March 2, 2024

The BRRRR method just got served a devastating blow. With new financing rules and regulations, the “Buy, Rehab, Rent, Refinance, Repeat” strategy could be coming to a close for rookie real estate investors. This is a sensitive subject for most investing experts, as the BRRRR method was almost foolproof from 2010 to 2020. ANYBODY could find a house needing renovations, make some needed repairs, and turn it into a cash cow by refinancing out of their original loan.

But now, the tide has started to turn, cash flow has been erased thanks to high mortgage rates, and finding a home for sale isn’t as easy as it always was. For investors who relied on the BRRRR method, this could be seen as the end of a wildly profitable era. But for expert investors like David Greene, Henry Washington, and Rob Abasolo this is just the beginning of a new type of BRRRR that could pay off handsomely but has much more lethal side effects.

In this episode, we’ll get into exactly what the BRRRR strategy is, how investors use it to recycle their down payments, and what changes have caused it to go out of style. Our expert hosts will also describe what you MUST do to make your BRRRR investment work in 2023 and why simply buying a fixer-upper is NOT a worthwhile strategy. So stick around if you don’t want to get burnt on your next BRRRR!

Rob:
This is the BiggerPockets Podcast show 751.

David:
You can’t cut corners when you’re going to BRRRR. You have to get it at a better price. You got to negotiate harder. You have to look for opportunities that you could add value to a property buying an 1,100 square foot home and making it a 1,900 square foot home. You really have to be disciplined versus when you’re just finding a property that cash flows, you can be lazy and then 10 years later, it really isn’t worth a whole lot more than you paid for it and you’re frustrated because the cash flow didn’t work out like you think. So while BRRRR is harder, I still feel like it’s safer because it forces you to do real estate the right way.

Rob:
Welcome everybody to the biggest, the baddest, the best real estate podcast in all of Apple Podcast territory and everywhere, all podcasts that exist. I’m joined here today by my co-host, Henry Washington and David Greene who are laughing at me in this intro. Gentlemen, how are y’all doing today?

Henry:
I am so much better now. You should do every intro from here on out until the end of time.

Rob:
I don’t get enough practice on this. My routine for this would be practicing in the mirror, but I just never thought that I’d get the opportunity, so I haven’t practiced. But hey, practice makes perfect. Guys, how y’all doing today?

David:
Watching you tiptoe through a intro like that because you don’t want to have to do it 17 times is the verbal equivalent of a three-year-old trying to avoid the lava walking across [inaudible 00:01:29]

Rob:
It’s true because you said I can only do it in one take. So here I am, one take Rob. And this is what you get. Look at all the laughs that we’ve provided today. How is everybody doing today. Henry, how you doing, man?

Henry:
I am fantastic. I enjoyed myself on this show. I think we need Rob for president slash BiggerPockets extraordinaire. I’m in.

Rob:
David, what about you, man? I know you, you’re having some technical difficulties over there with the microphone, but it does get better right into the episode.

David:
I’m actually in Scottsdale at our property and we are going to be hosting a retreat out here, so I’m having a good time. I’m going to try to change some lives and make some new relationships.

Rob:
Awesome. Hey, have you gotten your eyes on the new pickleball court? It’s going in this week.

David:
Ooh, I do need to see that.

Rob:
Go peeve it.

David:
Our producer said that my mic stopped working because I dropped it too many times during the show, and if that’s not a reason to listen to this episode all the way to the end, I don’t know what is.

Rob:
Well, let’s get into the episode. Today we’re talking about BRRRR. I think we actually have a relatively real conversation about the BRRRR Strategy. If newbie investors should be attempting this strategy, if experience investors should be attempting this strategy, some of the risks that we should be keeping in mind and some of the big changes on the horizon. Henry, what were some of your favorite parts of today’s episode?

Henry:
Yeah, I think you nailed it when you said we have a real conversation about it, right? Because I think we really talk about getting back to the fundamentals of real estate investing and we share a lot about how the market prior to this year has made us all look like geniuses, and now we’ve got to really put in the work. And then I think everybody needs to stick around to hear David talk about how he had to refinance the property and what that ended up looking like. Spoiler alert probably isn’t as great as people think, right? So it’s a real example of what’s happening out here.

Rob:
Yeah, for sure. David, what about you, man?

David:
If you guys are looking for a podcast that stops at blowing smoke up your backside, I think you’ve found it. That’s not going to happen here at BiggerPockets. So we get into some real life examples. We talk about the history, the future of real estate investing, ways that we may need to change our expectations, and then some lending regulations that have changed and how we can apply those to the ever-evolving first strategy. So I thought today’s episode probably could have been two or three episodes long. There was [inaudible 00:03:52] that we packed into it, but we got it all in on one show.

Rob:
Yeah. I’d love to do more real talk versions of these with short-term rentals, with wholesaling, with long-term investing, all that kind of stuff. I think this would be a really great series. But before we jump into today’s episode, David, I’m not going to give you the quick tip today because of your microphone situation. I’m going to actually pass it over to our good friend, the Henry Washington for today’s quick tip.

Henry:
Ooh, point guard Rob, dishing the rock. I love it. I’ll take the assist. So for today’s quick tip, during this episode, we talk a lot about buying at a deeper discount or getting a discount on your rental properties. And when you’re a new investor, that can seem overwhelming. You may not know how to do it. You may think it’s super expensive. You may think it’s super uncomfortable. Well, I want to give you two quick tips of things that you can do to help you get better at finding good deals and put the blenders on and not be distracted by everything out there.
First, learn what a good deal looks like in your market. Every market is different. Good deals are different in every market. You have to be a market expert, learn what good deals look like in your market. Once you are comfortable with that, then all you need to focus on is learning one strategy to help you find good deals and you implement that strategy over and over again until you find those deals. Put the blenders on, focus on those two things, and it will help you become a better deal finder.

Rob:
Awesome. Well, I say we get right into it fellas. Let’s do this thing. Today, we’re going to be talking all things BRRRR in 2023, and I really want to talk about why listeners should care about changing their birth strategy, what our predictions are for the horizon of 2023, and how should people be thinking differently overall. So I’m joined here by Henry Washington, David Greene, very, very professional men in the world of the BRRRR strategy. How’s it going fellas?

Henry:
Great.

David:
It’s going great, man. I like that you’re sitting in the captain’s chair. We’re getting to see Rob as the pilot of the plane.

Rob:
Listen, I’m just here to spectate as someone that wants to get into BRRRR, especially in 2023. Personally, I’ve got some things that I want to ask you guys, some things that you guys can help me work through, and hopefully this episode will answer a lot of questions with everything going in the economy today. So I just want us to take a step back for people that are at home listening today for the first time, they may be like, what is BRRRR? Isn’t that one of you’re very cold. I don’t know what this means as it pertains to real estate. So David, can you just walk us through the basic premise of the BRRRR strategy in real estate?

David:
I would be happy to. It’s not like I’m asked to do that a hundred times a day for the last five years. Thank you, Rob, for the privilege.

Rob:
You’re welcome. It’s a softball.

David:
Yes, thank you. Thank you. You got to get some momentum going on these podcasts. When I’m not hosting it, I like how you’re getting me the ball early in the first quarter. Get me going here. So it’s an acronym that it stands for, buy, rehab, rent, refinance, repeat. And it really is just the order in which you execute adding value to a property. Traditional rentals, people will buy them and finance them at the time they are buying them. Then they will put money into fixing them up. Then they will rent them out while the money that you put in the deal to fix it up and your down payment both get stuck in the deal where you can’t use that capital to buy more real estate.
With the BRRRR method, we buy it, then we fix it up, making it worth more, then we rent it out to someone. Then you refinance getting your capital back out of the deal so that you can put it into the next one and then repeat the process.

Rob:
Okay. All right. So this has been around for a long time, right? I got to imagine this is one of the original real estate concepts out there, right?

David:
Yeah. In fact, it’s funny that you’ll talk to some of these OGs in the game and they’ll explain the BRRRR method without knowing we have an acronym now, and I’m like, “You got to listen to our podcast because you could set that whole thing in just one word instead of having to explain it.”

Rob:
But if you’re like real OG and you’re super experienced, you’re like you knew what the BRRRR model was before there was an acronym. I think that’s its own special badge of honor if you ask me.

David:
Yeah. You’re exactly right. People were doing this for long before we came up with the word BRRRR. It was actually Brandon Turner that coined it. He’s always good at coming up with clever names that people can remember. Then I wrote the book about it, but I definitely didn’t come up with this system. I just sort of explained how to do it in the book. And then in BiggerPockets we’ve spread the message and it was really popular for a while.
And now as rates have risen, it’s become a little bit harder to execute because the price that you pay for the house at the rate that you got when you bought it is opted lower than what you would refinance into, and nobody likes refinancing from a lower rate into a higher rate. It is very difficult to do. It is going from the spa into the pool. If you’ve ever been in that scenario, you know exactly what I’m talking about. We like to do it the other way around where you started in the pool and then you go get in the spa.

Rob:
Can you tell us a little bit about why listeners should care about changing their BRRRR strategy and maybe how they should be doing things differently in 2023 overall?

David:
Well, the main reason that people should care about the BRRRR strategy is because I wrote a book about it, and I don’t want that to become irrelevant. The second reason is that normally I host this podcast they’re listening to, and I do the whole thing in one take, but with Rob as the captain, there’s probably going to be about 40, maybe 50 times. He asked for the editor to come in to be perfect. And BRRRR is not perfect. It’s never meant to be perfect. That’s one of the misconceptions about it. People think they have to-

Rob:
It’s perfect.

David:
It’s perfect, yeah. They think they have to get !00% of their money out of the deal for it to be a good BRRRR and that it’s not the case which we are going to talk about today. But in all seriousness, the reason I think BRRRR is relevant is we don’t know what’s going to happen with the other ways people make money in real estate.
So there’s many ways you make money in real estate. Cash flow is one of them. Buy and hold real estate is incredibly difficult to do right now. It doesn’t mean it can’t be done, it’s just much harder than it has been. There’s a lot more competition and most BRRRR projects are going to end up with buy and hold real estate. So you can’t make it work. Non-BRRRR makes it hard to work with BRRRR. You also don’t know that the market is going to keep appreciating.
You don’t know if the area that you buy in is going to go up. You don’t know if we’re going in a recession. So the typical way that you make money by real estate appreciating over time might be a while before we see it. Well, what BRRRR does is it forces you to add value to what you buy. It makes you force equity, which is one thing no one can ever take away from you.
You always have the ability to add value to a property that you buy. You also always have the ability to buy it below market value. BRRRR still works for those two things. That’s one reason that I like the strategy right now.

Rob:
Okay. All right. And Henry, what about you? I mean, I know that you’re a relatively experienced BRRRR. You may not have written the BRRRR Bible by David Greene, but I know that you’ve executed a lot of BRRRR. You’re probably going to do at least 2020 or so birds this year. So how should the listeners at home be thinking differently in 2023 as it pertains to executing like a full-on BRRRR?

Henry:
Well, I think the biggest change is the seasoning period has changed.

Rob:
What is a seasoning period in the BRRRR world? And then what are the big changes that we’ve seen in the seasoning periods?

Henry:
Well, the seasoning period in general is just the length of time that the bank says that you have to hold that property before you can access the equity through some sort of refinance or restructure. We have to remember, banks are in the business of making money. They make money through interest payments. And if you buy a property and then refinance it immediately, well, they didn’t really make much money other than the fees that it cost you to create that loan.
So they want you to hold the loan longer and that means you’re going to have to hold these properties longer if you buy them on a conventional loan because you can’t now refinance after six months. You have to wait for 12 months. So that could limit your ability to buy a BRRRR. It could cost you more money. Some people like to buy properties with hard money, which is fricking expensive. There’s tons of fees. The interest is higher, and you’re carrying costs are essentially higher. And if you now have to wait an extra six months, that’s six more months of expensive interest payments that you’re making right before you can refinance.

Rob:
Right. So if I can just boil this down very simply, let’s say that your hard money loan is 10%, which seems to be standard. Maybe it’s a little bit more. Maybe it’s a little less. And you are borrowing $100,000 at 10% over the course of a year. You’re going to be paying about $10,000 in interest. Let’s say that you did a BRRRR with that budget. You typically have six months to refi out of that. And if you do, that means that you’re paying less interest at 10%. So it behooves you to try to refi as fast as possible so that you’re not getting hammered by a 10% interest rate.
And the big change that we’re seeing right now is that you basically have to hold your hard money or your note with the bank for an entire year, and because of that, you’re now paying a lot more interest. Did I get any of that right or did I totally butcher this? David, I know that you own The One Brokerage. You’re a mortgage guy, kind of. What’s your take on this.

David:
David “the kind of mortgage guy” Greene. Thank you for that nice backhanded compliment. Let me just put on my wife.

Rob:
Well, listen, you are not technically a loan officer and we don’t want people to think that.

David:
That is a great point.

Rob:
And this is not mortgage advice.

David:
No, I think actually, technically… This is what’s weird. I technically am a loan officer, however, I let my license expire and I own a mortgage company. I have all the credentials, but they’re just hanging on the wall and I don’t use any of them. So you’re right, that’s what you mean by kind of. I know what you meant. Any opportunity that I have to make you look like you insulted me though, I’m absolutely going to take advantage of it.

Rob:
The kind of mortgage guy.

David:
The kind of mortgage guy. So basically if you’re financing into a conventional loan and there is any loan on the property at all, you’re going to have to wait 12 months instead of six months. If there’s no lien on the property, you paid cash for it or no lien was recorded and there’s no one that has to be paid off, that’s different. You can sometimes get around the 12 month and just wait six months to season it.
Or if you’re financing into a non-QM, non-qualified mortgage product. So not Fannie Mae, not Freddie, not VA, not FHA. Some of like the DSCR loans that we do or other loan products you can get around the 12-month seasoning that way too.

Rob:
Interesting. Well, that seems pretty significant because it’s effectively in the worst case scenario, doubling your holding costs. So I know you’re sort of doing some of this right now, but are there any solutions that either of you have seen to this problem, the seasoning thing? Is there any way around it or is it just like it is what it is right now?

David:
What about you, Henry?

Henry:
I mean, it’s their requirements, right? So it is what it is. You have to abide by what they’re telling you that needs to be done. So you have to either figure out a way to buy a property where you can cover the holding costs long enough. So either you’re buying at a deep enough discount or you’re being creative about what you’re doing with the property to produce more cash flow, but you’re going to have to hold it longer, so you’re going to need to be able to pay for it.

David:
Don’t you just love the way Henry explain things? Henry had a way of saying things so I could understand them. I like that. Yeah, that’s a great point. It doesn’t affect certain investors like me because I can’t get conventional loans anymore. So I’m not using conventional financing in any of my rentals ’cause I have more than 10. So I have to use non QM products like the DSCR loan. So it’s not affecting me when I’m doing BRRRRs.
I think a good way to look at it instead of saying, “Well, we got ripped off, we used to have to wait six months, now we have to wait 12 months.” Well, there was never an entitlement that we were allowed to just only have to wait six months. You’re getting a lot of money from another person. And yes, that’s how the golden rules are.
The one that has the gold makes the rules and you get to come up with how you want your underwriting guidelines to be when you’re the one who’s lending the money on this. So you can get around it somewhat easily if you go to a mortgage broker and you just use another product, but you’re not going to get the absolute very best cream of the crop rate. If people think that they’re entitled to the best rate you could possibly get, this is very frustrating. It’s very vexing. It feels unfair.
If you understand that conventional financing is actually sweetened itself, it doesn’t normally apply. It’s only because the government has subsidized these GSEs to provide conventional financing like this that we even get these really low rates, makes it a little bit easier.

Henry:
Yeah, I think people don’t realize too that, yes, there is a way to get around it. You’re just not going to use a conventional loan. And so if you’re buying it on hard money, you can also refinance into a 30-year fixed with hard money. A lot of people don’t realize hard moneylenders have 30 year fixed rate products. Now, the interest rate is going to be a little bit higher than a conventional, like a point and a half higher. But you’re getting 30-year fix and you don’t have the seasoning period unless that hard moneylender has a seasoning period requirement, which you will just have to check with them.

Rob:
So I do want to play a little devil’s advocate because I think you, me and all three of us, basically, we’re all professional investors. This is what we do. We’ve scaled up to basically. Conventional isn’t something that we can do or have done in a long time, but for someone just getting started out a newbie investor that really depends on the conventional route. Do you feel like this is a pretty substantial impact? David, when you were getting started in your flipping journey, in your BRRRR journey, would the six to 12 month seasoning period jumping like that have been detrimental to your growth in your scaling?

David:
Maybe. So I got around the six-month seasoning period when I was new by not using conventional financing. What I was doing was refinancing into a credit line at a regional bank. So I would put my cash up or I didn’t do this, but you easily could borrow money from someone else to buy the house and finance the construction. When it was done, I would refi at 75% of the appraised value through a credit line at a bank. And when that credit line got to a million, then I would refinance out of that into a blanket mortgage, free up the credit line, and I would start again.
So at no point was I ever using conventional financing even when I was eligible to be using it just because I didn’t want to have to wait. But at the same time, is there a huge rush right now that you need to get your money out exactly six months after you spend it? Is there so many great deals that your money just sitting there burning a hole in your pocket, you got to put it into action right now. Henry, what do you think?

Henry:
Yes, I think there are plenty of great deals out there if you know how to look. I think the dilemma is most new investors don’t have the infrastructure or the budget to be able to have that consistent deal flow. So I do want to piggyback off of what David said is that I also have never really used conventional products even when I was a newbie. And so I don’t want newbies to think that you have to start off using a conventional or an FHA loan to buy an investment property. Unless you’re going to house hack it, then you should totally use those products.
But if you’re buying it as a pure investment, there’s plenty of other loan options for you. I also leveraged small local banks to fund my deals. I would buy residential properties on commercial loans at a small local bank, which are an adjustable rate. So you typically have a three to five year adjustable rate period. And then I can refinance those into a 30-year fix on hard money. Right? So you’re avoiding the Fannie/Freddy loans altogether by going that route.
Yes, you’re going to pay a little more fees and you’ll probably pay a higher interest rate, but you get to get around this six months of seasoning, 12 months of seasoning.

Rob:
Okay. And that makes sense. I think that the rising interest rates, that’s the big topic right now. Right? Interest rates are going up and people are predicting that they’ll probably go up again and probably again. So I think that basically it’s leading to this discussion of how has the economy shifted and what are some of the new risks that investors should be mindful of getting into the real estate, but specifically executing BRRRR right now. Do you have any thoughts on that, Henry?

Henry:
I mean, look, guys, can I just be real with people?

Rob:
Yes, please.

Henry:
You hear all the time, “BRRRR doesn’t work, BRRRR is not working. I can’t find a BRRRR.” And that’s probably true. If your method for finding a BRRRR deal is hopping on the MLS and sifting through what’s out there and then buying it at the value that it’s listed at and then trying to add value to it and refinance. It’s not going to work like that. Interest rates are higher, which are causing your debt service payments to cost more, which is killing your cash flow. And if you’re buying it on the market, unless you have a strategy for buying on market deals at a lower price point, then you’re typically not going to buy with equity, you won’t be able to force enough appreciation to get the equity.
So obviously you can’t refinance when the time comes. If you want to BRRRR, guys, you’re going to have to learn how to buy deeper. You’re going to have to learn how to buy off market deals. You’re going to have to learn to underwrite your deals, evaluate what a good deal looks like, and then figure out a way to find those deals off market. I think there’s a lot of…

Rob:
Hold on, Henry. Can you just clarify, buy deeper? What does that mean exactly? Contextually, I think you mean you really have to go searching far and wide for your deals.

Henry:
Yeah. Buy deeper means buying at a deeper discount. If you want BRRRR to work, obviously, you need to buy it at a price point where you can afford to fix up the property and then you force the appreciation through fixing it up and then you refinance it at its new higher appreciated value, and then you can pull that cash out with that cash out refinance.
So in order to do that, you’ve got to be able to buy at a discount. And in order to buy at a discount, you’re going to have to have a strategy in place for buying on the market properties at a discount. Meaning something like taking everything that’s been on the market for 30 days or more and then offering half of what they’re asking. You’re shooting your shot on multiples hoping you get somebody to come back and counter offer you, and then you’re in this conversation about buying at a discount or you’re going to have to look off market, meaning property is not listed on the MLS.
When you’re buying off market, you’re typically buying a situation. And so when you say buying a situation, it means there’s something that’s causing this seller to need to sell at a discount and not sell on the open market for retail value, meaning they’re going to trade time for price. And you have to get good at learning how to find those things and find those situations.
You asked about how are the economic times impacting this BRRRR strategy? Well, in tougher economic times, that creates more potential situations where people may need to sell at a discount. And so if you can get good at finding those, you can buy them at the discount and then you’re able to do a BRRRR. So can you do a BRRRR? Yes, it’s going to take more work, guys. It’s just I think that right now it’s not a great time to hope on the MLS, find a deal that works as a BRRRR.

Rob:
Okay. All right. So if I’m hearing this correctly, that was a journey because basically you’re saying it is harder to do this right now, but it is possible, but you have to work a lot harder than we had to work in the last couple of years. But on the flip side, because of the pending thread of a recession for example, that’s creating a seller’s market that’s a little more desperate to offload their houses because the general population, there’s more situations that are being created where people just need cash, so they’re willing to take a deeper discount.

Henry:
Correct. 100%.

Rob:
David, what about you, man? I know that you are undergoing a ton of BRRRRs and flips at the moment. Has your strategy changed in a way that maybe isn’t super consistent with how you were doing it when you first got started?

David:
Yeah. The volume is down, but I think one of the errors I think people make when it comes to BRRRR is they compare the BRRRR strategy to an acquisition strategy. Are you going to do sub two? Are you going to do off market? Are you going to do BRRRR? That’s not an apples to apples comparison. You really need to compare BRRRR to just buying a traditional property. Are you going to put a bunch of money down and try to get something close to turnkey or are you going to buy a fixture where you want to recycle your capital back out of the deal?
Most BRRRR end up being buy and hold deals. If they weren’t, they become a flip if you get rid of it. And buying a buy and hold deal is very hard right now. You can’t just go on the MLS and look what out there and pay market price for a house and think you’re going to cash flow. You’re competing with people that are not investors at all that just want a house to live in that want these same assets and that 7, 8% interest rate to them, it’s a bummer, but it doesn’t kill the deal because they don’t need it to cash flow. They just need to make more sense than renting.
In most cases, owning makes more sense than renting. As investors, we have an added burden of wanting to get a good deal and wanting it to cash flow and wanting it to appreciate. So like Henry said, we’re going to have to work harder. So if buy and hold real estate itself is difficult, of course BRRRR is going to be difficult as well. I think the BRRRR strategy works for all of the different acquisition models.
So what Henry is doing, he’s looking for off market deals. It works great to BRRRR them instead of just hold them because he can get his cash out of that property and have more to deploy into the next deal. As far as what’s happening in my portfolio that you mentioned, I find that I buy the best properties and pay the best price if I make it a BRRRR.
You can’t cut corners when you’re going to BRRRR. You have to get it at a better price. You got to negotiate harder. You have to look for opportunities that you could add value to a property. Buying an 1,100 square foot home and making it a 1900 square foot home, you really have to be disciplined versus when you’re just finding a property that cash flows, you could be lazy. You could just go buy some turkey property that you think is going to make you money. You pay more than you should have. You don’t do anything to make it better. And then 10 years later, it really isn’t worth a whole lot more than you paid for it. And you’re frustrated because the cash flow didn’t work out like you think. So while BRRRR is harder, I still feel like it’s safer because it forces you to do real estate the right way.

Rob:
Yeah. That makes sense. But are there any new risks right now with this current economy? I mean, I think personally the way we’re describing everything, I think, you, me, and Henry, we can all probably break even on a lot of our properties and we’re good to just add that to the portfolio. If there’s some cash flow, great, we get the tax benefits. But right now it seems like penciling out a deal is a lot harder. And so for someone just getting started on their first deal, is there any kind of huge red flag for just a newbie that really wants to do this in 2023 or do you find it to be the same level of risk?

David:
Well, the biggest risk would be when you’re evaluating what the property is going to, how it’s going to perform after the refinance. So you’re looking at your interest rate as a big part of what your mortgage payment is going to be. Your mortgage payment is probably going to be your biggest expense in the house. If you write it at 6% and rates are at 7.5% when it’s time to refinance, that can catch you off guard.
So on deals that are kind of slim on the cash flow side, yeah, that’s a bigger risk. For a long time, maybe an eight-year run there, rates were pretty much going down every time they moved, so you were just getting an extra juicy deal. If your bird took too long to get going, while you just got a better appraisal because it was worth more and you got a lower interest rate, so it made the whole thing easier. It’s kind of the winds were at your back. Now, you got winds in your face a little bit more just like with all of real estate. So I think that’s the biggest risk that you’re going to be taking.
On the other side, if rates go up and the value of homes go down, when you go to refinance, your appraisal might be lower than what you were expecting it to be when you ran your initial number. So just keeping in mind that the value of real estate is a moving target target because it moves with the economy. It moves with the market. And it might be less favorable for you when you get done with your BRRRR than it was when you bought it.

Rob:
I think that’s totally fair. I actually think that’s probably the biggest risk personally because, I mean, are there scenarios where the hard money or the private money or the bridge loan interest is actually cheaper than the refi interest? Do you think that scenario has played out for anybody?

David:
Yeah. That just happened to me actually badly.

Rob:
Really?

David:
Yeah. I just had to refinance out of a 9% hard money loan into a 10.75% 30-year fixed. And that was not fun on a $2 million property.

Rob:
And because it’s a bridge loan or a hard money loan, it’s not like you can just keep paying that. It balloons or it matures after a year or something. Right?

David:
That’s right. So that’s kind of like musical chairs when the music shuts off. And the only chair that I could sit in was a 10.75% interest rate chair. That was not the chair that I was looking for. That’s like the little kid’s preschool chair that you’re barely fitting in. I wanted a nice La-Z-Boy and I ended up getting a little plastic one with one of the legs missing. And now I’m trying to balance on that thing. And that is part of the risk that you’re taking when you take these kind of deals on.
Now, for the last 10 years before this, the chairs just got better and more comfy and more cushiony, and chair technology had declined and I was getting my Al Bundy on, and it’s changed a little bit. Now, I’m like the guy in those phone commercials who’s talking to the kindergartners at the table and they’re not as comfortable as chairs. So yeah, that does happen. It can happen. It is something you have to be aware of.

Rob:
Okay. So we see the risks here. That to me seems to be the one that’s we’re all staring at is refining into a higher rate. Are there any tips that you can offer new BRRRR investors that are doing this right now that may be in this same scenario? I’ll open this up to both of you guys ’cause I know both of you are doing BRRRR right now, but any tips that you can offer, Henry.

Henry:
Rob, I wish there was a magic pill or a super, super secret loan product very few people know about that’s going to have a lower interest rate, but at the end of the day, there’s not. Right? And so what’s your biggest protection against these? When you’re in a situation like David, your loans do. You have to find a new product, Right? So your options are limited there. Really your only insulation is equity in the deal, meaning that you bought it at a very deep discount, and so you can afford to just keep it in whatever loan product you bought it in if it isn’t coming due and just pay the additional fees because you’ve got a big enough discount that maybe you’re breaking even, right?
Maybe you’re feeding it a hundred bucks a month, but you’re getting the tax benefits and the other ancillary benefits. It’s not pretty, but it could be the best option that you have if you don’t want to go into a 10 or 11%.

David:
That’s the same way I held myself on the dating market, by the way.

Henry:
The other option is, for example, right now I have a property where I bought it on a adjustable rate, a three-year adjustable rate. It’s coming due right now, and I can’t find a 30-year product that I want to put it into for an interest rate that I like. So we’re putting it right back into another three year adjustable rate, but it’s a lower interest rate, so I can get it at seven and a quarter instead of going into a 30-year at hard money at 10%. And so I’m biting my time in hopes that in three years that interest rates aren’t at 20% and then I’m in a worse position.

Rob:
But if it’s adjustable though, is that not a big… Could it not go higher than the 7.5% % within the three years?

Henry:
No, it’s fixed for three.

Rob:
Oh, I see. I see. Okay. Well, then seven and a half, that seems pretty standard for what we’re seeing right now, right?

Henry:
Yep. So that’s why we just said, okay, instead of taking this one and putting it on a 30-year, which is what we liked to do when the market was nice to us and the chairs were comfortable, like David said.

Rob:
La-Z-Boys.

Henry:
When I was refinancing into ergonomic La-Z-Boy with massage seat inserts and heated and cooled with cup holders that are like ice chest, now I’m just going to go ahead and put it right back on another adjustable for three years at seven and a quarter, and hopefully things change.

Rob:
Honestly, I would probably take that seven and a half. If I can get seven and a half percent right now, I’m probably not going to shop around too much. Let’s talk about things that used to work with a BRRRR that don’t necessarily work right now. And I think for example, the 1% rule that was sort of the golden standard for a very, very, very long time. Does that 1% rule still work? Or are there new rules of thumb that y’all are using to analyze your deals before you make an offer?

Henry:
I never liked the 1% rule.

Rob:
[inaudible 00:32:21] Yeah.

Henry:
Every time I did the math on 1%, it was just barely breaking even. And so I always shot for 2%, one and a half at a minimum. I mean, I think now you got to be at least one and a half to 2% if you’re going to make money. But again, it’s the same problem. We’re still looking at how do we make these deals pencil from a cash flow perspective and it’s harder.
So I feel like I’m one of those broken records right now. But the only way I’ve ever found cash flow even when 1% rule was the super cool thing to do, the only way I’ve ever found cash flow was finding deeper discounts, was finding a way to buy properties at a deeper discount. It’s just now, I’m not finding cash flow, I’m just offsetting higher interest rates. It just don’t pay me as much.

Rob:
Yeah. David, what about you? Did you have any heart for the 1% rule back in the day?

David:
I still use it in my head. I don’t make it a criteria of a deal, but if you came to me and said, “Hey, David, they got a house right here. I think you should buy it.” The first question I would say is, “Well, how much is it and how much will it rent for?” And if those numbers weren’t close to 1%, it’s just, “No, I don’t want to.” That’s really how I think it’s meant to be used. It’s more of a guideline than like… It’s not really something you hang on the wall to be proud of like, “Oh look, it’s 1% and it’s got all these other things.” When I looked at the 1% rule, there was two patterns that stood out to me. The first is that when rates were as low as they were, you could be flexible off of a hard 1% and it would cash flow more, right?
Because the interest rate matters, but that was never included in the 1% rule. So every price range has a break even where the 1% rule works at 7%, 8%, 9%. When they go down to three and a half percent, a lot more will work even if they’re not right on the 1% rule. The other thing is that I found as prices got higher, you’ve got a little more flexibility with the 1% rule. And by that I mean if it’s a $50,000 house, it has to rent for 500 a month or don’t even consider it.
But if it’s a $900,000 house, it doesn’t need to rent for nine grand a month, you’re never going to find that. So the higher price points, that 1% number starts to become looser. You can make a deal work at 7,500 a month if it’s a $900,000 house. I think both of you could agree that sounds good on cash flow right off the bat, just thinking about it.
So one of the ways that I pivoted when the market got hot was I just went into higher price points. I went into markets where I knew it was going to be better long-term appreciation to be a safer overall investment. There’s going to be less competition from other investors. The 1% rule wasn’t as important, and if you time it right, I could get a luxury property. You’re just a more expensive property with the buyer that got scared. It’s a $900,000 property. But Jerome Powell’s talk about the Fed increasing rates again, and they’re hearing news about Donald Trump getting arrested and the economy going into a depression and they’re like, “I’ll let this thing go for 675 if you could pay me cash and close in two weeks.”
So I just took the same principles that we’re using and used them where the air was a little thinner. I got a little bit higher up the mountain. Now, I understand not every single investor can do that, but when you understand these patterns that are behind these rules, like the 1% rule, you have a little bit of flexibility and freedom to work things out without adhering to it strictly. But as towards your question, Rob, if you’re still just looking on Zillow at stuff that’s out there and saying, “I’m going to keep looking for 1% property, your battery is going to die on your mouse before you find it.”

Henry:
Not on a mouse. The battery on the [inaudible 00:35:57] that’ll take you a while.

Rob:
This is, I think, a really big sticking point, Henry, because what you’re saying is so true and so obvious like buy at a deeper discount. Who is going to argue with you, right? Well, yeah, if I get a cheaper house, the chances of it working out is great, but you say it casually because you’re a sniper at this, right? You’re very, very, very good at this. But it takes a lot of work to go off MLS and search these properties, find people with situations, make offensively low offers, get them accepted.
I think that’s the hard part, not just for new investors who don’t know really how to do that unless they follow you on Instagram. Great, great. But there’s also the new investors. There’s people like me and a lot of other people and a lot of listeners that I would imagine we cut our teeth doing that and it feels like we have to go back into the trenches.

Henry:
You do.

Rob:
And work a lot harder than we did the last five years, right?

Henry:
Yeah, you do. When did people decide that real estate investing or building wealth was easy? It’s not easy, guys.

Rob:
Yeah, it was easy the last five years. But not easy, but it was doable.

Henry:
It’s not supposed to be easy.

David:
Let me get your guys’ take on this. Here’s why I think we got all messed up, and I just want to hear if you guys think I’m off or if I might be onto something. This became really popular around 2010 when we had just had a huge crash. Real estate was on sale, everybody needed a place to rent, and the economy went nowhere but up from money being printed and rates going lower and lower.
So when we first got into this whole thing, podcasts started getting popular, books started coming out about real estate investing. You were buying it for half of what it had been worth a couple years ago. Everything out there cash flowed for the most part. You just had to use a calculator and see which one’s going to cash flow the most. That was the game we were playing is I could get a 12% return at 15% or at 20%. I had to know how to run numbers to find which one was the better deal. But it wasn’t about avoiding buying a property that’s going to lose money because very few properties out there were losing money and then we thought that was normal, that this was just how it was supposed to work.
You’re like, “If I could finally convince somebody to buy a house instead of a new car, you could hit financial freedom in a couple years.” It was that easy. And we thought that was the baseline of what it was supposed to be, and more and more people got into the game, and real estate actually kind of balanced out. There’s some competition. We now are talking about it being hard, but this is how it’s been for the entire time before now. There’s so many more people that are in the game. I think we just got used to playing on easy mode and now we’re a normal game and we’re like, “What the heck? I got to count my bullets? I can’t just spray and pray. The game is a little bit tougher.” Do you, guys, think it’s more complicated than that or do you think that might be a part of this?

Rob:
No, I think, I mean, a large part of it. I’m not going to speak for Henry, but I do think it’s like we could put in a good amount of work and get a great return, and now we have to put in a lot of work to get a okay or a great return. And it’s like an ego check, I think for a lot of investors that they don’t want to do it. I think that’s very hard for some of us to accept.

Henry:
David, I think you’re spot on. I think the distinction that I want to make here is I don’t want to just say, “Hey, new investors. You’re not going to be able to just go buy a BRRRR.” What I want to say is, “Hey, new investors, you got to go work hard to build the wealth and the financial freedom that you’re looking for.” Right? It’s going to take some work. It’s not as much work as people think it is though, Rob. Once you start doing the work and you start to learn, “Hey, what does a good deal look like in my market?” And then what’s one strategy that I can implement to find those deals and just go hard at that strategy until it starts producing results. It’s not that hard. It’s just going to take a little bit of a learning curve on the front side.
The distinction that I want to make is it’s not just new investors don’t go do this. I think what we’re saying is if you’re going to be an investor, you’re going to have to work hard. If you’re going to be a casual investor, it’s not as easy to do that. BRRRR is probably not the greatest strategy for the casual investor right now.

Rob:
Okay, that’s good. And I always say, my little phrase is it real estate is not hard, but it is hard work and some people just don’t want to do the hard work. But it definitely for people that want to do, it’s out there. So you answered my question, but David, I guess I’ll toss it to you, which is should new investors be doing BRRRR right now?

David:
It depends on your timeline. So when we first taught BRRRR, we gave this ideal execution and said, “Here’s how it works. It was similar to house hacking.” We’d say, “Okay, you buy a duplex. You live in one half and rent out the other half.” It was just to understand how house hacking works. But then people would say, “Well, what if you want to do it with a triplex? Am I allowed to do that?” It doesn’t have to be exactly the way that it was described. BRRRR doesn’t have to be in six months, you get 100% of your capital out. You can do a BRRRR over 12 months or over 18 months. You can buy a property, put some tenants in there, start making some money, wait for it to be vacant, wait for the right time in your life, go add an ADU. Go build out more of the property. Go finish the basement, then put some more tenants in there, increase your cash flow, wait for rates to go where you want them to go. Boom, hit your refinance.
18 months later, you’ve got your capital back. Maybe the property has appreciated some. Now, you can move on and you could get your next deal. Nothing ever said it had to be a sprint where you were buying a property every single six months on the dot. Try to scale a portfolio so that you can retire in three years.

Rob:
I know your mic is mounted, but you could feel free to drop it. Just tip it over.

David:
Thank you for that. What are you thinking, Henry?

Henry:
I was just trying to think of how much of a nightmare it would be at a time trying to buy a house every six months. It doesn’t work like that, guys.

David:
Check my Instagram DMs and you’ll see a lot of people asking that for a long time. It took seven months. What did I do wrong?

Henry:
No, what you did was real estate. Great job.

David:
Yeah.

Rob:
So final speed round here, Henry, are you currently doing any BRRRRs?

Henry:
Yes, I will do them.

Rob:
You will do them. Okay, cool. And then, David, what about you?

David:
Yeah. I got a couple going on right now. What I did this time around other than the one property I told you about, that was the hard money loan. I only made that mistake once and then I realized, “Ooh, this could go wrong.” So luckily I stopped the bleeding before it got worse. On the next three or four that I bought, I did it a little bit differently. I did it buy it with private money. I didn’t buy it with hard money. Well, I did use private money for the down payment, but I got a 30-year fixed loan when I bought it. I just borrowed money for the down payment, used my money for the rehab.
So now that it’s getting done, I choose at what point I want to pull the trigger on the refinance. I don’t have to because I have a 6% interest rate on those properties. So if rates are at eight or nine, 10%, I just won’t refinance it. I’ll wait. And when rates come back down, and I still added the value to the property, but it’s sort of like I primed it and now I just wait. I let it sit there and it sits as equity on the balance sheet. It doesn’t become capital in my bank account, but that’s okay. I don’t need to, I can wait for the rates to drop and then boom, make it work for me.
Like I just said, stretching out that timeline and getting into it with a fixed rate instead of getting into it with an adjustable rate or a balloon payment was one way that I’ve mitigated risk and I think other people can too.

Rob:
Okay. All right. That sounds all good to me. Someone tossed me a pretty spicy BRRRR in my inbox today, a wholesaler for a million dollars in the ARVs 1.5. So I’m penciling it out. I still want to go after some of these bigger deals in LA now that I feel like sellers are becoming a little bit more reasonable. But final question and then we will wrap it up. Overall thoughts on Aaron Burr? Good? Bad? We out on him?

Henry:
Every time I hear Aaron Burr’s name, I don’t think of Hamilton, I think of that Got Milk commercial or the peanut butter and jelly.

Rob:
Aaron Burr.

Henry:
Aaron Burr.

Rob:
All right. You have to do is answer this one question and you’ll win $1 million. Aaron Burr.

Henry:
Aaron Burr.

Rob:
Go look up Aaron Burr commercial on YouTube and you’ll have a good laugh. So just to kind of summarize everything guys, it sounds like BRRRR is still a viable option for anybody really, but specifically newbies. It’s just a lot harder than it was and you have to gear up, get your teams and get everybody ready to work because 2023 isn’t particularly going to be easy, but it will be possible for those that actually want to put in the work. Any other thoughts there?

Henry:
No, I totally agree. You’re absolutely right. You’re going to have to figure out a way to buy properties at a deeper discount and you’re going to have to work harder, guys. BRRRR are there. They work. You’re just going to have to buy them right. I mean that’s the foundation of any real estate strategy. It’s like the rules haven’t changed for buying real estate. It’s just harder to do now.

David:
We had it easy for a long time where if you bought wrong, it looked like you bought right because you just had to wait 24 months. You look smart. There was a lot of ways that you could be bad at this. It was like the rim was bigger frankly. If you’re just playing basketball, they gave you a really big rim, or you’re playing on a eight-foot tall hoop and you thought you were a lot better than you were, and now we’re playing regulation.
I know no one wants to hear that, but that is why BRRRR is harder. It’s why everything is harder. Short-term rentals are harder. Risk is up, reward is down. The whole thing is tough. The reason we still do it, the reason everyone is doing it, guys, because think about this, if it was a bad time to buy real estate, no one else would be buying it and there’d be a lot more easy deals for people like us to find.
There aren’t a lot of good deals because people are still buying these properties and it’s because there’s nowhere else that’s better to put your money. You’re not going to do as good in crypto or NFTs as people did. The stock market is very risky. You can’t keep it in the bank. A lot of people are taking money out of the banks, right? If the whole road is uphill, it doesn’t matter which car you choose to go uphill. Whether it’s all of the different strategies we talk about on these podcasts, they’re all going to have a harder time than what they did before.
So just keep that in mind that though this isn’t as easy as it was. To our opinion at least, it’s still vastly superior than to every other option that you have out there that is somewhat remote passive incomes that involves leveraging money to be able to buy it.

Henry:
Boom.

Rob:
Yeah. Tip that microphone back on the desk, man. I know you just picked it up. All right, guys. Well, I know I can tell you everybody where to find y’all. Find Henry Washington over at the real Henry Washington on Instagram and You can find David Greene @davidgreene24. Not for any particular reason other than that. 23 other David Greenes beat him to it. David Greene 24 or his new website, davidgreene24.com or on YouTube at the real David Greene? No, David Greene Real Estate.

David:
@DavidGreene24.

Henry:
And I’m-

David:
Yeah, it used to be David Greene Real Estate. You’re right, Rob.

Henry:
And I’m @thehenrywashington, so there’s…

Rob:
What did I say? I said the Henry Washington.

Henry:
You said the real Henry Washington and the real Henry Washington is probably a fake Henry Washington.

Rob:
You told me… Oh, okay. All right. And you can find me @robuilt.

David:
Do you ever say it as the Henry Washington, like you’re from Ohio State University?

Henry:
Only when I’m talking to anybody who played for the University of Miami, Florida or Ohio State.

David:
There you go.

Rob:
Do you ever say it in an old English accent like the real Henry Washington?

Henry:
No, I’ve never done that.

David:
Rob, I don’t think anyone else knows that, that’s supposed to be old English. That just sounds like an old man.

Rob:
Just an old man. I said old.

David:
It sounds like Homer Simpson’s dad.

Rob:
Old comma English. All right. Well, Dave, do you want to close this out?

David:
Yeah, very much. Thank you guys for joining me on the show. Rob, you did a great job piloting here.

Rob:
Thank you.

David:
We had about 72 corrections for our editing team. Hopefully we get this to you guys before 2024. We’re using virtual assistants, so we might need a whole army to get through it, but I think that it came out great. Thank you, guys. I really appreciate the advice that you gave in being here with me. This is David Greene for Henry, the real Henry Washington and Rob old man Abasolo signing off.

Henry:
And David the kind of mortgage broker.

 

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