To BRRRR, or not to BRRRR, that is the question…
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.
Where do I find these houses? I get them from a variety of sources: word-of-mouth, wholesalers, Realtors, or partners in my joint venture program.
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.
Related: How I Find Private Money Lenders to 100% Fund My Deals (& How You Can, Too)
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:
Exterior
Living Room
Kitchen
Bedroom
Bathroom
What do you think of my strategy? Comments? Questions?
Let’s talk in the comment section below!
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23 Comments
Excellent article. Thank you!
Thanks Sisee. I
Hey Joe, great article…and nice rehabs! I agree, value-add plays in major metros is a great place to be. It allows for cashflow, appreciation (where the real money is), and resilience during economic downturns. I invest in Los Angeles, and often explore higher cashflow market, but end up returning to major metro core, where subsidized housing a very bankable strategy. Thanks for your post and insights!
Mark
Hey Joe – great article and smart approach in high dollar markets.
Thanks Sam.
Thanks “Dr. Joe”! Great article.
Everyone, “Dr. Joe” as we call him is legit (he’s in my market). He’s been preaching this strategy for years and has the properties, w/before after to prove it.
Thanks James. I appreciate your kind words. As you know, the DC market is extremely competitive and riddled with landmines (I have the “battle scars” and over 30 years of lessons learned to prove it). With this said, I truly believe that BRRRR is a viable strategy if implemented correctly. What surprises me is more people aren’t including it as part of their overall investing toolkit.
Totally agree with your observations Mark. I like you am not convinced that if you live in a major market, then your only salvation is to invest in properties hundreds and thousands of miles away in unfamiliar locations. As the saying goes, the grass is always greener on the other side — until you get there. Then you find out that success requires an understanding of the environment including what works and doesn’t and then assembling a team and implementing a strategy given the realities of where you are.
So if I have the numbers right, a finished home value is between $475k and $650K. This is subsidized housing? How much rent are you getting for a house like that?
The rents received depends on several factors including neighborhood where the house is located (in some markets rents are based on zip codes and/or census tracts), number of bedrooms and other market conditions. Rents are generally higher in Washington DC because its a high cost market, extreme shortage of quality housing in desirable locations and populations growth caused by the strong local economy, populations shifts and gentrification effects. Rents range from $3,000 – $5,000/month.
I LOVE the after pics. The high end touches make such a difference.
Thanks Kat. The high end touches is what differentiates my properties from other available rentals. The net effect is I am able to attract customers and clients (aka tenants) that truly appreciate the opportunity to live in my homes. The net result is my customers: (i) stay longer (minimal turnover and vacancy costs), (ii) take care of “their” homes, (iii) pay their rents and, (iv) are generally pleasant to work with. I try and create a win-win scenario. It works!!!
High-end touches in a rental? Interesting!!
I know it goes against common accepted practice. It probably sounds alien. I’m sure many Bigger Pockets readers think I’m crazy or insane!!! I would if I didn’t have 30 years experience to prove otherwise.
Just the tip of the iceberg. Can’t wait for the next one… Please give us more and don’t hold back 🙂
I have personally seen Joe partner with investors in my network to give them active, hands-on experience with BRRRR in my DC metro market. We have hosted open houses at many of Joe’s BRRRR projects over the past 10 years and I have even partnered with Joe myself on a recent deal. This one is one of my favorite “Dr. Joe” projects https://www.youtube.com/watch?v=J717xYrsqgY
Great article Joe.
Thanks Andre for the kind words. Due to popular demand, “I won’t hold back” on future articles. FYI, my next blog article that debunks many of the Section 8 myths is now up on the BP website.
As you know, I enjoy helping people learn and implement the buy, fix and hold strategy. Nice video of you and I in action sharing knowledge and “not holding back.”
We both agree the pie is big enough for everyone. Just because we help people doesn’t mean there’s less for us. There’s more than enough for everyone. There is no way that you, I or anyone one person can satisfy the need that exist for investors that provide quality houses in quality neighborhoods especially serving low income families with Section 8 vouchers.
Many people I’m sure will disagree with me and for this reason I’m more than happy to share my experiences – good, bad and ugly!!
Very good and helpful article. Really appreciate when seasoned investors include actual examples as well as pictures to back them up!
Thanks for the kind words. My goal was to share with others that its possible to get cash flow AND appreciation if you are able to implement a strategy that is based on the realities of where you are based. I don’t agree that as real estate investors we have travel to strange and unfamiliar places just because we happen to live in high priced market.
I included the photos to reinforce the points I’m trying to make and to let “skeptics” see that this can and is being done.
Nice advise. Thank you. Looking forward for more quality advise from you..
This is a great article! I appreciate your effort and time to explain the process and share this knowledge with examples. It definitely helps the visual learners like myself.
I appreciate your feedback Giovanni. More than happy to help you out if I can.
Dr. Joes does surgery again! Giving us the raw details on his strategy. Great info doc!
Thanks Yannik. I’m back “in surgery” next week i.e. I’m buying another buy, fix and hold property next week in DC.
For those interested in following this project from start to finish let me know by signing up on my website (i.e. under the legacy investment network).