Brandon Turner Lost Investors $15 Million Pt. 2 (Why The BRRRR Model Doesn't Work)

0:00Today, Cole, is the recap. Really, it's part two of Brandon Turner's escapade of lighting $15 million in buying assets is to get all your money out them and slightly lose $100 a month. This strategy will absolutely crush it for you. You'll accomplish your goals and consider it an incredible win. All real estate is actually the same, right? You've got some rent, you've got some expenses, what's left over is your profit. You know, my original vision was that I was going to own 1,000 single-family rentals. I got to about 130 and I realized that uh I was climbing a mountain I was just on the wrong one. And I did what Monopoly taught us. With my thing is get rich slow. And all of wealth building is getting rich slow. Sure, you can take exponentially more risk and you might land there, but you might end up dead broke and get crushed by risk and debt. Welcome back to the Be Wealthy Podcast, where we help real estate agents, real estate investors, and people in the real estate space make more money, and then we show them what to do with it. Today, Cole, is the recap. Really, it's part two of Brandon

1:04Turner's escapade of lighting $15 million of investor money on fire. Well, not all investor money, Cole. Not everyone was hurt in this. I mean, not the class A investors. You know, probably the people that had more money, maybe his friends or whatever, they didn't get hurt. It was only the class B investors that lost all their money, Cole, which is typically the people that probably followed him on BiggerPockets, the people with smaller amounts of money. Really, Cole, that would have been the people that needed the money most. Lost the most amount of money, which is what I think is absolutely completely terrible. Um but I want to follow up cuz there was a lot of uh we had some comments uh on the different platforms, and I want to clear up some confusion. And first, there's a lot of comments around BRRRR, cash-out refi, value add. And so, Cole, I did something incredible. I went to Google uh and I asked, "What is a BRRRR?" Like, what is the typical definition, right? And so, let's just go through definitions, and I think that'll be really helpful as we go into part two today, but before we do Cole, we are wrapping up a 30-day stint out here in Northeast Georgia, Northeast Georgia.

2:06And what we're calling the maiden voyage. I don't know why it's the maiden voyage, it's usually a boating thing. Uh we've been out here 30 days operationalizing our business. We got 96 units, about 40,000 square feet of commercial out here. It most importantly a golf course and even more important than that Cole, I really think it's the fishing pond.
Fishing pond is important.
The fishing pond is is a big deal. Cole caught his first fish there. I mean, you'll never forget your first fish, that's what they say.
I had a lot of blood.
I mean, it it's and also he didn't know that kayaks don't have plugs. That did that joke did come up and it was hilarious. So, let's jump into some definitions today. So, BRRR, buy, we're going to buy something, rehab, rent it out, refinance it and get all of our money back is really the cornerstone of this, and repeat. So, buy, rehab, rent, refinance, and repeat. I have no problem with that strategy, but it is always talked about and if you look at any anything online, it's talked about in the short term. I have never seen this pitched as a long-term strategy where we're we're taking lots of time. Every

3:09every forum and if you go to any forum on Bigger Pockets where, you know, Brandon Turner created his incredible foundation, if you went on there and you read all the BRRR, it is all short-term. People are all they talk about is how they have no money in the deal. I'm getting money out of the deal. My view on this is actually what makes things cash flow. I'm I'm not actually trying to get all my money out of the deal. Yeah, that's cool over time, over 5 or 10 years if rents rise dramatically and I can do that, that's awesome. It's just not my target. My target is to take my investable capital that I earn in something in my day job and I have an amount of money I want to place an investment and that investment will earn a rate of return. Typically does cash flow if we're talking about real estate. So, I'm not actually looking to refinance and and get my money back. I'm going to buy it with a great loan. Now, if the property's so bad that it can't get long-term financing, there's a strategy for that, but most people aren't doing that. They're buying it either a long DSCR or they're typically buying it with bank financing and they're doing the rehab then and put you and keeping their dollars that they use for rehab into the deal. So, that's what BRRR is, right?

4:11Buy, rehab, rent, refinance, repeat. All right, so how is that different than a cash-out refi? Because there's a lot of confusion in the comments. My definition of a cash-out refi is you put money down, you have a $200,000 mortgage, in the future you want to refinance that for $300,000, that when you would take the $100,000 out of the property. Again, this is typically done years into the future. This can be because of prepayment penalties that are possibly placed in loans, but usually it's because of rent growth. As rents grow at about 3 to 5% per year over time, that can happen over 10 years, that growth is pretty dramatic. It's got enough rent growth that you could go pull out a significant amount of capital, probably the money that you put into it, maybe even more, to take to do another investment. And so, a cash-out refi, and why I say BRRR is just it re-wrapped, because it's just people trying to do it sooner. And I'm going to walk you through the problems of why it really doesn't actually work to do it most often that quick. If you're going to get your cash back that quick, rent growth hasn't gone

5:13up enough, and so you typically kill your cash flow. Another comment that we had in there was this value add, and so all of these kind of wove together. So, the third definition I want to work with, Cole, is value add. And our good friend Google says it like this. Value add multifamily investment is a strategy where an investor buys an older or underperforming apartment building with the intent to increase its market value through physical renovations, operational upgrades, or better management. Common value add categories. Interior unit upgrades. We're going to go through, improve all of the units. Maybe they're just old and dated. This might be new kitchens, might be new cabinets, flooring, carbon, plumbing, electrical, hardware, all of those things we might upgrade. It might be exterior amenity curve we might curve curve a I got a little stutter there called Rarely am I out of words. We might improve the curb appeal called the common areas. We might go to to repaint it, re-roof it, all the things on exterior. Then we might go to operational efficiencies.

6:14Are we or are we not sub-metering utilities back to the tenants? Can we do anything with energy efficiency to make it more efficient and lower our costs? Do we change management companies or manage ourselves? And then can we create any new income streams, right? That's typically value add. And so when you look at what Brandon Turner bought, I would not define Cole a 96-unit apartment building that wasn't that old or I'm sorry, a 96% occupied apartment building selling at a four cap to be the typical value add where we're going to massive physical renovations, operational upgrades, or better management. Yes, he showed some rent growth, but the rent growth was just with the market gave him. It wasn't because of any of the things we're talking about. So value adds got to play. Now the most important definition Cole that I think we need to go to is what is what Brandon Turner did which is called the roast. And that one's going to I hope hits Google. And that's where you are raise a fat fund off a hot webinar from BiggerPockets. That's where you overpay at the top of the market and you buy a building at a four cap with the lowest

7:16interest rates ever and you lock in a super short-term loan. You overpay. Then you put in all your acquisition fees and asset fees and you just feed this thing Cole. You got to really feed it. That's the A part. We should call it the F part, but that would make it an it may it would make it a roafst. So then you go to the S. That's where you sink underwater when the rates climb. You have the rates go up a little bit and then kaboom. And then T, that's just you tell the LPs, especially those class B investors they get nothing, as we say, "Hey, no big deal, just the market 15 million lit on fire." That's the roast. Raise a fat fund, overpay at the top, acquisition fees, sink, you know, underwater when rates climb, and then tell the LP tell the LPs it's just the market. So, the four definitions we just covered was everything from a BRRR, cash-out refi, what is value-add, and what is a roast, which I think is most important. Cole, we get the roast thing there. So, I thought it would be helpful if we ran some math, and I know that math is a long-lost language of the investor. But, when you look at math, it's really interesting. So, let's just pretend that

8:18there is a deal out there today that there's a fourplex that is worth $350,000 that could be purchased for $300,000. It needs $50,000 worth of work, and it'll be worth $400,000. So, Cole, we've got this incredible deal that is worth 350, we can buy it for 300, and you put 50 grand into it, it's worth 400. So, option one, what has been done, the tried and true, someone would most likely put 20% down. And I'm going to assume they just got long-term financing, and they're going to fund their own rehab. So, Cole, $300,000, if you put 20% down, you're going to have a loan amount of $240,000. And I did some of this math on my 10bii calculator this morning. It if that loan amount is 6 and 1/2% on a 30-year fixed, which 6 and 1/2 today on a 30-year fixed, Cole, would be an incredible rate on an investment property. So, I'm using really one of the lower rates you're going to see. I'm using a 30-year fixed mortgage, and I'm going to assume rents are at the third at the 1% rule. So, this property uh that's worth $350,000, we're going to assume that it rents for

9:213,500. Now, in nearly every market in the country, the 1% rule is almost impossible. So, in other words, I'm using the most the most optimal situation imaginable, Cole. I could not put more blue sky on this. There's just none left. I mean, I can't see the kind of blue sky that Brandon Turner sees when he sees a four cap at 96% occupied. Like I it's not like that good, but it's pretty good. It's but it's pretty good. And so So, this Here's what would happen. That payment is $1,516 a month. Again, $240,000 loan, 6 and 1/2% interest is $1,516 per month. So, if we're renting it for $3,500, Cole, most rental properties are going to have, especially a fourplex, a 40 to 45% expense load, excluding the principal and interest payment. So, the expense load, something not a lot of people talked about, it's not blowing up on Bigger Pockets, but really it's all the expenses that go into your property divided by the monthly rent. And we're just trying to get a percentage. So, that's going to be your repairs, your

10:25maintenance, your taxes, your insurance, vacancy, HOA, all of those things. We're not doing principal and interest, everything but your PI payment is going to be about 40 to 45%. So, I'm going to use the low end of that range at 40%. So, Cole, $3,500, if it's $1,400 is your expense ratio, that gives you $2,100 and what we would call gross profit. So, we got 3,500 in rent, we paid all our expenses except for our mortgage, we've got $2,100 left over. If our mortgage payment, Cole, is $1,516, that gives us $584 a month in cash flow. So, I just want to know where we're where we're at here. $3,500 in rent, after all of our expenses including our mortgage, we're making $584 a month. Now, we had to What are our dollars that we've invested? We've invested $60,000 in a down payment and we've invested $50,000 to rehab. Again, this is under the 1% rule which we used which is and the 40% expense ratio. So, this is the most optimal scenario and we're making

11:28$584 a month. Now, now that we've done that, let's make this super cool. Let's BRRR this thing. Let's really turn it to 11. And so, ready Cole? You close your eyes, you dream property's worth 400,000 bucks. So, what we want to do now is make sure that we we rip all of our money out. We cannot have a dollar in this deal. That would be impossible. If you put a dollar in there, Cole, the whole thing is an investor, you just you blow up and you can never go on BiggerPockets again, okay? That's the thing, if you literally have a dollar in the deal. So, we got to get all that money out. So, we have a new loan at $350,000. So, the investor gets their 50,000 in rehab back, they get their $60,000 down payment back. New loan is at $350,000 at 6 and 1/2%. I kept the same interest rate on a 30-year fixed. New payment is $2,212 a month. Now, Cole, I I don't know if you know this or not, but in 9 months you probably signed a year lease. So, those rents are the same under this 1% rule. So, we're going to take $3,500. Now, your 40% expense load, that's going to be the same. So, $1,400.

12:31And now we're going to subtract the 20 You know, we So, it gives us $2,100 left over of gross profit. Now you subtract $2,212 from $2,100, Cole. And this is where it gets tricky. That amount's going to be negative in your calculator. It's going to be It's going to be red with a little minus in front of it. And that's not good, Cole. So, now after you did this, yes, you got your $110,000 back, but you're losing $112 a month. Assuming that you only have a 40% expense ratio and you're getting a 1% rent. 1% of value. You're using the 1% rule, Cole. So, if your goal in buying assets is to get all your money out them and slightly lose $100 a month, this strategy will absolutely crush it for you. You'll accomplish your goals and consider it an incredible win. So, I'm not making fun of BRRR, but I just took the most optimal scenario possible. I took the average price of a fourplex across the country and I used everything possible to make it as good as possible and it loses money.

13:33The reason I know this is I have seen my private coaching clients go through this because they hear these podcasts, they see things on Instagram that aren't real, and they see their favorite influencer who really doesn't do anything but sell ideas that sound sexy, but it's not reality. And so it doesn't mean that investing like this is wrong, I just think you've got to run the math behind your strategy with clear definitions. So the issue here isn't burr, it's time. Rent growth needs time to grow to create a large enough spread between the down payment and the rehab so that when we cash it out, I'm sorry, we need we need time for rents to grow dramatically to increase dramatically over the fixed cost of your mortgage. So when your mortgage goes up, when you go pull $100,000 out of the deal or more, rents are high enough that you still have positive cash flow. That's the whole point. And so I believe that every rental property, especially something like this, should have four to $600 every month of passive income of totally passive of positive cash flow because you're going

14:35to have larger repairs. Things are going to come up. An AC unit of $10,000, if you're losing $112 a month, right? All that is out of your pocket, it won't pay for itself. Now I think the detractors will go on here and say, "Wait a minute, in a couple years rents are going to grow by 3% and that'll increase it." Sure, but why do you want to go buy 30 of these, close your eyes, and you're waiting 10 years hoping that that happens? There's a better way to do it. There's a better strategy out there. So burr isn't wrong, it's the timing structure of getting it back which makes it rarely work. Now could you possibly find the only deal on Earth that works for a burr? Sure. But again, it's all really the cash out refi. So I just want to draw this point, Cole. I'm going to draw it a little and see if this makes sense. We've never moved on camera with Tangle, so this could just be a complete disaster, but I think I can draw this and have it make sense. And so, all right, cool. If you If you look at two things, I'm going to make This is a rent growth on the left-hand side. On the bottom line here is time. And so, what I want to look at here is your normal rent growth.

15:38Your mortgage is going to look something like this, right? It's fixed. So, we've got a 6 and 1/2% 30-year fixed mortgage. And in our example that we gave, $240,000. Right? That amount is fixed. If it's $1,500 a month or whatever it was, that amount is $1,500 every single month. It's going to be that way. And so, our rent starting out at this point here was, I think we said it's $3,500 a month. And rents pretty traditionally climb at 3 to 5% per year. Right? That's just a normally the way it works. And so, what happens is if this is time and this each little ticks here are a year, so when we go rents when they go from here to here, it's going to be hard to cash out $100,000. And so, what we need to do if this is our cash out point of $100,000, we have to wait enough time for rents to climb over to here, which might be 5 to 10 years. But once rents get to here, yes, we could go refinance

16:41to $350,000 and pull out our $110,000 because we still have the gap here, which is our positive cash flow. And so, that's what makes it all work, right? We've got to have that spread. Everything in investing is based on the spread that you can create and you want to have passive income. And so, if you look at that, again, Burr's not wrong, but that's a great example of how it actually works. We've got to run the math. And so, now I want to jump into some of these comments and see if we've cleared some of this up. So, EricJames7819 says that Burr isn't a rebrand of cash out refinance, it's a rebranding of value add. Okay? So, but we're still talking about time, right? I agree that it's value add. I agree it's over time, but when you do it over time, isn't it just a cash out refi? You know, it's interesting, Cole. I bank with a private bank. And when I go in there and tell them that I'm looking to take cash out, I say I was looking to Burr it, they would look at me like I'm an alien.

17:44Which means the bank that banks really wealthy individuals, they actually don't know what Burr is. I know it's going to sound controversial, Cole. It's kind of wild. They actually don't know that. They would call it the people that actually lending the money would call it cash out refi. The people try to sell courses and books and tapes online to tell you don't need any money in the deals and you can get rich with no money and all of the other people's money and never have money in the deal, they have a whole different set of acronyms that they've got to make it sound cool as opposed to, "Hey, let's go do some work. Let's make some money. Let's make some great investments." You know, I still go back to Jeff Bezos asked Warren Buffett, "Why doesn't everyone follow your your business model? It's not that hard to figure out what you're doing. You're buying incredible companies at really good prices." And Jeff and and Warren Buffett's answer is like, "Well, no one really wants what I'm doing. My thing is get rich slow." And all of wealth building is getting rich slow. Sure, you can take exponentially more risk and you might

18:46land there, but you might end up dead broke and get crushed by risk and debt. Um and so, you just got to be careful. Josh Ponder 7179, he says it's not the same as a property value going up naturally over time. So, I don't And then Tim Campbell G6S says it's both. I I think that we've we've cleared that up that yes, there is the possibility for forced value add. It's most likely going to take more time, and if you're building an entire strategy and acronym around a one-off thing that worked one time or 2% of the time, it's really not it's not as widespread as people want it to believe that. All right, the second thing. Aaron Murphy 8796, at the start of the show I mentioned that Burr is the same as the cash-out refi, and then around, I guess the 6-minute mark, I go over the model from the '70s due to the time period over which it plays out that you recommend one and not the other. For me, it's time, right? It's just if rents grow if you can pull all of your money out and it still has passive income and you want to call it a Burr, a roast, a toast, or you come up with your own

19:48thing and it still has passive income and it allows you to accomplish your goals and it has passive income and it doesn't create risk for you, I am all about it. Like, I couldn't be a bigger fan. I just don't know that it shakes out exactly like that. Then we talked about the one of the comments was, yes, a 4 to 6% increase in and this is a really good comment by Aaron Murphy 8796, that I said, "Hey, when the interest rates went from 4 to 6% that wasn't that big of a deal." That was a big deal. That was maybe misstated by me. The real point I was making is that Brandon had the option to do a 10-year fixed mortgage and he didn't. And so, by not doing is what caused it to blow up. Had he had a longer horizon, it would have given him more time to work through it and it would have given him extra 5 years to solve the problem. And so, that's what I would have I would have definitely gone you always would take the longest-term fixed debt if it was only a few basis points different, which was the case here. Walena GV 9PH says, "Cap rates are a valuation metric for net operating income. A cap rate's

20:49not a return." She provides the formula here. No, cap rate's like a yardstick. It just tells you the capitalization rate on your money if you paid all cash. It's just one it's one piece of data in the overall pie of what you want. The point I'm making is buying a 4% cap rate with 4 and 1/2% debt and doesn't really make sense. 96% occupied that I don't really see the value add play there. Feels completely illogical. It just feels like you're buying to buy and just holding your breath and counting and hoping appreciation happens. Trusted physician advisor said, "Did I really I mentioned that my single family if I could go back in time I stayed in the single family game too long and I I said it was a mistake and so I want to clean that up a little bit. You know, my original vision was that I was going to own 1,000 single family rentals. I got to about 130 and I realized that I was climbing a mountain I was just on the wrong one. And I did what Monopoly taught us, which is I took the four houses and I traded in for the one hotel, which I'm kind of sitting in one of those hotels as I'm filming right now. I traded a little more than four houses for this particular hotel, but the idea is the

21:51same and so I I definitely think I mean the two things skills in life that taught me really everything I've needed to be successful today. The first was being a real estate agent. I learned how to run all businesses by being a real estate agent. And if you're a really great agent running a really great business, whether that's solo or whether it's with a team, it teaches you all the skills, especially if you're participating in the real estate investment side, it teaches you all of the skills you really need to be successful. And the second skill I learned was actually by managing a single family rental really effectively looking at the expense ratios and understanding mechanics of a rental property. Because as it turns out Cole as I scaled my portfolio from owning a Starbucks to an AT&T building to a Denny's to a couple resorts now, all real estate is actually the same, right? You've got some rent, you've got some expenses, what's left over is your profit. And so understanding those ratios is really what taught me everything I know today. And so when I look at this, I would not trade anything for single family rentals. Will I still buy single family rentals that make sense? Sure.

22:54My goal though is to take as soon as I can as rents grow and climb, I want to take six or eight of them and roll them up into a larger asset that's more efficient that has greater cash flow and is traded based on the cap rate instead of sold as a commodity or based on comps on the other homes in the neighborhood. And so, I wouldn't I want to reframe that mistake. It's not a mistake. I stayed there. I just would have got out of that sooner and I would have had a better strategy rolling up to commercial sooner. But great catch there, trusted physician advisor. And number six, the last comment here really was strategy depends on the investor. And this guy's doing cool. This is an even newer. It's the BRRR Lo, which I think is buy, rehab, rent, refi, repeat, and then do a lease option. Man, you could really throw a sandwich with that and then maybe it ultimately flips into the roast, I think at the end. You just roast that BRRR Lo. But Shilo Lundahl, real estate coach, says the real estate strategy depends on the investor and their stage of life and their specific goals. I don't think that people invest differently than me are wrong or dumb. I just hope the strategy matches them. I do a bunch of BRRRs or

23:56cash out refis then add lease options to them. And so, I would say I follow the BRRR Lo model. Look, I again, I say but I'm not a huge fan of lease options. I love them for the investor. I'm not a huge fan of them for the tenant because they can be very predatory. And yeah, you can structure a lease option where no one ever wins in it. You push all the repairs on them. The odds of them buying are low. And I just don't find that to be a win-win. I'm not saying there's anything wrong with, you know, doing it the right way. Anything done right's right. I just see that slippery slope of where people start doing lease options and and it it's it can be done the wrong way. But again, if that's your strategy, whatever strategy you use, if the math works, it lands you there safely, it creates passive income or positive cash flow, and gets you to your goals, it all makes sense to me. Right? I'm all about everything that accomplishes your goals. My The purpose of this show is to break down reality, back it up with math, talk about actual practical things that work in for the majority of people that they would work over 90% of the time or more, not on a one-off, one-time, one-case

24:58basis, and help people get their goals and so they can get free. And so today we broke down the the definitions there. I'd love to hear your comments on where we're at, but before we get into the comments, Cole, if you're at the gym, you're on a run, you're driving somewhere, if you're driving somewhere you're not on auto pilot in a Tesla, don't do this, but leave us a review. Please leave us a review, leave us your comments, tell us your thoughts. Your review is the fuel that fuels our fire here, that feeds our fire, Cole. You can have fuel fuel a fire, it's got to feed it. I'm not a technical thing, you're going to want to write that down, Cole. But we broke down the different things here today. I hope it was valuable. I'm Brett Tanner, this is the Be Wealthy podcast, and we will see you back here next week.