Big City BRRRR-ing: Why It Might Just Be the Holy Grail [With Photo Tour!]
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The general consensus in many real estate circles is that buy and hold investors must choose between cash flow or appreciation.
If you want cash flow, then the opinion is you have to settle for second tier or tertiary markets away from major coastal cities. In this scenario, you’ll likely get decent to good cash flow. However, this may come at the expense of appreciation.
Likewise, the thinking is that if you want significant long-term appreciation (in my opinion, this is where the real money is), then you have a better chance in tier one markets (e.g., in and around major coastal cities). In this scenario, history suggests you have a greater chance of appreciation; however, this will require you accept lower cash flows—if any!
Well, I disagree. If the goal is financial independence, then I say why settle for one out of two? The aim should be to get both cash flow and appreciation!
Through trial, error, and 30 years’ real estate investing experience, I’ve figured out a way to get the best of both worlds in one of the most expensive real estate markets in the United States: Washington D.C.
How? BRRRR—with a Section 8 twist!
Being the nation’s capital, Washington D.C. has weathered economic downturns quite well, especially when compared with other major cities. Federal Reserve and other economic data clearly support this.
With that said, similar to other major cities, Washington D.C. is struggling with affordable housing, gentrification, and other challenges. The bottom line is there's a housing crisis that appears to have no end in sight.
This situation in turn has created opportunities for astute real estate investors.
How to Generate Cash Flow While Forcing Appreciation
So how am I actually acquiring these properties, getting them rent ready, and finding quality tenants who will pay high rents and stay for a long time (i.e., 5, 10, 15, or 20 years)?
Here’s my secret: I look for rundown, ugly houses in desirable, up-and-coming neighborhoods, where the local housing authority pays rents at market rates.
First, I know what types of properties I want, and I know what I don’t want. In short, my buying criteria are focused and very targeted.
Buying anything just because it’s a “good deal” is a major mistake—one that will derail the strategy I’m attempting to convey.
Given the highly competitive D.C. market, I buy these houses with cash ($400K to $500K) using a combination of private lenders, bank lines of credit, and my personal funds. Same goes for how I fund my rehabs, which range from $75K to $150K.
How to Land Deals in Competitive Markets
I know. You can pick your jaw up off the floor. I get that these numbers are eye-popping if you live in a less expensive market.
But in markets like D.C.—or San Francisco, Seattle, Boston, L.A., etc.—this is what it takes to buy and get these deals done.
A critical part of my strategy is to add value, force appreciation, and create equity by:
- Only buying in neighborhoods where after repair rents are high.
- Only buying houses where I have the potential to add at least one (but preferably two) bedrooms as part of the rehab. (For example, I often turn three-bedroom houses into five-bedroom homes.)
By focusing my rehabs on amenities that add value and force appreciation, I have built-in equity after rehabs are complete—a critical part of my BRRRR strategy. This ensures my refinance appraisals come in as expected, or sometimes slightly higher.
Coupled with the high market rents, when I refinance, I’m able to recoup most of my expenses and don’t have to leave much of my own cash in the deal. But how can I cash flow?
By understanding how much rent local housing authorities pay (rents are publicly advertised), the guesswork is eliminated from the equation. In short, I know up front what rent will be approved and whether this amount will allow me to meet my cash flow targets.
By working backward, I know how much I can pay for a house, how much I should spend on the rehab, and more importantly, how much cash flow I can realize after all is said and done and all expenses are paid.
I encourage you to learn more about this powerful, profitable, and often-overlooked niche.
Before and After BRRRR Photos
Before I go, I’ll leave you with these photos from one of my recent deals:
What do you think of my strategy? Comments? Questions?
Let’s talk in the comment section below!