BRRRR investing reports

After being a Real Estate Investor and Consultant in the Indianapolis market for nearly a decade, I have helped several real estate investors build portfolios of residential rental properties. The Buy, Rehab, Rent, Refinance, and Repeat (BRRRR) investment model was been around for decades but has recently been popularized by the Bigger Pockets community and various investors and authors. The BRRRR model is quite powerful and can be very effective, but inexperienced investors tend to overleverage their positions and do not realize the danger they put themselves in.

What is BRRRR

The basic concept of BRRRR investing is to

  • BUY – Identify and purchase properties at costs well below market value. The greatest position for most BRRRR properties will have enough cash to acquire the property without a loan. These properties will likely require some level of renovations.
  • REHAB – Force equity into the property by renovating and/or upgrading the property. Many BRRRR investors will pay cash for these activities as opposed to taking on interest-bearing debt.
  • RENT – Find a suitable tenant to move into and lease the property after rehab is complete. This puts the property into an income-producing state.
  • REFINANCE – Borrow money against the property to liquidate some or all of the initial investment. Many investors hope to cash out the majority of their investment and possibly mortgage more than their initial investment.
  • REPEAT – Recycle the cash from the refinance for another project.
BRRRR investing reports

Problems with the BRRRR Method

Many new real estate investors do not understand the ongoing costs of owning, managing, and maintaining rental properties. Some investors will mortgage their property and nearly the entire rental price, leaving very little room for cash flow or build up cash reserves for future problems. While the property may generate enough income to pay the Principal, Interest, Taxes, and Insurance (PITI,) it may not be enough to cover any other problems. Frequent problems faced with rental properties are

  • Late rent payments
  • Unexpected maintenance expenses
  • Unexpected management expenses
  • Vacancy
  • Cost to return the home into a rent-ready condition
  • Leasing commissions and fees to property managers/realtors
  • Evictions, city fines and/or fees, or other legal expenses

Properly Positioning your Investment Portfolio

I’ve worked with dozens of real estate investors in our market to educate and best position them for success. They have to understand the real costs of owning rental properties as well as the amount of leverage being used. When properly positioned, I have seen many investors make a 100+% Return on long-term Invested capital in 5-7 years, but I have also seen investors who were over-leveraged and had to sell their rental properties at a loss in just a year or two.

When building a BRRRR deal, the most important things to consider are

  • What loan to value (LTV) are you looking for with your refinance? Many banks will offer 75% and some will even offer 80% of the appraised value of the rental property for a refinance, but this will increase your mortgage costs and impact your monthly cash flow.
  • What is the rental price? Instead of maxing out the LTV on a rehabbed property, the best-positioned investors try to position the mortgage payment to be no more than 50%-60% of the monthly rental income.
  • How much money do you need in reserves? Even though a home has been recently renovated, sometimes there are unplanned expenses that were not considered during the rehab. This becomes more likely the older a home is. I’ve seen sewer lines fail just weeks after a tenant moved into a recently rehabbed property. I’ve seen mature trees shed limbs that have crushed cars, broken windows, and even break through a roof. What if your tenant runs into financial problems a few months into the lease and you have to pay several mortgage payments without receiving an income. Many investors recommend having at least 6 months of rental income available for operating reserves, but if you have a small portfolio, I may recommend even more money.
  • When your property is cash flowing properly, pay extra money toward the principal of the loan. This will speed up the equity growth into the property and reduce the amount of money lost to interest in the home. If you look at your amortization table, you will find that most of your mortgage payments go to the interest for several years, so even an extra $100/mo when things are going well will quickly pay down the principal.

The Upcoming Bubble

With the recent Covid-19 pandemic, we are seeing reports of millions of Americans that are still unemployed, millions of homeowners in mortgage forbearance, and millions of tenants several months behind on rent and utilities. Many of these tenants live in rental properties with mortgages and many of those investment properties maxed out their loan to value opportunities when refinancing the properties. I expect that we will see millions of investors lose their homes to foreclosure over the next couple of years as another housing market bubble pops. This will not likely by as bad as the previous market collapse, but it will create opportunities for those who are best prepared.

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