Does the BRRRR Method Still Work in 2024?

David:
This is the BiggerPockets Podcast show 904. What’s 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’ve got an awesome show in place, and Rob is here to help me bring it to you. Rob, how’s it going over there?

Rob:
It’s good. I’m 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, “Hey guys, I’m doing a podcast.” And so they’re 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’re calling it The BRRRR in 2024. Does it Still work? Do we need to make tweaks to the strategy? We’re here to give you the inside scoop.

David:
That’s 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’re here today to give you an update on the strategy and how we are applying it in today’s market, and this is so important that Rob, who’s actually extremely conflict diverse, did kick a bunch of people out of a hotel room. Rob, I’m very proud of you and thank you for doing that.

Rob:
It was awkward. It was really, I was like, “Guys, I’m so sorry. You said I could use this and it’s 1:00 PM and I got to go.” And then they’re like, “Oh, we’re so sorry.” So I have to bring it. I have to hold my end of the bargain. So let’s get into today’s episode and talk about the BRRRR.

David:
All right, let’s do it.

Rob:
Let’s set the stage first. So let’s talk about what BRRRR is. We talk about it a lot and a lot of people are like, “Are you cold? Are you talking about the nemesis to Alexander Hamilton?” So David, tell us what the BRRRR is and why is it such a popular real estate strategy?

David:
BRRRR is an acronym. It stands for buy, rehab, rent, refinance, and repeat, and it’s 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’s 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’s 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.

Rob:
Yeah, let’s contextualize this a little bit and let’s help people understand the basic premise by putting some numbers here. So let’s say that you buy a property for $50,000. Let’s 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, “Hey, I would like to do a cash-out refi because this property is now more valuable than when I bought it.” 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’re able to get that $75,000 back to pay back your initial investment and rehab budget. Did I explain that correctly?

David:
That is perfectly well said, and sometimes it’s 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’re 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’s 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.

Rob:
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’s right, right?

David:
Brandon Turner himself.

Rob:
Yeah, okay. That’s what I thought. And so, yeah, it’s a strategy that’s been utilized for a long time, but has there been a moment in time in which the BRRRR strategy worked best?

David:
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’ve got new deals coming along, it works great because you’re amplifying how quickly you can acquire real estate. Now it’s also a buy and hold strategy. This is a strategy that you use to keep a property. It’s 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’t find cash-flowing properties, you can’t find BRRRR properties because they have to cash flow when you’re done. And if you can’t find properties to add value to, it’s hard to find BRRRR properties because you can’t add value to the property. And if you can’t find great deals because there’s a lot of competition, it’s hard to find BRRRR properties because you can’t 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’ve said, “Hey, well, buy and hold real estate is really tough, but I’m going to get into short-term rentals.” So they’ve used the BRRRR strategy and combine it with a short-term rental instead of a traditional rental. So when you’re 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.

Rob:
It’s been a strategy that’s worked for a long time, but I think a lot of people on the podcast are probably like, “Hey, I’m on board with this strategy, but it’s 2024 and things are a little bit tougher now.” 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’s say, 10 years or so?

David:
Yeah, absolutely. It’s 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’s harder to find contractors because everybody wants them, and there’s less inventory to actually pick from because less houses are hitting the market.

Rob:
It really does feel like contractor and rehab… 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’ve 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’s 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’re trending in the right direction, right?

David:
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’t going down. They’re 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’s 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’m 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’t keeping up with that, downstream of it we find that rents can’t keep up as well, and so that means that even though the prices of these deals are going up, the rents aren’t 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’s really meant to speed you up.

Rob:
Yeah. So let’s 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’s presenting for investors today. Can you tell us, is there a specific correlation as to how inventory sort of affects the BRRRR strategy?

David:
Yeah, because inventory affects pricing. The less houses there are, if we’re assuming that demand is constant but supply goes down, the more expensive something’s going to get. There’s also less options for you to choose from because investors forget that they’re competing with other investors. Everybody listening to this podcast, you and me, everyone who reads these books, everyone who’s listening to the other podcasts and the other people that are internet influencers, they’re 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’s 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’ve 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’ve got big hedge funds like Blackstone that are scooping up a lot of properties and they’re trying to keep it inside their portfolio. That all used to be inventory that hit the MLS and now it doesn’t. So even though on the surface it looks like real estate’s the same as it’s always been, it’s actually very competitive to where it used to be, and that’s why we see so much less supply making its way down to the market that we could buy.

Rob:
Yeah, but what can investors actually do about this? Because everyone wants to break into this. It’s 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’t know, it seems like less people would want to get into this, but the competition still seems pretty high?

David:
Well, there’s two ways. You got to fight your way to the front of the funnel, okay? You can’t just show up and look at houses on Zillow and think that you’re 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’re 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, “Hey, I’m looking to buy houses. If you know anyone that has one to sell, let me know.” That’s a bit of a nuisance. People don’t like doing it. But if you don’t do it, it just means that house is going to go to the person that did. So acknowledging you’re in a competition, even though it’s uncomfortable, is a healthy way to start.
The other way that I’ve incorporated into my investing is that I don’t just look for the low-hanging fruit. We used to be like, “Oh man, look, ugly carpets, ugly cabinets, ugly kitchen. I could buy that thing, switch out that stall shower, make a tile shower, boom, I’ve added equity, I’ve got a flip or a BRRRR if I want to keep it.” 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’t buy it at cheaper prices.

Rob:
So now with all that said, David, let’s 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’re going to answer that question in detail, including strategies investors can use to BRRRR, right after the break.
Welcome back. I’m here with Sir BRRRR himself, David Greene, and right before the break I asked him the question we’re here to answer. Is it still possible to BRRRR in 2024? So let’s jump back in.

David:
It is possible, just like it’s 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?

Rob:
Probably not. No.

David:
Yeah, it’s just going to be harder, right?

Rob:
Yeah.

David:
But it’s harder because it’s a better asset to get into. Everybody’s 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’s going to hold its value, but it’s just going to be harder for you to find these deals. That’s why I’m 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.

Rob:
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… It’s 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’ve done or within your network, do you feel like there’s been any relief at all in the supply chain to open up the goods for the renovation process?

David:
You know, that’s a great question. What I’ve 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’t 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’re 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?

Rob:
Yeah.

David:
That’s the principle that I found you have to put into the deals you’re doing. So if you’ve already got a place under contract, it used to be a contractor gave me a bid, I reviewed the bid, I said, “Okay, sounds good.” 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’d 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’s talked about the level of detail that he knows in every flip he’s doing and what things cost. That’s the level of attention that you’re going to have to pay to keep your rehab costs reasonable, and for people that aren’t doing that, they’re just going to be frustrated.

Rob:
Sure.

David:
It’s like, where’s all my money going? Well, it’s going to the contractor.

Rob:
For sure, and because they mark up the materials too and their time which rightfully so in many instances. So let’s talk about that. Let’s say, yeah, you bought the property, you’re in this rehab process, it’s 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’re a first timer doing this?

David:
If you’re 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’re going to have holding costs that skyrocket because you’re 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’s 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.

Rob:
Yeah, I’m 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’s an intangible skill that you learn from that which could be the actual craft of doing a skill like, I don’t 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’s 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’t hard. That way anytime I actually worked with the contractor, I was like, “Hey, this $10,000 bid should be more like $2,000 and I’m not too dumb here.” 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?

David:
Well, I’m an advocate for doing whatever you can to reduce your risk when the market’s tough. So for instance, maybe you can’t find a flip property, but can you do a live-in flip?

Rob:
Absolutely.

David:
Right. That reduces your risk a ton. Maybe it’s 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’s significantly less than if you had bought it and you buy in a great location where it’s going to appreciate, and then three years, you’re going to take all that equity and you’re going to roll it into the next opportunity. You have to compare the opportunities that you’re 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.

Rob:
David, something you mentioned that I don’t 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?

David:
Yeah, and for investing in general, I do think that. In fact, that’s 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’s less to buy, there’s less meat on the bone, and it’s harder to get cash flow. The whole thing is trickier. Does that mean don’t do it? No. It means to adjust your expectations. So this book that I’m 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’s 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’re just not getting them right away.
So I’m 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’re 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’re putting into work, the skills that you’re building, the education that you’re acquiring, because, Rob, you’ve 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.

Rob:
Yeah. Yeah, yeah, it’s all about also being adaptive and being nimble which is why you’re titling that book Pillars of Stealth, right?

David:
That’s really nice. I like that.

Rob:
All right, so let’s talk about sort of the next R here which is rental, which there’s some parallel pathing that’s going on during the rehab and the rental side of things because when you’re rehabbing you have to sort of know, hey, how nice should I make this rehab or how standard can I make it. I’d imagine there’s 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, “Am I matching them or is there a delta in actually being a nicer quality BRRRR and will that delta yield me more profit?”

David:
It’s a great question, and the answer is sometimes. There’s three main reasons that I see people rehabbing a house. You’re either rehabbing it to sell to someone else which is a flip, you’re rehabbing it to keep it as a long-term rental, or you’re rehabbing it to keep it as a short-term rental. Okay? So if you’re trying to flip it, you don’t want to make it nicer than the surrounding areas because then you’ll have a more expensive property that the appraiser won’t give extra value to and you won’t be able to sell it for as much as you thought because it won’t 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’re competing with when your house goes on the market and be a little bit nicer than them, but not a ton nicer.

Rob:
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’m curious if that also transcends over to the long-term rental side of things.

David:
What I’m 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’s 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’t want to be too much better than those options because then you wasted money. You don’t want to be not as good as those options because then they won’t choose your property, and you don’t want to be exactly the same as those options because then you’ll be slightly competitive until your competitors do a little bit better. So you have to understand the reason you’re rehabbing it. If you’re 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.

Rob:
Got it, got it.

David:
If you’re doing it for a standard renter, it doesn’t matter if it’s 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’s not enough rental inventory. So if this is just a standard buy and hold rental on a year-long lease, you don’t need to make it super nice. You need to make it super durable so that things don’t 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.

Rob:
Makes complete sense.

David:
All right, now that we’ve covered a few tactics that investors can use to give themselves an edge to make BRRRR work in 2024, we’re going to get into some good news about how financing options have changed and improved. So stick around and we’re 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’s market. So let’s get into the good stuff.

Rob:
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’re 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?

David:
Rates are higher than they used to be, but lower than they were recently. So they’re sort of trending in a better direction right now. They’re 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’s 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’s 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’re having to come out of pocket for. Those are usually loans that last for a year, sometimes two years. So once you’re 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’re 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’t 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’t keep refinancing out of them because my DTI can’t keep up. Well, now you’ve got a lot more lending options that will allow you to do it. So even though the rates haven’t been as favorable as they were eight years ago, the lending flexibility is much more favorable.

Rob:
Yeah, and for everyone that may not know what a DSCR loan is, they’re 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’s very hard to get a loan conventionally, but a DSCR loan is really looking more at the actual projection of that rent. So it’s a really powerful tool. It’s a little bit more expensive usually than a conventional loan.

David:
Yeah, it’s usually a point higher on the rate usually.

Rob:
Yeah. But still worth consideration. I wanted to ask because there’s 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?

David:
Yeah, that can make sense if you think rates are coming down in the future. If you think they’re going to go down, you can get a HELOC. It’s 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’re going to get a higher rate than if you had just done it in the beginning.

Rob:
Yeah, and just one quick caveat here. HELOC stands for home equity line of credit. You’re basically taking a line of credit on the equity of your house which I guess makes sense, that’s why they call it a HELOC. But one thing that’s 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’s 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’ve 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.

David:
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’s exactly the case.

Rob:
Yeah, because HELOCs are really powerful and they’re really cool things. In a perfect scenario they can get you out of a bind, but yeah, we don’t ever talk about the possible downsides, one of them also being that if you’re 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.

David:
That’s right. So to sum that up, rates are higher and they’re less favorable than they were in real estate’s heyday, but options and flexibility is better than it’s 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’re talking about now, you focus on adding value to the property, you add square footage, you add bathrooms if it doesn’t 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’s actually pretty smooth to the financing where that used to be a big area of concern when you’re trying to scale a portfolio.

Rob:
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?

David:
In the previous market cycle, we told everybody get as much cash flow as you can, and that’s 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’re not going to get the immediate gratification that cash flow provides. You’re 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’s 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’ve ever seen, that’s cash flow, and this appreciation is like Godzilla. You can’t 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’s not about just let me get a couple houses and I’m out of the game and I’ve retired, I’m on the beach with a Mai Tai. It’s about building up your skills. It’s about delaying gratification. It’s about making wise investments that will grow over time. It’s 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’ll 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’s going to let you down.

Rob:
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’re 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’t know, sometimes people see breaking even on a BRRRR like not a good thing. I’m like, “Guys, in Vegas, they say a push is a win.” That’s great. Breaking even on a house that you got for free, come on.

David:
Well, not only that, they don’t see it as a good thing if they didn’t get more money out of it or if it doesn’t cash flow right away. But if I said to you, Rob, hey, you’re going to do a deal, you’re going to get all of your money out or a little bit of it out and it’s going to break even on cash flow, but you’re going to have created $75,000 of equity. You’re going to be paying off a loan every single month with the renter’s money. The rents are going to go up every single year from where they are today. The value’s 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’s going to add square footage, more value, and it’s 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’s a loss for you?

Rob:
No, I can’t. I was taking furious notes as you said all of that, and I just, I can’t argue with any of that, David. I would like that YouTube video if I was watching that on the YouTube video. So if you’re 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’s episode of BRRRR in 2024. Is it still a viable option? The answer’s yes.

David:
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’s crazy, you could buy in a different market that’s not your backyard, and there were so many podcasts done on how to do it. We’re still going to have to be adapting, and that’s why you listen to podcasts like this. So thanks for that. Rob, you want to take a shot at my nickname today?

Rob:
Oh, yeah, yeah, yeah. This is Rob for David Sir BRRRR Greene.

David:
Signing off.

Rob:
Signing off, signing off. End scene.