happens when first purchasing the property.(pre rental investment).