Comparing the BRRRR Strategy and Private Equity Real Estate Syndication:

Phil Singer
Aug 16, 2023
5 min read

Investing in real estate is a time-honored method for building wealth. However, the landscape of real estate investment is vast and varied, offering numerous strategies to suit different investor profiles. Two such strategies that have gained popularity among investors are the BRRRR strategy and private equity real estate syndication. In this blog post, we will explore both of these investment approaches, comparing their characteristics, benefits, and potential drawbacks.

BRRRR Strategy: An Overview

The BRRRR strategy stands for Buy, Rehab, Rent, Refinance, and Repeat. It's a hands-on approach that involves the following steps:

Buy: Acquiring a distressed or undervalued property.
Rehab: Renovating and improving the property to increase its value.
Rent: Renting the property to tenants to generate cash flow.
Refinance: Refinancing the property at its new, higher value, allowing the investor to pull out much of the original capital.
Repeat: Repeating the process with additional properties.

Pros of BRRRR Strategy

Equity Growth: Through rehabilitation, investors can significantly increase the property's value.
Cash Flow: Rental income provides a steady cash flow.
Leverage: Refinancing allows investors to pull out capital for further investments.
Control: Investors have complete control over the property and its management.

Cons of BRRRR Strategy

Time-Consuming: Requires hands-on management and involvement.
Risk: Market fluctuations and unexpected rehab costs can affect profitability.
Financing Challenges: Refinancing depends on the property's appraised value and lending terms.

Costs of BRRRR Strategy

Buying Costs:

Property Acquisition: The initial cost of purchasing the property, including down payment and closing costs. Typically 25% of loan to value. Assumption of all risk and affects your credit and debt to income ratios.
Inspection and Appraisal Fees: Necessary to assess the property's condition and value.
Inadequate Deal Flow: Early investors typically do not have the network and ability to source competitive loans or structure financing to minimize the costs of debt service.

Rehabilitation Costs:

Renovation Expenses: These can vary widely depending on the property's condition and the extent of the required improvements.
Unexpected Repairs: Unforeseen issues like plumbing or electrical problems can add to the costs.
Permit and Compliance Costs: Ensuring that all renovations comply with local regulations.

Renting Costs:

Property Management: If you hire a property manager, this will be an ongoing expense.
Marketing and Tenant Acquisition: Costs associated with advertising the property and screening potential tenants.
Maintenance and Repairs: Ongoing costs to keep the property in rentable condition.

Refinancing Costs:

Loan Origination Fees: Costs associated with refinancing the property.
Interest Rate Risk: If interest rates rise, it could increase the cost of refinancing.

Repeat Costs:

Scaling Issues: As you repeat the process, managing multiple properties can become complex and time-consuming, potentially requiring additional resources.

Market Risks:

Property Value Fluctuation: If the property value decreases, it may affect your ability to refinance or sell at a profit.
Vacancy Risks: Extended vacancies can lead to a loss of rental income.

Liquidity Risks:

Cash Flow Issues: The BRRRR strategy requires significant capital, and any delays or issues in one stage can lead to cash flow problems.

Legal and Regulatory Risks:

Compliance with Laws: Ensuring compliance with all relevant laws and regulations, including landlord-tenant laws.

Other Potential Costs:

Insurance: Adequate insurance coverage is essential and can add to the ongoing costs.
Tax Implications: Understanding the tax implications of the BRRRR strategy is crucial, as it may affect your overall profitability.

Private Equity Real Estate Syndication: An Overview

Real estate syndication is a method of pooling resources from multiple investors to purchase and manage large-scale commercial real estate assets. It operates as a partnership between general partners (active) and limited partners (passive). Here's how it works:

General Partners (GPs): They identify properties, perform due diligence, secure financing, and execute the business plan.
Limited Partners (LPs): They provide capital, typically ranging from $25,000 to $100,000, and remain completely passive. Assume no risk of the debit and the risk assumed to the extent of the capital provided. Typically no legal exposure to litigation. Usually paid preferentially before GPs.
Returns: Include cash flow distributions, refinancing, and sale/exit, with returns ranging from 15% to 25% IRR over a 3 to 5-year hold period.

Pros of Real Estate Syndication

Passivity: Investors can enjoy returns without the day-to-day management hassles.
Diversification: Access to large commercial assets that might be out of reach individually.
Tax Advantages: Substantial tax benefits through cost segregation studies and depreciation.
Risk-Adjusted Returns: Steady cash flow and strong risk-adjusted returns in a 100% passive role.

Cons of Real Estate Syndication

Illiquidity: Funds are typically locked in for the duration of the investment.
Less Control: Passive investors have limited say in the property's management.

Costs of Real Estate Syndication

Most of these costs are buried in acquisition fees and management fees.

Upfront Costs:

Minimum Investment Requirements: Syndications often require a substantial minimum investment, which may limit accessibility for some investors. Limited partners need to be accredited investors which limits a large swath of the population.
Due Diligence Costs: Investigating the syndicator's track record, the property, and the market may require professional assistance and associated costs.

Ongoing Management Fees:

Asset Management Fees: These are typically charged by the syndicator for overseeing the property's day-to-day operations.
Property Management Fees: If a third-party property manager is used, this will be an additional ongoing expense.

Legal and Regulatory Costs:

Legal Fees: Costs associated with drafting and reviewing legal documents, compliance with securities laws, and other legal considerations.
Regulatory Compliance: Ensuring compliance with all relevant laws and regulations, which may require specialized legal or financial expertise.

Financing Costs:

Loan Origination Fees: If the syndication leverages debt, there may be costs associated with securing financing.
Interest Payments: Ongoing costs if the syndication takes on debt.

Capital Call Risks:

Additional Capital Requirements: Investors may be required to contribute additional capital if unexpected expenses arise, impacting liquidity.

Market Risks:

Economic Fluctuations: Changes in the broader economy can affect property values and rental income.
Location Risks: The success of the investment may be tied to the specific market or location of the property.

Liquidity Risks:

Limited Liquidity: Investments in syndications are often illiquid, meaning it may be challenging to sell your stake if you need to access your capital.

Operational Risks:

Syndicator Performance: The success of the investment is often closely tied to the syndicator's expertise and performance.
Conflict of Interest: Ensuring that the syndicator's interests align with those of the investors.

Tax Considerations:

Complex Tax Implications: Understanding the tax implications of investing in a syndication can be complex and may require professional assistance.

Other Potential Costs:

Insurance: Adequate insurance coverage for the property and potential liabilities.
Unexpected Expenses: Unforeseen repairs, vacancies, or other issues can add to the costs.

Conclusion: Which Strategy is Right for You?

The choice between the BRRRR strategy and private equity real estate syndication depends on your investment goals, risk tolerance, time commitment, and desired level of involvement.

For Active Investors: If you enjoy hands-on management and have the time and skills to oversee properties, the BRRRR strategy may be suitable.
For Passive Investors: If you prefer a hands-off approach and want to diversify your portfolio with commercial real estate, syndication might be the better option especially if you like your time and no hassles.

Both strategies have their unique advantages and potential challenges. It's essential to consult with a financial advisor or real estate professional to understand which approach aligns best with your financial objectives and investment profile.