How to Fail at The BRRRR Method | 4 Steps to Avoid

hey everybody i'm tarle garber with fixated real estate and i have a big confession for you i am a recovering house flipper that's right i have flipped over 600 single-family homes in my career and in fact it wasn't until a little over 500 properties that i decided to keep my first rental ever now you can get rich flipping houses you can make a high income flipping houses but you cannot get wealthy flipping houses eventually you got to keep assets to be able to build wealth if you flip all your assets sell all your assets you're not building well building wealth that said i'm going to go over you guys today the burst strategy the buy rehab rent refinance repeat huge hype huge popularity lots of people want to do it but i'm going to show you guys how to fail at the burst strategy so if you follow these tips and tricks i can guarantee your failure at the burr strategy so let's get into it right now [Music] okay so what is the burst strategy buy rehab rent refinance repeat what that basically just means is you buy a really crappy property you rehab it to build value into the house or into the multi-family or into whatever you can bur anything commercial multi single family doesn't matter so you buy something really undervalued that's messed up you add value to it by rehabbing it then you put tenants in it and then you refinance it do what's called a take out refi and then you do it over and over again if you did it correctly you did what's called an infinite bur that's where you bought a property put money into it and then got a huge value on it just like you would with a flip right and instead of selling it you put a tenant in it and you refinance and hopefully got a cash out refi to get all your money back and have no money into the deal and cash flow every month on it and if you can do that you can do that over and over and over again and make infinite wealth that's the theory that's the hopes does it happen every time no now there's many ways you can mess the burst strategy up some of you guys are going gonna figure it out on your own like i did and i hope that you guys can figure it out faster by following these steps so maybe you can actually avoid them to begin with i'm not gonna be able to go over every single step there's so many ways some of you guys are so creative you'll figure out your own ways to fail at the burst strategy just like i did as well i'm going to go over with you guys guys just a few key ones that are big big big pitfalls that you're going to want to avoid so the first one is probably the most common one that i see when it comes to failing at the burr strategy so the first one i want to go over is doing rent grade versus flip and this has to do with finishes so basically you run comparables comps comps on a property that you're going to go you're going to go do a burst strategy on now key to this to the burst strategies always remember this every burr must be a good flip but not every flip must be a good bird so when people are running their comps they're usually doing comparables on properties was basically i have a crappy house i want to make it super nice what does a super nice house sell for in this market wherever you're selling your house in every market's different so you're gonna have to figure that out realtors can help you from comps so if i'm gonna say i want a house to sell for x in this market and look really really nice you're pulling comparables based on that market and you're usually looking for higher grade finishes highest and best use that kind of stuff for that particular property so just like a flip that's how you're going to run your comps to figure out what your arv is after repair value so you do that you have a 150 000 house you put 50 grand into it you think the house is going to be worth 250 275 by the time you're done that's an awesome property cool so you do all that and it's going to require you to do quartz it's going to require you to do the tile it's going to require you to do luxury vinyl planking it's going to require new electrical new plumbing in this example maybe it doesn't in your market but let's just say in this in this market make believe market we're talking about that property is required you need new roof new plumbing new electrical new quartz new tile new everything looks super nice to get that higher arv but you then run rental comps to see what it can rent for and you look at rent grade finishes instead and you go oh well it's a rental now so i'm going to buy the property think it's going to sell for 250 275 using these finishes but it's a rental so because it's a rental i'm going to go to put formica in it i'm going to put sheet vinyl in it i'm going to carpet everything i'm not going to upgrade all the plumbing and electrical and so forth so you're base purchasing your property on a higher level arv comparable but then you end up putting in rental grade finishes because you just assume it's a rental so we don't need to do as nice finishes now why is that a huge mistake and this is the number one thing i see that people do in this in this strategy to fail at the burst strategy is they put rent grade finishes in by doing comps on flipgrade properties and when they go to get their appraisal which will be the number two fail their appraisal they get a low appraisal and they're blown away why their property wasn't worth 250 275 instead it's worth 200 to 25 because they got rent grade finishes instead of higher end finishes that they needed to do based on their market here's a catch though every market is different i'm not saying you need to put quartz tile or any of that kind of stuff in every single property to get the best value you need to know that for your market so that falls into number two fail low appraisal you get a low appraisal why is that such a key it's a huge key to this part because if you're looking to do an infinite bur right where you're getting all your money back out of this deal right in the scenario so let's say you have 200 simple math let's say you have 100 000 arv after repair value and it and you want an appraisal for a hundred grand on this property right i'm starting over this is a new property so don't get confused with the last example so 100 000. most of the time when you go to do a refinance to refinance out the deal you're going to get 75 to 80 percent loan to value ltv loan to value to be able to refinance and get your money out now if you have 80 000 into the project from purchase and rehab then you're going to want to get an eighty percent loan to value on a hundred thousand dollar value of the property to be able to get a hundred percent of your money back eighty percent of a hundred grand is eighty thousand and if your cost in the project is 80 000 and it appraises for 100 you get your money back yay it's awesome right but what if it appraises for instead ninety thousand dollars eighty percent of ninety thousand dollars in that scenario is what seventy two thousand dollars roughly so if you have eighty thousand dollars of cost it appraises for ninety thousand you only get an eighty percent ltv that's seventy two thousand dollars you're gonna have to leave that difference was about eight grand into the property so you get a low appraisal at that point why do you get a low appraisal lots of reasons and this is how you could fail go back to step one rent grade versus high quality finishes which is maybe you needed to do in your market maybe you did your comps wrong to begin with in your market maybe which i'm seeing this a lot today you're betting the market's going to go up so here's a huge key when it comes to running comps and comparables especially today when it comes to getting appraisals from an appraiser when i'm flipping a house in tacoma or seattle market where we're at right now i can make some assumptions based on buying in a hot neighborhood that i might get multiple offers on a property to bid it up that's me projecting the future value of the property based on how hot the market is now when an appraiser appraises for the property they praise off of actual sold comps in that area they can't assume you're going to get 10 offers on a property and bid it up so if your property's worth a hundred grand and that's what it's worth based on what's been sold that's what they have to comparable for comp 4 for their appraisal they can't assume that you're going to get 10 offers on the property and bid it to 110 or 120 000. they can't do that but if you ran your market comp saying that you are going to get that you're gonna be in for a rude awakening when your appraisal comes back a lot lower than that and that's happened many many many times to many investors out there so how do you handle it if you get a low appraisal a couple things sometimes you can actually challenge the appraisal with your bank depending on who you're getting your lender through and you can challenge the appraisal maybe you have some additional comps the challenge with challenging appraisals is that you're relying on the appraiser to say hey i was wrong you are right not every appraiser is going to be willing to do that some will you might have some hope or you have to deal with it you either have to pay for another appraiser go to another bank right or you accept the lower appraisal now in that case if you accept the lower appraisal your options are really only two options you either have a lesser value on the lower appraisal and you have to leave money into this deal which in our example earlier you have a ninety thousand instead of a hundred thousand you have to leave eight grand into the deal because you only get seventy two 000 instead so in that case if you don't have that eight grand what's your option well you have to sell the property in that case or you have to borrow the additional eight grand from somebody else to leave it in it gets really messy at that point the key is this run really good comps as much as you can go back to step one run as many comps as you can to get a better confident value into the property and then hope for the best that your appraisal comes back correctly but you can fail if you don't plan for that so let's go on to step number three about how you too can fail at the burst strategy or at least at a minimum get really really frustrated with the whole process to begin with so step number three you don't actually qualify for the refinance on the back end to begin with so what that means basically is that you don't qualify for the refi so the refi qualify the refi this step here is the most crucial step of the entire thing it's the only thing that makes the burst strategy actually work so long as you want to get your money back out if you have all cash and you just buy rehab and rent you just skip r if you buy it all cash and just keep doing that over and over again but most of us would like our money back out of the deal in which case you have to refinance the property with a take-out lender right remember that you're doing your takeout of the property to get your money back and in this scenario what if you don't qualify so you go back to these other two steps as well to realize like okay did i comp it right to begin with did i actually plan for the appraisal to go correctly as well but most importantly and i believe this should actually go all the way back up to step number one of even doing a burst strategy to begin with is what is your exit strategy exit strategy is the key to everything in real estate more exit strategies you can build into a deal the better so part of the burst strategy the only biggest part of the burst strategy is the refinance because that's what makes it a burr so that's your big exit strategy so you must before you even start doing a bur go figure out if you qualify for a refinance to begin with now a lot of hard money lenders out there are going to qualify you to be able to buy a property especially if it's a good flip because remember every great bur must be a great flip first so if every great bur is a great flip any hard money lender is going to look at that saying this is a great flip yes we will lend money to you to buy it but it's completely different when it comes to refinancing and keeping the property long term so do you qualify for a refi do you qualify to do a take out finance do you qualify for a cash out finance and on top of that did you plan ahead enough time to be able to do the actual refinance itself so let's go into what happens if you don't qualify for a refinance to do the burst strategy some things to consider when you don't qualify to do a birth strategy is what lender are you actually going with are you doing a conventional loan with a fannie freddie backed lender in those cases most fannie freddie backed lenders conventional mortgages are going to look at you on a debt to income ratio how much money do you make versus how much debt do you got and what's your credit score those are the two big factors and of course your security of employment right if you are a full-time investor that just quit their job and doesn't have the best credit in the world or most secure income there is and you can't really prove your income that you've been making whether you've been flipping or wholesaling or whatever right you're not going to look that attractive to a conventional lender so please go check out conventional lending first if you haven't done this before and see if you get qualified to begin with and if you don't then you have to go to the different options of lenders out there there's other options optional lenders out there like asset based lenders where they're not looking so much at you they're looking more at the asset itself the actual property and they use something called dscr debt service coverage ratio now what that means is the rents that you receive after cost how much is left over to pay your mortgage right so a good an interesting example of that would be let's say you get twelve hundred dollars of rent and now every lender calculates dscr a little differently but twelve hundred dollars of rent and let's say you have a hundred dollars in taxes and a hundred dollars in insurance right so now you're down to a thousand dollars so you get 200 in cost some lenders will also count property management they'll also cut count capital expenditures and some other things to get to what your actual net rents will be now whatever that's left over and let's keep it really simple in this example and say the lender only cares about taxes and insurance when it comes to your debt service coverage ratio so if you have twelve hundred dollar rent hundred dollars for taxes hundred dollars for insurance you're left with a thousand dollars a month out of your rent before your mortgage payment now how do you calculate dscr at that point the lender is going to say your mortgage payment is let's say a thousand dollars a month let's keep it that simple and your rents are receiving as a thousand dollars after expenses you have a 1.0 dscr it's a one-to-one ratio now let's say you go down to 800 a month of mortgage payment and a thousand dollars rent you have about roughly about a 1.2 debt coverage ratio at that scenario so it changes the lower your mortgage payment is and the higher rents are the bigger that dscr becomes right in that scenario and the more that you qualify for as far as a lender is concerned so why is that super important if you're analyzing your bur strategy in the beginning right you're doing your comps and everything there you need to factor in your rental comparables not just your finished comparables to begin with if your rents are only going to be a thousand dollars a month and your mortgage because the property is so expensive it's going to be 2 000 a month right it's a horrible burr but maybe it's a great flip i don't know in seattle we run into that stuff all the time so your options fannie freddie lender that's going to look at you and a little bit at the property itself they're going to count some of the rental income towards your income or asset based lender dscr they look at you still but they really only are looking at maybe your credit score and experience and then they add then they look at the asset and then you have community banks portfolio lenders and so forth those are gonna be your credit unions and everything and they're going to look at you really hard just to see if you're legit but they don't then after they qualify you so they're basically vetting you out a lot of times to do like a three-year three-year financial enema on you basically just to figure out uh if you're a legit business and once you've qualified for that then they turn into an asset based lender and they just give you loans all day based on the property so everything's a little different then you also have your hard money lenders that'll give you a shorter term finance maybe they'll give you a two or three or five year loan only they're gonna have a higher interest rate higher points and so forth the fact of the matter is if the property has a high enough appraisal and has high enough rent rents there is a lender out there that will probably give you a loan it might not be the best loan in the world it might be a higher interest rate it might be crappier terms but you can find a way to get a loan out there all right now my final guaranteed way to help you fail at the burr strategy that i'm going to go over with you today is you suck at being a landlord now let's just say that for a second i fall in this category for sure so let's write that down hate being landlord that can come into various various different shapes and sizes of what that actually means let's define that for you when i flip a house i buy a crappy house i rehab the heck out of it we got three four five six plus months into this deal we've had headaches we've had contractors running it we've had contractors leaving it we've had overages and budgets under just it's been a frustrating mess because most rehabs are not the most beautiful thing in the world that's not why i got into this business i got into this business to make money not run contractors but that's what we have to do so by the time i'm done with the property i'm done with the property i don't want to deal with it ever again so i hate being a landlord but i love the wealth it generates for me and my family so what did i have to do i had to overcome hating being a landlord by hiring property managers and putting my wife in charge of all of it so i have nothing to do with it whatsoever right she can do whatever she wants with that so that's how i overcome step number four is i pass it on to somebody else completely and lead me the heck out of it because i can guarantee you if i was in charge of number four being the landlord we would fail at it so let's talk about that what are some major pitfalls if you hate or suck at being a landlord number one you can't rent the rent the place out if you don't rent the place out you don't get a good tenant in there then you're going to have some challenges or you don't do the right proper screening because maybe you want to save money and be your own property manager a lot of us if you pencil a deal out and you don't had at a property management fee which is between eight to ten percent a month of the rents if you don't add that fee in there and the only way the deal is a good deal is if you self-manage the property you should be second-guessing whether you should be buying that or not you should always be able to afford a property manager into a deal to make it make sense it should be a buffer if you if you have if you don't do a property management management into the deal and you decide to self-manage you have an extra eight to ten percent a month into that deal that you calculated so remember that so let's say that you hate being a landlord you don't get the best tenant in there you don't screen it correctly and you just have a nightmare of a situation on your shoulders because of a bad tenant and you being possibly a bad landlord and you're starting to realize and and second guess whether why you kept the property to begin with and why you didn't just flip it from day one and if you didn't calculate a property management fee in there and you later have to give it to a pm now all of a sudden you might be losing money on the deal because you didn't calculate enough buffer in there so what happens if you do all of these at the same time where you can't get a good tenant in there you can't get attended at all right and maybe it takes you months to handle that situation you all of a sudden don't qualify for the refi you have a low appraisal come in right and you put rent great finishes in there instead of higher end finishes that you needed to be able to get the appraisal you needed in the first place when you hit all four of those you're in for a rude awakening on this property in this in the strategy so let's talk about the absolute worst case scenario of all of this you get a tenant in there before you start to qualify for a refi you rent it out to a horrible tenant that all of a sudden maybe isn't paying the best rents or they start messing the place up to begin with so maybe you're not getting the highest rents that you thought you're going to get because you didn't screen it correctly you're going to qualify for a refund they're like hey you don't qualify for the refund you go to an asset-based lender and they go like hey your dscr isn't high enough to be able to get the refi at all the appraisal's not coming back at the right point or a combination of the two right and also maybe you put red grade instead of finished grade finishes in there that you needed to get the higher arv and you have a tenant inside the property now too what do you do well you say hey i'm gonna flip the house i'm just gonna sell it well it's really hard to sell the house when you have a crappy tenant in there right and it's also hard to get the high value that you wanted to get out of it in the first place because you put rent grade finishes in there instead of flip grade right you're in for a rude awakening if you didn't plan out these steps in depth before you even started the burst strategy so a lot of us on this fancy youtube social media world might make you think it's so easy do the burn make millions be rich but the truth is you can mess this thing up bad if you don't pay attention to these steps and work with the end in mind work backwards on this how are you going to refinance how are you going to rehab it how are you going to do all that great stuff get a good tenant in there rehab it and then buy it work backwards so one last tip for you guys on this if you stop start with the every time you look at a property if you start with what's the highest and best we can get for this house or this or this multi-family or this commercial deal whatever it is and then work down the chain so for us the very first thing we look at is is this a way we can buy this property make it an infinite bur that's the first thing we want to try to do if we can't make it an infinite burr instead can we make it a really good rental that we leave some money into it and be able to keep it if we can't do that can we flip this thing and make it a great flip we can't do that is it a tear down and more of a development deal if we can't do that can we wholesale the deal on set if we can't do that can we list it on the mls and sell it where it is i don't i'm not a listing agent one of my staff is and she can list it instead right or do we just pass on the deal a lot of us start from the bottom up start from the top down work backwards just like when you do the burst strategy work backwards to make sure it's a good deal before you buy it that said i'm charlie yarber make sure you comment like subscribe to this video and i'll see you on the next one [Music] you

Channel: BiggerPockets

Views: 76,459

Keywords: brrrr method, brrrr, brrrr strategy, brrrr real estate, real estate brrrr, how to brrrr, what is the brrrr method, what is the brrrr strategy, what is brrrr, brrrring, buy rehab rent refinance repeat, real estate investing, real estate investor, flipping, flipping houses, flip houses, buy rehab rent refinance repeat method, buy rehab rent refinacne repeat strategy, brrr, brrrr investing, brrrr investing strategy, cash out refinance, how to brrrr real estate, rentals, biggerpockets

Id: a1HAJuDroeQ

Length: 22min 28sec (1348 seconds)

Published: Wed Feb 09 2022