Discover the 3 flaws of the BRRRR Strategy. BRRRR is an acronym which stands for Buy, Rehab, Rent, Refinance and Repeat. And while the technique itself is not inherently flawed (it has been applied for hundreds of years in real estate investing), the coining of the acronym BRRRR to describe that process has created some unintended consequences. In this video, you'll learn these 3 destructive flaws and how you can avoid them.
3 Flaws of the BRRRR Strategy
Flaw #1: Strategy Focus
The acronym promotes a focus on just simply applying the strategy. However, the problem with this approach is it excludes the most important focus you should have in real estate. The deal and the results.
What do you want real estate to accomplish financially for you? There are only two answers to this question. Either people want more money right now or they want to get a return on investment on their existing capital. Of course, some people want to build wealth and increase their available cash, but the idea is, knowing what sort of results you want helps frame which strategy you're going to take. In my book How to Be a Real Estate Investor, I go into detail about this concept of cash now versus building wealth.
You also want to have a deal focus. You want to focus on the best strategy for that deal. The BRRRR acronym assumes every deal is the same, but you want to be focused on what the best strategy is for that specific deal.
In some areas of the country you can buy vacation rentals that are rehabbed and furnished and already rented. This means you don't have to apply the rehab and rented steps in the acronym. The only problem with the property may be that the management is charging 35% of gross. Then all you need to do is to remove that management, putting in your 10% of gross management. You could also possibly increase the income by optimizing Airbnb, VRBO, HomeAway, and TripAdvisor listings. However, even if you can’t do that, you're already earning an extra 25% of gross just by switching management.
The point is, having a deal focus keeps you from automatically checking off all the steps in the acronym. It puts you in a position where you're doing what you're supposed to be doing as far as achieving your financial goals. Then on a deal to deal basis, you're applying the right strategy to produce the most results.
Flaw #2: Traditional Focus
The BRRRR acronym puts the focus on a traditional version of real estate investing. It's not inherently wrong that there are certain techniques that are traditional. However, only following traditional techniques excludes you from all the creative techniques. It puts you in a box and there's so much opportunity beyond that. You end up dismissing deals that could have made an incredible amount of money if you applied the right technique. In our deals we think outside the box and apply creative techniques:
Buy - We acquire them with creative financing.
Rehab - Some we don't need to rehab, or if we do maybe we move a tenant buyer in there who's going to do the fix up for us.
Rent – If we do the rental, it's done in such a way where it's going to maximize the results.
Refinance - We don't have to refinance because we took it over subject two.
Repeat - Of course, we'd like to repeat those as many as we can.
If you want to learn more about all the different techniques you can apply, I would encourage you to check out my on-line course, that's absolutely free, where I have combined many of my most popular videos and some additional trainings as well. It's a curriculum over 10 hours long on creative real estate investing.
Traditional BRRRR Deal Example:
As a creative real estate investor, we still do traditional deals, but we also have an entire toolbox of creative techniques. Here’s an example of traditional BRRRR deal that that our people might do:
- Buy a property for $20,000
- Rehab for $15,000, so you're in the deal at $35,000
- Rent it out for $900 or $1,000 a month
- Refinance and pull that $35,000 out of there and do a long term 30-year fixed rate loan
- Repeat as many of those deals as you want to do
This can be a great technique in specific areas on certain houses. Otherwise, there's so many other techniques that are excluded when you have this focus of doing BRRRR deals because it's traditional in nature and you're leaving behind so many other opportunities.
Flaw #3: Wrong Order Focus
It promotes the wrong order. Now that it's an acronym, people want to start with the Buy, which is the worst place to start. You want to begin with the end in mind; not only in the result that you're trying to accomplish, but if you begin with the end in mind it shapes the process and ensures you make good decisions.
Of course, you want to ensure you do a deal that is so good you want to repeat it. Make sure you know what the terms, requirements and underwriting guidelines are for the refinance loan. Who's the lender? What are they going to expect? Take all the steps necessary ahead of time to ensure the deal is a success. Often people will buy up a money loan, rehab and then rent it out only to realize they missed a few details and now it could take an extra 12 months to get a refinance. Suddenly, it kills all their profit. You must begin with the end in mind and work your way backwards.
Some things to consider when thinking about renting out your property are: Who are you renting to? Who's your tenant? Do you want to be in the traditional renting business? Do you want to be in a situation where the rent doesn't come in on November 1st and December 1st and it's a single mom with kids that you need to evict around Christmas time? On the other hand, do you want to be in the business of vacation rentals? You do get the benefit of more income and temporary tenants, so you don’t need to worry about evictions. However, you have to deal with partiers and spring breakers trashing the place. You need to know what you're getting yourself into.
I would argue that when it comes to single family homes, the majority of those should be flipped. They should be short term cash now techniques. Very few techniques really make the single family home viable as a long-term wealth building strategy. I have a video on some of those techniques, 3 Ways to Turn a House Into a Cashflow Machine, so it can be done, but oftentimes it's not as good as you think.
Have you ever totally rehabbed a house? Hired the contractors and made sure that everything worked out. This can be a minefield. There are a lot of problems that investors run into. I have a video 7 Things to Never Say to a Contractor, which will help get you started. If you've ever been down this road, you know that there are a lot of pitfalls.
There is this concept out there that you must repeat and there are a lot of people out there that have bought 20, 30, 60 single family homes that they've accumulated over a long period of time. Eventually they get fed up with the hassle and headaches and they sell the entire portfolio because it's such a mess. In fact, I have a video on this called Flipping Versus Renting Houses. In it I go in depth into how it’s possible to own 60 family homes and be angry about it instead of being appreciative.
If you haven't already, I suggest to you check out the 3 Ways to Turn a House Into a Cashflow Machine, because I go into greater depth on how you can apply some of the things I’ve highlighted in this post to really make a lot of money with a single family home.
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