Legacy Wealth Holdings

DOES THE BRRRR METHOD STILL WORK?

BUY – RENOVATE – RENT – REFINANCE – REPEAT

Here’s the BRRRR Method in a nutshell: you buy a rental property, fix it all up, put a tenant in place, and then refinance it to pull all your money out and pay off your money lender so that way you don’t have any skin in the game anymore.

When you can buy deals at a discount, you can increase the value by putting sweat equity into those properties. Then, you can go back to the banks and the financing terms are generally better than what somebody would pay for it on the open market because the appraisals are coming in higher. Typically, you’re all-in on a deal for 70¢ on the dollar. When you refinance, if you’ve increased the value, the bank will give you a 70% loan so you can pull all your cash off the table.

Then it’s just a matter of how many times you can do that.

So that has been the method that I used to build my rental portfolio from 2015 to 2020. And that method works very, very well.

The question is, does that method still work?

The market has gone bananas. And now that interest rates are rising, what does that look like?

Great question.

WHY WE AREN’T USING IT

What I would say is that our purchasing criteria has changed dramatically over the past few months. When I look at my career in real estate from 2005 to today, I find that there are different things that led the way based on shifts in the market. In 2005, flips were huge! Back then you could get zero-doc, no-doc loans on deals with zero down and get 100% financing from banks.

And then all of a sudden, the bottom fell out.

In 2007 and 2008, money was nowhere. So then creative finance became a thing, and short sales became really popular. Loan modifications were huge back in the days right after the market shifted. There were a lot of people losing their homes to foreclosure, so people would go out and say, “Hey, let me help you modify your loan or help me do a short sale on it.” The banks were taking losses, and then investors were coming in and buying those properties at a lower basis.

That all changed as money became easier to come by and equity started building up again. And then all of a sudden you could find deals and you could raise capital and bank financing popped up again. So then the buyer method made a lot of sense in the 2010s.

Now, what’s happened over the course of the past two years is that it’s been very much a seller’s market. We’ve actually been selling off a lot of our C-class stuff, our smaller buildings, and things that aren’t what we want to hold or where we want to be long-term.

Because of the market shifting, you’re going to follow the money. You’re going to follow what works. In the past couple of years, it made sense to sell your portfolio, made sense to transact, flip, wholesale, and whole tail different deals. And not just single family, but also apartments and other commercial properties.

That made sense because there was a ton of capital out there and a finite amount of deals. Now, with interest rates rising, things have changed again.

When interest rates go up, cap rates typically increase as well, which means valuations come down on rental real estate. So now you’re not getting the values from a refinance as you might have gotten from a sale.

The first thing to understand is you’ve got to change as the market changes. You’ve got to follow the different opportunities that are available based on the external variables of the marketplace. That said, we’re not doing BRRRR as much now as we used to.

The second reason that we’re not doing BRRRR as much is that it doesn’t meet our long-term goals. We’re structuring our deals differently these days, like doing seller financing where I don’t need to bring any of my own capital, so I wouldn’t need to do a Buy, Renovate, Rent and then Refinance type of a deal. I can just use private money or seller financing in order to take these deals down without any money out of my own pocket. That said, if there’s a good deal that we can buy, fix up and still refinance …

WE MIGHT STILL DO THE BRRRR METHOD

For example, there are a couple of development projects we’re working on that have longer time horizons, so we’re still planning on doing the BRRRR Method for those. That process (getting all the infrastructure in, going vertical, getting it all occupied, and then being able to show a little bit of runway of rents coming in in order to go out and refinance) takes a couple of years to go through. 

So we’re taking out some of those deals right now and then seeing that through over the next couple of years. Our intent is to then refinance in a few years once we’ve created that additional value.

We’re also doing a lot of creative finance deals. If you don’t understand creative finance, make sure you’re out there investing in yourself, investing your knowledge, getting in rooms where people are talking about commercial real estate, creative financing, seller financing, those kinds of deals.

We’re making a lot of offers right now with seller financing as the primary type of financing. We’re bringing private money to some deals, but we’re also structuring deals where we bring the financing from a bank and have the seller provide the down payment money and then carry it a little bit longer term. So depending on how you’re structuring deals and depending on the types of deals that you’re buying, the BRRRR Method could still work for you.

Today we’re buying for cash flow as long as the cap rate or the net operating income is greater than our cost of capital or our blended cost of capital and as long as those deals are in an A-class or B-class kind of an area, they’re built newer and they’re going to be a good long term hold.

So to answer the question “Does the BRRRR Method still work?”

Depending on your goals and the way you structure deals, yes.

We made a video on this! Watch it on the Legacy Wealth YouTube channel here: https://www.youtube.com/watch?v=Ottx8Y6Zfak