July 22, 2023

JF3243: Jim Fredo — Applying the BRRRR Method to Multifamily, How to Know When It’s Time to Cash Out and Refinance, and How to Source Adequate Contracting Work




Jim Fredo is the key principal and founder of Spring Capital Partners, which employs the BRRRR method to add value and refinance funds quickly, holding long-term for cash flow. In this episode, Jim shares his business plan and timeline for cash-out refinancing on multifamily deals, what he learned from a recent 28-unit purchase, and how he’s overcome the biggest struggle of finding adequate contractors to cover the renovations.

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Jim Fredo | Real Estate Background

  • Key principal and founder of Spring Capital Partners
  • Portfolio:
    • 97 doors 
      Single-family rentals and multifamily
  • Based in: Pittsburgh, PA
  • Say hi to him at:
  • Best Ever Book: Can’t Hurt Me by David Goggins
  • Greatest Lesson: Be creative, but don’t force a deal.

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Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed and today I'm here with Jim Fredo. Jim is joining us from Pittsburgh, Pennsylvania. He is the key principal and founder of Spring Capital Partners, which employs the BRRRR method to add value and refinance funds quickly out of multifamily, which they hold for long-term cashflow. His portfolio consists of 97 units, ranging from single family rentals to a 28-unit multifamily property. Jim, can you tell us a little bit more about your background, and what you're currently focused on?

Jim Fredo: Well, my background, I started off in entertainment and high tech; nothing too exciting, until I discovered real estate, and I've been doing real estate for 16-17 years now. I started off with single-family flips, everything you could do to make a little bit of money in real estate, and now I'm focused on larger multifamilies. And the entire time, I have done the BRRRR method, as you mentioned. So our goal is to get our money back out quickly.

Slocomb Reed: Jim, you and I were saying before the interview started that we have very similar portfolios, and we've employed very similar strategies in building our portfolios... For our listeners who are sophisticated, but don't know the residential or the BiggerPockets lingo... Can you explain what the BRRRR method is? And can you explain how you've taken a 28 unit property through that process?

Jim Fredo: That's a good question. So BRRRR stands for buy, renovate, rent, refinance, repeat. So it's basically adding value to a property, usually through renovations; sometimes we do it through poor management. We find a property that's managed poorly and improve the methods and make money that way. So the 28-unit property fell into this system. They have people -- they're paying very low rents, the buildings are not in great shape. Rooms are falling down, they've got mice, they've got lots and lots of complaints about the building, so you can't get higher rents in those conditions. So we go in there with our team, we fix it up... And that one we just purchased a month ago; we've already got a lot of the work done, within a year; we'll have those up to good rents and it'll improve the value, and cash out.

Slocomb Reed: Jim, this is a primarily commercial podcast where the most common business model we discuss is the value-add business model, if you're familiar. I want to talk about going full cycle on a BRRRR deal. What I mean is go from acquisition to refinance, because I know you and I both have a long-term hold business plan. But what is the largest property either by unit count or property value that you've gone full cycle with that you've gotten your cash-out refi?

Jim Fredo: I've done this with six units, full cycle.

Slocomb Reed: Awesome. Let's talk about those. You had started by talking about finding distress, which is usually operational distress. The rents are too low because the place is in poor condition. And you were about to talk about getting them renovated.

Jim Fredo: Yes. But one of my favorites is the six-unit that I talked about. The seller was coming under fire from the [unintelligible 00:04:30.22] fire escape didn't work. The building was just in bad shape. He had tenant problems. He was selling it at a very low price, so we paid full asking, and we went in and we fixed the fire escape; a very expensive fix, but the tenants started seeing the improvement. We updated all the interiors. We bought that for, I think, $125,000. We put about $70,000 into it. And when we were finished, it appraised at 325k, which was actually on the low side. So we were able to pull the money out, it cash-flows... And it's been great.

And I'll tell you, my two favorite things about that story - the seller called me the day after closing, and he's like, "Oh, I slept so well last night." So he was happy with the purchase. And his brother was a tenant. His brother was breaking the lease to move out. After he saw what we did, he stayed. He's been there the entire time, I think going on for years, and he's been the perfect tenant. So it's a great success story.

Slocomb Reed: Outside of single-families, Jim, so from two units to six units, how many times have you gone full cycle on the BRRRR strategy?

Jim Fredo: That's a good question. I don't know the number of buildings, I know that number of units. Probably 20 times.

Slocomb Reed: 20 times. So it's 20 times that you bought a property experiencing enough distress, and improved it enough that you could cash-out refinance almost all or some amount more than your initial capital?

Jim Fredo: Yes.

Slocomb Reed: Awesome. For our larger multifamily investor listeners out there - I'm excited for the conversation we're about to have, because I want you to hear what kind of opportunity is available in this space. As a lot of you know, I operated in it as well. My smallest BRRRR deal was a 700 square foot one bedroom/one bath single family; my largest is similar to the stuff that Jim is buying right now. So let's talk specifically about employing the BRRRR strategy in these multifamily deals.

Our listeners will be fairly familiar with the value-add business plan, Jim, where they're buying larger apartments, starting about the size that you're getting into now, with the opportunity to do enough improving or increasing the NOI to force enough appreciation that they can sell for a considerable profit five years down the line, proportional to the property's value. They are typically not forcing as much appreciation as you and I are, and they're not doing it nearly as quickly. That leads to a lot of opportunity in the space that we're talking about, especially because there are a lot more properties this size, that are experiencing significant distress due to bad operations. Mom and Pop landlords who fall behind, things like that. That's all a lead-up to this question, Jim... How much distress does a property need to be experiencing, or how much of a discount do you have to get when you buy one of these in order to know that you can successfully cash out refi within a couple of years?

Jim Fredo: That's an excellent question. If you take the after-repair value, and you take 70% of that, minus all of your costs going into it, that is what we can offer. When I say costs, I'm talking about renovations, holding etc. And the reason I pick the 70% is that's where you can typically refinance, at a 70% loan-to-value. Obviously, that varies. Sometimes it can be as low as 65%, it can be as high as 80%... But 70% is a pretty good working number. If you could do that, and you can do that in a short period of time, you can actually refinance and have no cash in the property and hold it long term. But if you don't get quite that deal, then you are looking at a longer-term hold, like a lot of investors do, where it's a five-year hold and then you sell. But our plan is always to hold it long-term. So we'd like to get that money out as quickly as possible, so that's why we target that 70% of the value, so we can refinance everything out.

Slocomb Reed: You know, it sounds like you're taking fairly fundamental single-family home flipping metrics and applying them to multifamily here...

Jim Fredo: Yes, it's really the same technique, just on a larger scale.

Slocomb Reed: Are these the numbers that you used, these metrics you used when you bought your 28-unit?

Jim Fredo: Yes.

Slocomb Reed: Gotcha. Talk us through those numbers a bit. This is in Pittsburgh, correct?

Jim Fredo: It is.

Slocomb Reed: Gotcha.

Jim Fredo: So this one's a little tough... This was a little overpriced, so we kept this one is affordable housing. So we were able to get some subsidized funds, some reduced interest rates in order to keep it profitable as an affordable housing, and then keep it available for tenants who either have a section eight voucher or are just below the average median income for the area.

So we looked at what the renovations are, and we looked at what it would take to make this thing so that people want to stay there and be good tenants. We subtracted those numbers, and then looked at the rents that were low and what could they realistically be when we were finished. This particular property had a lot of people who were paying essentially one-bedroom rates, or one-bedroom vouchers. They're all two-bedroom units. You cannot operate a two-bedroom property with one-bedroom rents. So unfortunately in this case there will be some displacement; we will help people find places that are one-bedrooms, but we'll have to get those up to two-bedroom numbers. But the way to do that is to do the renovations, as we talked about - new roofs, some windows, some structural issues, plumbing, electrical problems... Every toilet in there rotated, so you've got water leaking, so lots of water drips...

So those economies of scale keep your utility costs down when you're paying for the water. So all this factored in to make the numbers more efficient so that in a year or 18 months when we refinance, we will have built the value that we need to cash everything out.

Slocomb Reed: Big picture, 28 units, affordable housing, almost all or all are two-bedrooms. How much did you pay for it? What is your total budget for renovation, holding costs etc. and what to expect the ARV to be?

Jim Fredo: The purchase price is 1.7. 200k in renovations, and the ARV, I believe, came in -- I think it was around 2.5. But we have some subsidized loans, so it's not quite the 70%, but we'll be able to refinance and pull our funds out.

Break: [00:11:20.29]

Slocomb Reed: Jim, did you raise capital from other investors for this 28-unit, or have you raised capital in the past for your other smaller properties?

Jim Fredo: I have, and I did for this. So most of the people that I've raised funds from are people I've known for a long time, that I have a relationship with; they want to do real estate investing, and I'm really helping them out in many cases to get involved. So this was the same case, where there were people I've worked with before, and we gathered a small amount of money... We didn't need a whole lot of money going into this. But we gathered some money, put the funds together and closed this. But I've done this on many of my small projects - small raises, not large raises.

Slocomb Reed: What is the ownership structure you use for these kinds of deals?

Jim Fredo: LLCs.

Slocomb Reed: I mean, between you and your partners? Is it a joint venture? Are they limited? Is it a syndication? I imagined not for the six units, because the numbers are too small... But did you structure the 28 unit as a syndication, or is it all JV? And the other big question here is when you get to that cash-out refinance, is there some level of return at which you're buying out your partners? Or are they coming along for the long-term hold ride with you?

Jim Fredo: That's an excellent question. Because these are people I have a long-term relationship with, we have not done it as a traditional syndication. So it is an LLC. So everyone has some skin in the game, if you will, and we're all staying in it for the long term for the cashflow. Everyone's trying to have their cash flow for when they retire, and this helps them do that. Now, I'm working on some bigger deals where we are going to do a traditional syndication where you have live partners, general partners; everybody's involved from the beginning, and will be in it long-term.

Slocomb Reed: With these joint venture partnerships, how was the equity in the property, in the deal, distributed amongst the partners? You can speak in generalities, of course. I don't need to know who the partners are and exactly how much of these properties they own... But how is it the equity is distributed?

Jim Fredo: So we have it set up in a similar fashion as you would with a syndication. The general partner gets a percentage. So that's to find the deal, put the deal together, do the asset management, bring it to stabilization, refinance it. And then the bulk of it goes to the money. So whoever puts the money in gets a portion of that share based on how much they put in.

Slocomb Reed: What do those percentages look like for the quote-unquote general partner?

Jim Fredo: The general that we use this 30%, which gets increased to 40% once everybody gets their cash out.

Slocomb Reed: And that's without putting any capital into the deal, 30%?

Jim Fredo: Correct.

Slocomb Reed: That's interesting. Jim, these BRRRR deals have a lot of moving parts, even more moving parts as you scale into commercial multifamily, with six units and then with 28 units. As you have scaled from single family duplex into larger properties, what have your biggest struggles been?

Jim Fredo: I believe the biggest struggle is having enough contractor help. So I have my own renovation company with my own W2 employees. I did that just for some stability in this market. And that's been great when you do one, two units, three units at a time. But as we scale, that becomes a little bit of a bottleneck. So I do have long-term relationships with some subcontractors who can help out and help us get these units turned quickly, so that we can stay on target. Because we certainly don't want to take four years renovating a large portfolio; it's got to get done in a fast manner.

Slocomb Reed: So the biggest struggle has been scaling your in-house renovations to meet the needs of a growing portfolio?

Jim Fredo: Yes. Because as you start scaling, you need more people, and they're not your employees, so you are beholden to their schedule, which isn't always conducive to what your schedule is.

Slocomb Reed: That makes a lot of sense. Do you do all property management and construction management in-house then?

Jim Fredo: We do. I have a property management company as well, a long-term partner. She's a licensed broker. I tend to be the boots on the ground, but we do keep everything in-house.

Slocomb Reed: And your rehab crews are specific to the needs of your own portfolio?

Jim Fredo: They are.

Slocomb Reed: Gotcha. Again, we were talking earlier about the similarities between our portfolios. One of the things that I've done for renovations is build out human resources that are frankly twice as much as my portfolio actually requires... And then effectively general-contracting them out to other investors and project managers, so that I know I have them available for my stuff when I need them, but I also know that I can keep them busy and make a little bit of money along the way.

Last question here before we transition the conversation, Jim. Most of my experience doing BRRRR deals in the like one to six-unit space was before 2022, and before that the massive interest rate hikes that we've seen, and some of the fluctuation that has hit the larger multifamily market, especially. Have you seen this shift impact your portfolio, or the deals that you're doing, or the properties you're looking to acquire and what you can get them for?

Jim Fredo: Absolutely. So we had to do a pivot last year because of the increasing interest rates. Now, we still pick up occasional single family duplexes, etc. because they're just great deals, so we'll grab them. Those haven't been impacted, because [unintelligible 00:18:54.29] are still strong. However, on the bigger units, the cap rates are lower than the interest rates, so you just have trouble making that work with traditional methods. So we have been doing more of the affordable housing with the subsidized interest.

So as it is right now with the 28-unit, I know what my permanent funding is going to look like in a year. I've got my cash-out appraisal, so everything's tied up. So it doesn't matter what happens to interest rates at this point. I'm set and locked in for a year. So to do the traditional method, where we do our bridge loan, and then we go to refinance in a year... That's a little scary right now, because we don't know what's going to happen, so we had a pivot to adjust for that.

Slocomb Reed: That makes a lot sense. Jim, are you ready for the Best Ever Lightning Round?

Jim Fredo: Absolutely.

Slocomb Reed: What is the best ever book you recently read?

Jim Fredo: David Goggins "Can't hurt me." He's a beast. If you haven't read that book - he's just amazing. An ultra marathoner.

Slocomb Reed: Nice. What is your best ever way to give back?

Jim Fredo: I like to help new investors. None of us did this alone. I like to give back helping some of the new investors getting involved in new deals. I post daily on Facebook with tips and other things to help new investors.

Slocomb Reed: Jim, on the properties you've acquired, what is the biggest mistake you've made, and the best ever lesson that resulted from it?

Jim Fredo: Oh boy, how much time do we have left?

Slocomb Reed: Well, that's why I'm asking for the biggest one.

Jim Fredo: Well, it's big. My very first purchase was an absolute disaster. I think I made every possible mistake you can make in real estate on that one transaction. Shared utilities, poor condition, poor neighborhoods... The takeaways from it were immense. I'll never do share utilities again, except water. I don't have much of a choice there. [unintelligible 00:20:50.28] Nope. Nope. So it has shaped my investing approach.

Slocomb Reed: Let's itemize some of them. You said specifically shared utilities. What were the other ones?

Jim Fredo: Really horrible building. I did not know my numbers. So I didn't budget for renovations... I bought these crappy buildings thinking "Oh, everything's gonna be great, right?" No. The furnace went up in one unit... It was four units of four or five properties altogether, and those were big furnaces, and that's a big tab, and I didn't budget for it. I bought this when the cap rate was [unintelligible 00:21:24.09] I think it was 21%, which is like, "Wow, that's amazing." Which it is, if you can fill it, and they pay their rent, and they don't damage it...

Slocomb Reed: And if you don't have to fix anything.

Jim Fredo: ...none of which were true. My background screening was not that great. I gave people second chances who really were not a good fit; they would start dealing drugs... I had learned from there that if someone has a problem, two months security deposit does not fix that problem. That's the last money you probably will ever see. And there are probably a few other lessons I learned from that property. Like I said, every mistake I could make, I think I made on that one deal.

Slocomb Reed: Good to get those mistakes out quickly, then.

Jim Fredo: Yes.

Slocomb Reed: Jim, what is your best ever advice?

Jim Fredo: The best thing you can do is work on your reputation and your relationships. They are key. Everyone will know your reputation, and it will open or close doors for you. And those relationships will also open or close doors for you. Don't forget those two things. Super-important.

Slocomb Reed: Last question, where can people get in touch with you?

Jim Fredo: Facebook. I do a lot of posting on Facebook with some tips. They can also go to my website, SpringCapital.partners.

Slocomb Reed: Those links are in the show notes. Jim, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this episode, please do leave us a five star review. Share this episode with a friend you know we can add value to through our conversation today. Thank you, and have a best ever day.

Slocomb Reed: Thanks, Slocomb. I appreciate it. I appreciate your listeners. Happy investing.

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