What is MINDSET behavior?

Mindsets. A mindset is a set of beliefs and assumptions regarding how malleable specific attributes are in the world around you. From a psychological perspective, there are two types of mindsets: fixed mindsets and growth mindsets. People with fixed mindsets have beliefs that are fixed and unchangeable.

A growth mindset is the belief system that ability, skills, and intelligence can be developed. A growth mindset believes that change is possible. A fixed mindset is the belief system that abilities and skills are fixed. It's a limiting belief system.

IS BRRR Possible in the Philippines?

A few months ago, I wrote a blog post on BRRRR Investing in the Philippines. If you haven’t already, make sure you head on over to the BRRRR Investing in the Philippines Primer as I talk about some of my thoughts on using the strategy locally. In a nutshell, BRRRR is an acronym for the steps Buy, Rehab, Rent, Refinance, Repeat. In a BiggerPockets blog post, Brandon Turner coined the name BRRRR, but the essence of the strategy has been around long before that.

Since sharing my thoughts on BRRRR Investing in the Philippines, I’ve been getting a few well-meaning questions on its relevance in the country. Issues like “bank loans here are short,” “there aren’t cash flowing properties around,” or “if it’s possible, then everybody would be doing it” are some of the concerns I’ve heard.

First, let’s cover the necessary mindset shift. And then, we’ll go into some of the frequently asked questions on using the BRRRR strategy in the Philippines.

Page Contents

• Shifting your mindset on BRRRR

• FAQ and common concerns

  • Is BRRRR possible in the Philippines?

  • Banks don’t give out 30-year loans in the Philippines. Interest rates are too high for positive cash flow.

  • It is impossible to find cash-flowing properties in the Philippines.

  • Does BRRRR have to be on foreclosed properties?

  • Do I have to follow the exact steps mentioned in the book? Isn’t BRRRR supposed to be this or that?

  • How are infinite returns possible with the BRRRR strategy?

  • How do I get equity out of the property?

  • Everyone says BRRRR in the Philippines is difficult to pull off.

Shifting your mindset on BRRRR

At its core, the BRRRR strategy is really about adding value to a property and recycling equity — where “recycling equity” is by getting a loan with your property as the collateral.

If it’s phrased like that, can anyone really tell you, with a straight face, that BRRRR isn’t possible here? Not likely.

You see, doubters tend to be literal and stiff, unfortunately. If it’s not in the book, then it’s not the BRRRR strategy. But it benefits us to see things from a holistic standpoint.

The true purpose of knowing how to BRRRR is to open our minds and realize that it’s possible to fast-track the collection of cash-flowing rental properties using the same capital over and over.

Instead of saying, “No, that’s impossible,” we ask ourselves, “How can I make it possible?”

In other words, we change every “No” into a “How.”

• “No, I can’t afford it” becomes “How can I afford it?”

• “No, it doesn’t make financial sense” becomes “How can it make financial sense?”

Now, let’s address some of the common concerns people have on BRRRR in the Philippines.

FAQ and common concerns

Is BRRRR possible in the Philippines?

Yes, BRRRR investing is possible in the Philippines if it means fast-tracking the collection of cash-flowing rental properties using the same capital over and over.

Investors who go after this strategy need to do the following:

1. Buy a property below market value.

2. Improve the rental property to increase its market value.

3. Take out a loan with the property’s “improved value” as collateral.

4. Use the proceeds to buy another property.

These steps are certainly easier said than done. But that doesn’t mean they’re prohibitively impossible.

(Related: Building Wealth with Real Estate Through Property Accumulation)

Banks don’t give out 30-year loans in the Philippines. Interest rates are too high for positive cash flow.

These issues are definitely huge setbacks. But again, there are ways to work around the problem, even if the solution isn’t ideal.

Remember that your monthly amortization is a function of the loan amount, tenure, and interest rate. If the allowed tenure is unfavorable (e.g., 10 to 15 years) or the interest rate is high, that leaves us with the loan amount.

To reduce your monthly amortization, this may mean higher down payments. Now, a higher down payment isn’t exactly good nor bad — it’s just the lower risk-return alternative. (See The Risk and Return Trade-off Applied in Real Life)

So how does this impact the BRRRR strategy? For one, this may mean a longer time to save up for the down payment. Or you might need to use other people’s money. Maybe initially fund it with another multi-purpose loan.

Also, consider an excellent deal you acquire for, say, 70% of market value. It wouldn’t be surprising to see this property cash flow well despite the unfavorable tenure and interest rates.

And finally, Pag-IBIG, cooperatives, family, and friends are some of the alternative capital sources you may want to consider.

It is impossible to find cash-flowing properties in the Philippines.

While it is harder to find cash-flowing properties when your loan options are restricted, they do exist. I believe the reason for this widespread notion is the popularity of condo units as investments for Filipinos.

Unfortunately, as Ken McElroy would say,

“the bigger the brochure, the worse the deal.”

Condominium projects are overmarketed (marketing expenses ultimately add to your costs) and relatively efficiently priced. You’re probably not going to cash flow well with a condo unit with in-house financing. And if you do buy them in cash, there are likely higher return alternatives anyway. I haven’t even mentioned the adverse effects of vacancies. (Is a Condo a Good Investment? Rarely… Here’s Why)

Furthermore, there’s typically a tradeoff between appreciating properties and cash-flowing properties. It’s similar to the necessary tradeoff between growth stocks and dividend-paying stocks. Since most people trying to learn BRRRR are in urban areas with appreciating properties (at least relative to “cash flow areas”), finding cash-flowing properties becomes doubly hard.

Instead, maybe try the fringe areas around your city. The provinces are a great place to find cash-flowing properties. (Palawan, anyone? Hit me up if you’d like to talk.)

Does BRRRR have to be on foreclosed properties?

No, BRRRR doesn’t have to be on foreclosed properties. As a matter of fact, foreclosed properties aren’t necessarily good deals.

(Related: Are Foreclosed Properties Cheaper? A Revisited Truth on Why They’re Not)

Do I have to follow the exact steps mentioned in the book? Isn’t BRRRR supposed to be this or that?

Yes and no. Suppose you want to be literal about it. In that case, then fine, altering a step isn’t the exact BRRRR strategy described by modern proponents.

Yet again, the strategy has been around for a long time, with varying pieces. For instance, sometimes this means buying the property with 100% cash. And other times, it means bringing in a partner. The true purpose of the BRRRR strategy is to highlight how accumulating properties is possible by adding value and recycling capital.

As long the essence of accumulating properties is there, and the deal makes sense to you (taking into account contingencies and reserves), then you can proceed without the exact BRRRR steps.

(Related: I Stopped Timing the Real Estate Market. You Should, Too)

How are infinite returns possible with the BRRRR strategy?

The infinite return BRRRR scenario is probably best explained with a quick example.

You estimate a property to be worth Php3 million. With a few renovations, you also estimate you could increase the value to Php5 million. See this guide on How to Value an Apartment Building: Expert Tips by a Pro for Beginners.

Convinced that it’ll cost you just Php400,000, together with some significant property management changes, to increase the property’s value to Php5 million, you make an offer for Php3 million. The seller gladly accepts.

You then proceed with renovating (rehabbing) the property and implementing changes such as submetering, stricter tenant screening processes, etc. (13 Useful Ways to Avoid Bad Tenants) Turns out it costs Php400,000 to rehab. You can then rent it out at higher prices, and your estimated Php5 million after-repairs value turns out to be pretty much accurate.

Then you approach a bank for a loan, with the apartment as collateral. The bank’s appraisal concurs with yours. At a loan-to-value ratio of 70%, the bank agrees to give you a loan of Php3.5 million.

In the end, you spent Php3.4 million and got out Php3.5 million. Since returns are calculated as “gains divided by investment amount,” and your investment amount is essentially nothing, then your returns are supposedly “infinite.” (Dividing by zero gives an error.)

Granted, this is an oversimplified example to show how infinite return is possible. Or a way of saying it’s a very good deal.

How do I get equity out of the property?

Equity is the amount you own in a property minus the amount you owe on it. If you have an outstanding mortgage of Php1 million in a property that appraises for Php5 million, then you effectively have Php4 million equity in the property (Php5 million minus Php1 million).

Why is this relevant? Because the Php4 million equity is, in fact, your money. It is money you can use on other projects. To get your equity out, you can either sell or take a loan on the property. (Options to Consider Before Selling Your Property)

For example, Pag-IBIG’s Home Equity Appreciation Loan (HEAL) allows you to borrow against your property for whatever purpose. (Terms apply.)

How do you know if it’s better to sell or keep an investment property? One way to know is by tracking your ROE. Read more about it here: Should You Sell or Keep an Investment Property: Using ROE as a Signal.

Everyone says BRRRR in the Philippines is difficult to pull off.

If this is true, then isn’t that a good thing? Suppose it is challenging and complex for many people. In that case, that just means there are better opportunities and margins for those who do endure.

Scaling often means partnering with other people. So consider sharing this post with your friends, family, and business partners.

Have you tried the BRRRR strategy in the Philippines? What issues have you faced, and how did you overcome them?

(Related: BRRRR Investing in the Philippines (A Primer))

The B4R (Buy, Rehab, Rent, Refinance, Repeat) Method is a real estate investment strategy that involves flipping distressed property, renting it out, and then cash-out refinancing it in order to fund further rental property investment.

One of the main differences between the B4R Method and a conventional investment property strategy is the focus on investing in Foreclosed Properties, and on refinancing the purchased property in order to buy another one.

If you’re a real estate investor considering this type of strategy, read on to learn about how the B4R Method works, its pros and cons, and if it’s the right method for your financial or real estate investing goals.

How The BRRRR Method Works

If done correctly, the BRRRR Method can provide passive income and a revolving method for purchasing and owning rental property. The method works through the following steps:

• Buy a property: The property you purchase should be a distressed property that needs some work to get up to code and ready to rent. Because of the home’s condition, it will likely be cheaper to purchase.

• Rehab the property: Since the property is distressed, it may require extensive work. In this step, you’ll renovate the property to make structural, safety and aesthetic improvements, and prepare it for renters.

• Rent out the property: Determine the rental price and find people to rent the home.

• Do a cash-out refinance on the property: With a cash-out refinance, you convert your equity into cash. You access your equity by taking out a bigger mortgage, borrowing more money than you currently owe. The cash can be used for anything, including purchasing another property.

• Use funds from refinance to buy another property: In this final step, you’ll start the process all over again. Using the funds from your cash-out refinance, you’ll purchase another distressed property and rehab it, before renting it out and refinancing that property.

Buy, Rehab, Rent, Refinance, Repeat: Tips For Each Step

When practicing the BRRRR Method, it’s important to take the following steps in their exact order. Here are a few tips for following each step of the acronym.

Buy

The BRRRR Strategy relies on you purchasing a distressed property in need of updates and repairs, so it may be hard to get a traditional mortgage on the home. There are a few reasons for this. Most lenders require an appraisal on the property, but the value is difficult to assess on this type of property. Depending on the type of loan you get, the property may also need to pass specific guidelines to qualify. A distressed property will most likely not meet those requirements.

Before you rule out financing completely, talk to a lender to see if you do have any options. It may be possible to use a home equity line of credit (HELOC) or a hard money loan to finance the purchase, but these options can be high-risk and are often not recommended.

When buying a distressed property, it’s important to calculate the after repair value (ARV). ARV is the estimated value of the home after you renovate or rehab the property. To determine ARV, you compare the planned final result of the home to similar homes, or comparables, that have recently sold in the area. These homes should be similar in size, number of bedrooms and bathrooms, age, type of build and condition.

When deciding how much to offer on the home, follow the 70% Rule in real estate. Avoid investing more than 70% of the property’s ARV. For example, if a home’s ARV is $300,000, you shouldn’t pay more than $210,000 for the home.

Rehab

When you rehab a home, the first improvements you’ll need to make are any that will bring the home up to code and ensure it’s safe to live in. Next, you’ll want to identify the types of improvements that will truly increase value. These may include updating your kitchen and bathroom, improving the curb appeal and installing energy-efficient windows, appliances and other features.

Before you start your project, make sure you create a realistic budget and timeline for it.

Rent

It’s important to find renters before you refinance (the next step) because lenders generally won’t refinance until a property has tenants.

When it comes to choosing tenants, you’ll want to look for certain qualities:

• A good record of on-time payments

• A stable job with steady income

• A good credit report

• No criminal behavior or history of eviction

• Positive references

You can find this information by meeting with the potential tenant, having them fill out an application, reviewing their credit report, asking for references and performing a background check. Of course, you’ll want to make sure you get their consent and follow all housing laws.

When determining the rent, it’s important that it’s both fair to your renter and able to produce a positive cash flow for you. You can determine this by subtracting the total expenses to own and rent the home from the total amount of monthly rent you’ll charge. Let’s say you charge $1,500 per month for rent and your mortgage payment is $800. Barring any other expenses, your cash flow is $700 per month. Look at rental rate comparables to help you find the right price.

Refinance

In the BRRRR method, you do a cash-out refinance so you can use the money to purchase another distressed property to flip and rent out. In order to do this, you’ll need to find a lender that offers a cash-out refinance, and you’ll need to meet the qualifications of the loan.

While the lender will have its own set of requirements, you’ll need to meet a minimum credit score requirement (typically around 620 for a cash-out refinance), a maximum debt-to-income ratio (usually around 50% or less) and have equity in the home. You may also need to own the property for a certain amount of time before you can get a cash-out refinance.

Keep in mind that you’ll also need an appraisal – and there may be additional fees, including closing costs, that you’ll need to pay to do the loan.

Get approved to refinance.

Repeat

In the final step of the BRRRR Method, you’ll go back and repeat the previous steps, in the same order as before. If you want to continue to repeat these steps, it’s a good idea to take notes each time you go through the process so you can learn from past mistakes.

Pros And Cons Of BRRRR Investing

Before deciding on the BRRRR strategy, make sure you weigh the pros and cons to ensure this is the right investment strategy for you.

Pros Of The BRRRR Method

A few pros of the BRRRR Method include your ability to make a passive income, increase your rental portfolio, build equity during the rehab process and repeat the process as long as you’re able.

Cons Of The BRRRR Method

Some cons to consider here are the cost and work required for rehabbing the home. And since you may not be able to get a traditional mortgage on the home, you may have to get a more expensive or riskier loan. And what happens if, when you go to refinance, you qualify for less money than you originally planned?

This method also requires patience. Along with waiting until renovations are complete, you may also wait the amount of time required for you to own the home before you can get a cash-out refinance. Consider, too, that it may take time to find good tenants to rent your home.

Alternatives To The BRRRR Method

If you decide the BRRRR Method isn’t the right real estate investment strategy for you, there are other strategies you can research. The traditional investment strategy involves purchasing a home in good condition (by using a traditional mortgage or paying cash) and renting it out in exchange for rental income. The rental property basically pays your mortgage and any extra income can be used however you like, though it would be smart to put it toward paying off the mortgage faster.

A more creative strategy could be a crowdfunded real estate investment. This newer approach uses funding from a wide range of investors who pool their money to purchase real estate. This allows people to make investments for less money and work, while still reaping the rewards.

The Bottom Line

The BRRRR Method can produce passive income, building your real estate portfolio over time. However, it takes patience to rehab the home, find tenants and allow for seasoning before you can get a cash-out refinance. It’s important to consider these pros and cons before planning your next move – a traditional investment strategy may be a better option.

If you’re new to real estate investment or buying, owning or selling a home, you can find more information in our Learning Center, which covers topics like mortgage basics, refinancing, loan types and home buying.