As someone who’s been in the trenches of real estate for 42 years, I’ve seen plenty of strategies come and go. The BRRRR method – that’s Buy, Rehab, Rent, Refinance, Repeat – has been making the rounds. And while it’s got its fans, I’m here to tell you, it’s not all it’s cracked up to be. Let’s unpack this together, and I’ll show you why I’m not boarding the BRRRR train.
The whole concept starts with buying a property that needs to be rehabbed at wholesale price, likely in the low end of your market. You buy it, fix it up, rent it out, then go to the bank to get a new loan and pull out some cash. This new loan is supposed to give you back all the money you spent and more so you can do it all over again with another property.
Sounds like a smooth ride, right? But I have two big problems with this plan.
The first problem is the word RENT.
I don’t rent houses I lease option them. It only took me about 20 years to learn this lesson after owning hundreds of houses with tenants.
When I put a tenant buyer in the house, I get thousands of dollars of upfront non-refundable option deposits that are mine to spend any way I wish to spend them the day I receive them. I usually get 5-10% deposit that goes toward their down payment but if they don’t buy, they don’t get it back, and if they do buy it’s credited toward their down payment at closing, so I never have to bring a check when selling a house.
No tenant will give you thousands of dollars upfront because they don’t have the option to buy. Sometimes you’re lucky to collect the first and last month’s rent plus a security deposit.
I don’t collect security deposits; I collect non-refundable option deposits that I never have to give back.
All my lease option tenant buyers are responsible for all of the repairs on the house after the first 30 days as a condition of their option. In other words, my tenants have skin in the game and intend to buy it or they wouldn’t give me such a big upfront deposit.
This is money all landlords doing straight rentals are forfeiting, but the best part is when you have a tenant with several thousand dollars skin in the game you don’t have to worry about them paying the rent. If they don’t, they don’t get their deposit back or credited.
NO MORE TENANTS FOR ME. Only tenant buyers. I’ve had tenants that stay in the house for over 12 years and never buy. Sooner or later you’ll either get a call they are moving, or they are closing. I’m happy with either choice because if they move, I get to go get another tenant-buyer and collect another several thousand dollars. If they buy, I get a big check.
My biggest objection about BRRRR is the part about refinancing. That means you must personally guarantee the debt and cannot get more than 80% of the equity from the property and usually have to wait a year before you can even do that.
The problem here is that one would pull a lot of money out of the property which would create a rather high payment, especially in this marketplace with these rates, and spend the money within a few weeks or months. But the loan keeps going for 30 years.
The biggest issue here is the person guaranteed debt and risk their credit, their assets, and their marriage to buy a house. Thousands of people across America are buying houses every day without using their credit and none of their own money.
In addition to that, how many loans do you think a bank will give you before they cut you off? It won’t be many and then what will you do?
These folks usually forget that sooner or later, the house is going to want some of that money back, and if it’s already been spent, it creates a downward slide that only gets worse with time.
I call this the cash flow shuffle and have seen many investors crash and burn over my 42 years because they thought this was the way to get rich in real estate. It’s actually the way to get into bankruptcy court when Murphy raises his ugly head and things don’t go as planned, and they rarely do.
Don’t assume I have an issue with buying and holding properties. The opposite is true. I like to see my clients buy and hold all the properties they can, as fast as they can, create monthly cash flow, and wealth simultaneously. But I want them to do it with NON-RECOURSE DEBT, which is not personally guaranteed debt.
When you don’t guarantee debt, there’s no bank telling you when you’ve had enough loans, nothing shows on your credit report or your financial statement because non-recourse debt is not your debt. If things go wrong, all you can lose is the house and no one can chase you personally to collect the debt.
Non-recourse debt means either you bought with owner financing or took title subject-to or used private money to pay cash for the house. No requiring a personal guarantee on Planet Ron.
That means you can get all the goodies, including appreciation, depreciation, monthly cash flow, debt, reduction, and forfeited deposits for a large percentage of your tenant buyers. Money now, money monthly, and money later all on the same deal. Do it once and get paid for years, both inside and outside of your IRA.
In case you weren’t aware, all your real estate deals can be done in your Roth IRA tax-free. How fast do you think your wealth will grow when you’re not paying taxes on all the gain?
It’s one thing to grow wealth and cash flow, but it’s another thing to keep it. Guaranteeing debt is a good way to lose it.
Real estate is a vehicle to generate cash, not bury cash. All my terms deals are bought using a little cash to pay closing costs and sometimes a small down payment but any cash I put upfront will be recuperated within a month with a nice upfront profit. Once the tenant buyer is installed with a 5 to 10% down payment.
Of course, if I’m buying a house that needs rehab, I’ll always borrow more from a private lender than I need to buy it, repair it, holding cost, and then some. Therefore, I need none of my own cash, in fact, I bring it home from closing because I borrow more than I need.
If I can’t buy using seller financing, the next best option is leasing the house with an option to buy. This can be a great way to control a property and generate income from it without actually owning it which gives you the flexibility to test out being a landlord without the full commitment of a mortgage hanging over your head.
I highly recommend having someone experienced working with you on your first few deals and getting the proper training before you make a ton of mistakes you’ll regret later. We have that, and one-on-one mentors that can help you if you wish.
You don’t need money (at least not a lot of it) to buy houses in Ron’s World. So, what else could you be looking for? Experience? Guidance? That’s what all our well-qualified mentors provide without you having to give up a big chunk of your profits.
Knowledge is power, especially in real estate. The more you know, the better your chances of spotting a good deal – or avoiding a bad one. Invest time in learning about the market, understanding property values, and building a network.
Real estate investing can be a path to financial freedom, but it’s not without its risks. The BRRRR method, for all its popularity, is not a one-size-fits-all solution. By exploring alternative strategies and focusing on building a solid, risk-free foundation, you can create a real estate portfolio that stands the test of time.
Remember, the goal is not just to grow your portfolio quickly but to build it in a way that’s sustainable and secure over the long haul.
