Would you make BRRRR the first deal you ever do, or the third?

Question

I've been reading this room for a couple of weeks and I can't tell which way the room actually leans on this one.

The case for starting with BRRRR: if it works, the money comes back and you can go again, so you learn buying, renovating, renting and refinancing all at once and you're not stuck saving another down payment for two years.

The case against: that's four things to be bad at simultaneously, and the last one depends on an appraisal and a rate you don't control. A plain rental, already tenanted, teaches you landlording and lender paperwork with nothing swinging a hammer.

I have enough saved for one modest deal, so whichever way I go, I get one attempt before I have to wait. That's the part making me hesitate. Where does the room actually land?

mitchell_ray4 · Accepted Answer

Coming from the trades, the rehab is the part I'd worry about least, and I think that skews how I read your question. I can look at a bathroom and get within a few hundred dollars of what it costs to put back. What I couldn't tell you is what a lender will lend on it afterwards, or how long the appraisal sits in a queue.

So my answer is that it depends which half you already know. If you can't price scope, a first BRRRR means two unknowns pointing at each other. If you can, the financing half is at least learnable by asking questions before you buy anything.

Rena Expert · Answer

BRRRR chains four steps and the errors compound instead of averaging out. On a first deal the thing people underprice is the gap between the after-repair value they assumed and the value an appraiser will support from closed sales.

Run it with numbers. Purchase at 140k, rehab at 45k, plus closing and holding costs, call it 195k all in. You assumed an ARV of 250k. A cash-out refinance at 75% of appraised value gives 187.5k, so 7.5k stays in the deal and you can live with that. Now the appraisal comes back at 232k. 75% is 174k, and 21k is stuck. Nothing about your rehab changed. One input moved.

The second constraint is debt service. Many rental refinances are sized on the property's ability to cover the payment as well as on loan-to-value, so at a higher rate the loan can be capped below the LTV number you modeled. Loan-to-value limits, seasoning requirements and coverage minimums vary by lender and change over time, so get the current ones in writing from the lender you actually plan to use before you buy.

The answer to your question depends on whether you can source real comparable sales. If you can pull closed sales of renovated properties similar in size and condition within a tight radius, a first BRRRR is a defensible risk. If you can't, you're guessing at the number the whole strategy rests on. Note that roughly a dozen states do not make sale prices public at all, so in those markets you need a licensed agent or an appraiser to get closed data rather than a public records site.

luis_carrera · Answer

I've modeled both paths more times than I'd like to admit. The thing that pushed me toward doing a tenanted rental first wasn't the renovation risk, it was realizing I'd never actually read a loan commitment. Twelve pages of terms I'd only ever seen summarized in a podcast.

A boring rental purchase makes you read all of it with less at stake. Then when the refinance matters, the document isn't new.

@rena-expert, on comps, how tight is tight? I keep seeing half a mile quoted and my area changes character in three blocks.

ehernandez74 · Answer

A question before the vote makes sense to me: what do you want in eight years? The repeat step is the whole point of BRRRR, and it only pays you back if you actually want six or eight properties. I don't. I want three I never think about.

If you're in that camp, the refinance stops being a capital-recovery tool and becomes an ordinary question of whether you want more debt on a house you already own. @rigging, you said you have enough for one deal. Do you have enough patience for the second one arriving in four years instead of one?

bmoreno23 · Answer

Voted cosmetic-only. Starting from zero, I'd rather my first mistake cost me 4k than 40k.

Would you make BRRRR the first deal you ever do, or the third?

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