Coronavirus Updates

Sorry, But BRRRR Isn’t Dead: 9 Ways to Salvage This Strategy in an Economic Downturn

Expertise: Mortgages & Creative Financing, Real Estate Investing Basics
28 Articles Written
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In the BiggerPockets Forums, so many people are saying, “BRRRR is dead,” or, “It’s dangerous to BRRRR now.”

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Hardly!

Like many, in the past few weeks, I’ve wondered if my investment strategy of choice—buy, rehab, rent, refinance, repeat aka BRRRR—will withstand the test of such a steep economic decline.

And while it is probably still too early to tell what the full economic impact of the lockdown from COVID-19 (and quite honestly, the possibility of more lockdowns to come) will be, I feel that the BRRRR strategy—if executed in a conservative manner—can weather this climate very well.

Related: Will Coronavirus Kill the BRRRR Method?

What Is the BRRRR Method?

As a primer, here’s what the BRRRR method is all about in a few sentences.

BRRRR is a long-term buy and hold strategy. Fundamentally, you are buying the property at a steep discount, forcing the value on the property through a rehab, placing a (high quality) tenant at market rents in order to generate cash flow, and using this forced equity and income stream to carry the down payment on the property and qualify for the refinance.

This allows for recycling the same capital over and over to acquire even more cash-flowing properties.

Is BRRRR a Safe Investment Strategy Despite Economic Instability?

Portrait of a concentrated Asian accountant at her workplace using her calculator. Concept of accounting in business.

Here are just a few of the reasons I feel that BRRRR is still a very safe investment strategy:

  1. BRRRR means owning fully rehabbed property with less CapEx and maintenance costs for the first few years. By using the equity in the home to cover these expenses up front, I can lower my operating expenses going forward and increase my cash flows.
  2. BRRRR properties cash flow (when underwritten properly). Although rents rose in the past few recessions rather than declined (in the case of my portfolio), I can cut rents 10-30% and still remain competitive in the marketplace. (In fact, I can actually cut my rents in most cases 40% and still cover all costs.)
  3. BRRRR means refinancing into long-term debt, locking in historically low interest rates that are government-backed. By placing debt on the property, I can get leveraged appreciation returns on the equity part of my investment.
  4. BRRRR property can be sold for more than you paid if necessary. Because my personal equity position is super low, if I found myself in a real pickle, I could fire sale the property 20+% and not lose much (if any) of my own capital—and I can keep my bank happy, as well.

But the entire point is not to have to cut rents or fire sale the property in order to survive. The point of BRRRR investing is to create long-term wealth.

How to Invest in BRRRR Projects Amidst Economic Uncertainty

While I don’t think the fundamentals of BRRRR investing have changed at all, investors who were (or are) shorting their underwriting numbers have a higher probability of getting burned.

So, how do you safely invest in a BRRRR project amidst such uncertainty? Let’s look at nine ways to get back to the fundamentals and protect your downside.

1. Thorough Analysis

Perform better market and submarket analysis to stack the investing cards in your favor. Do a stringent analysis of the MSA and submarket.

2. Quick Turnaround

Look for shorter rehab projects, so you can get in and out quickly. This will limit how much the real estate market moves during your project.

But don’t be unrealistic. Always budget for a project to take longer than expected to accommodate work interruptions that are still bound to happen.

time-asset

3. Reasonable Loan Terms

If you are going to use hard or private money to cover the purchase and/or rehab costs, get a minimum of 12-13 short-term debt, giving you time to refinance out. Here is a guide on how to finance your projects.

4. Conservative Underwriting

Perform a more conservative underwriting analysis. Here are a few uncertainties to consider in order to mitigate risks for the foreseeable future:

  1. We are still operating on pre-COVID-19 pricing, which makes determining the true after repair value (ARV) of the asset tricky. For this reason, it is prudent to calculate a minimum 5-10% price reduction off the ARV and account for that reduction in the purchase price.
  2. The true vacancy rate of any given submarket is likely in flux. When you work with a property manager, they will quote you the vacancy rate across their portfolio; however, when you turn a unit, if it sits empty for one month, that is an 8% vacancy rate. To account for this, increase vacancy rates in your analyses for the foreseeable future.
  3. Ensure rents cash flow. While infinite cash-on-cash returns feel amazing, if you are only clearing $50 a month, this could be dangerous. I like to have at least $150 in cash flow for a SFR. This gives me room to slash rents in a down market and keep the property occupied.

5. Quality Tenants

Screen tenants thoroughly. Work with your property manager to stay compliant on tenant selection in your market. But when possible, be sure to review the applicant’s employer, income, and reserves as part of the screening process.

Related: How to Rent Your Property to the Right Tenants—Fast

6. Local Moratoriums

Carefully research what you can and cannot do as far as late fees and evictions in your current market of choice. The coronavirus pandemic is all-around a horrible situation for everyone. Yet, I do want some level of control and recourse for a non-paying tenant.

7. At-the-Ready Lending

If you are executing a BRRRR, the refinance is your exit. Among taking other steps to ensure the refinance will go smoothly, have the lender lined up and get pre-qualified before you purchase the project.

Take care to not overleverage a project. Just because you can get an 85-90% loan-to-value on a refinance, doesn't mean you should. Give yourself the flexibility to move the investment if needed.

Person sitting at a desk signing paperwork with guidance from another person who is pointing at a line item

8. Proper Preparation

Take your capital and do it again. Get your lender involved up front and know what reserves you need to move onto your next project. That way, you can save up and identify when you are ready for the next property.

9. Ample Reserves

Carry a significant amount of cash reserves. Personally, I have six months of expenses and the insurance deductible set aside per property. Perhaps it’s a bit excessive, but I sleep well at night.

Related: The Essential Importance of Cash Reserves in a Crisis

Bonus: How to Be Even MORE Successful Moving Forward

While getting back to basics is key in this economic environment, here are other ways to ramp up your game moving forward.

1. Level-Up Your Team

  • Look to work with a lender that can help you move quickly, get creative, and solve problems. I would also build out a local bank relationship where you invest, should you find yourself needing financing help.
  • Look to work with a property manager (PM) who is reputable, creative, and again, a problem solver. Also, ensure that the PM has enough reserves in their bank account to weather this storm! The last thing you want is for your PM to go belly-up and for you to have to move your portfolio. It may seem like a difficult question to ask, but ask it!

2. Consider Different Asset Types

With many commercial lenders on the sidelines, think about investing in smaller multifamilies to leverage your 10 golden conventional spots. If you invested in fourplexes, you could have 40 units with just 10 loans—80 if you and a spouse can qualify separately.

3. Think About Tenant Needs

Location, location, location… and a home office. Think long and hard on what your tenant wants if they are locked down again.

  1. Does the property have a yard or an open space nearby?
  2. Is it located in a safe area to go for a stroll or walk the dog?
  3. Does the property have privacy from neighbors?
  4. Does the property have its own entrance or does it share common areas and stairwells?
  5. Does the property have a nice layout? The option to put in a home office?
  6. Does the property have clean paint and flooring and decent lighting?
  7. Does the property have amenities like a pantry, washer/dryer, dishwasher, and/or storage? What about a deep freezer to store food (or somewhere to place one/plug one in?
  8. Is the home located in walking distance of essential businesses like a grocery store and/or bank?

Conclusion

BRRRR investing certainly is not dead. If anything, as J Scott pointed out in his book Recession-Proof Real Estate Investing, I see this investment strategy being more viable in the months to come as we realize the true economic fallout from COVID-19.

And while many investors have been waiting for this "once-in-a-lifetime chance" to invest, I think the current uncertainty provides all of us an opportunity to get back to real estate basics and shore up our investing foundations.

Recession-Proof Real Estate book blog ad

What do you think? Are BRRRR investors in trouble? Why or why not?

Join the discussion with a comment below.

Whitney is a real estate investor and personal finance trainer whose vision is to launch 10,000 families on the path toward financial independence. After purchasing her first rental in 2002, and hi...
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    Ricardo A Perez
    Replied 20 days ago
    @Whitney Hutten thank you so much for this article as a up and coming investor it provides hope that the BRRRR is not dead ! thank you.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 20 days ago
    You bet, Ricardo. I highly suggest reading J Scott's book to understand more of the market fundamentals at play.
    Gordon Cuffe Investor from Roseville, CA
    Replied 20 days ago
    An investor should not expect to refinance out of the hard money loan in less than 6 months nowadays. I have noticed many of the lenders with a seasoning time frame of six months or less have changed their guidelines and or not financing at this time. A investor should prepare for 12 months before they refinance just in case.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 20 days ago
    Hi Gordon, I spoke with my lending team yesterday and today. For conventional, if you are doing a cashout refi, yes... you have to wait 6 months. Otherwise, for government-backed loans, it is business as usual. If you are doing commercial, you should look for a bank that carries their own notes. Servicing is none existent at the moment!
    Christina K. from Saint Louis, MO
    Replied 20 days ago
    Great article. I found it and the linked articles very helpful and inspiring. Thank you for sharing your knowledge.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 20 days ago
    You are very welcome, Christina.
    Jonas Garcia
    Replied 20 days ago
    Thank you, lots of good info here. The links were helpful too
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 20 days ago
    Glad they helped, Jonas!
    Paul Karagas
    Replied 19 days ago
    Your article is of particular interest to me because just before everything changed 2 months ago, I was shopping for an additional rental property in Pueblo to add to my portfolio. I home I was interested in back in February was already under contract and I was getting ready to apply for an home equity loan against one of my rentals for the home purchase. Since then, much of my planned funds had to pay for a full sewer line replacement and I'm afraid the banks wouldn't loan the funds I needed since my down payment would now be much less than before. What bank have you used to get that commercial loans for your brrrr properties? They might offer loans in Pueblo, I'm hoping. Thanks, Paul K.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 16 days ago
    HI Paul, Commercial loans are tough right now. Start talking to local banks and ask if they carry their own notes or if they sell them. If they carry their own notes, you will have far better luck right now.
    Rick R. Johnson
    Replied 19 days ago
    Hi Whitney, Good article. Thank you. The challenge currently facing the Mortgage industry is that investment property financing, and self employed borrower financing is really tough right now. I have an investor that owns a number of properties, and with rates being so low, I thought it would be a good time to refinance his portfolio. When I started pricing them out, I was shocked at the lack of availability and the cost of the rates. For example I priced it out at Quicken, and to get a rate of 3.75 (the highest rate they offered) had a cost to the borrower of 3.741% or in dollars $5,087.69. We are also seeing a lot of overlays where they are reducing the income on self employed borrower by 25%, reducing the maximum income to debt ratio to 40%, then requiring 6 months reserves in addition to whatever the program requirements are. Currently almost no one is doing cash out. Ouch! I think the BRRRR method is great, and normally it totally makes sense, but, with all the turmoil in the market currently, it may be a few weeks or months before refinancing options return to normal. Just beware, it may take longer than expected and you don't want to get in trouble getting out of a hard money or private money with a tight deadline.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 16 days ago
    Very true, Rick. Non-QM mortgages, if you can find them, are being heavily underwritten. Conventional lending has the edge right now in this economy.
    Alex Bekeza Lender from Los Angeles, CA
    Replied 19 days ago
    Solid article. BRRRR is not yet dead! Investors just have to sharpen their pencils, get back to the basics, and create strong relationships with their funding partners in this new landscape.
    Steve Vaughan Rental Property Investor from East Wenatchee, WA
    Replied 18 days ago
    I like the idea of the brrr strategy overall, but am often disappointed in the lack of seasoning and cost disclosure when written about or discussed. I hope the authors of articles, the podcast hosts and guests et al that tout how great BRRR is - go to the forums to answer the frantic and surprised people. I didn't know I had to wait 6 to 12 months to refi. My shady hard money loan is coming due I didn't know it was going to cost me over $5000 to do it. (Often more like $7k+ ) I've seen some authors in the forums like you, Whitney, which is great. Most not. Folks shouldn't have to discover there are seasoning requirements for the best terms only in the comments as a response. Guess they'll discover the refi cost gotcha later as well. I've reduced my costs with a direct lender/bank I already have a relationship with. Tips about how to save refi costs would be good, too. Thank you.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 16 days ago
    Thanks, Steve. It's hard to guide someone or post in the forums what the expect as everyone's situation is so unique and different. I try my best to stress with new investors, that you need to have your carry out refinancing situation figured out BEFORE you close on your property under the hard money lending so you have very little surprises (and can focus on knocking that second appraisal out of the park). Also, you should shop around. Lenders vary widely in their fees, especially on the non-QM side.
    Slaiman Atayee from Washington, D.C.
    Replied 18 days ago
    This is great! I just got quoted 3.4% total closing on a cash out refi, after reading that the national market was potentially dried up or too expensive to make any sense. If anything, the economic climate will push some property owners towards liquidity, which means potentially getting their properties for pennies on the dollar.
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 16 days ago
    So interesting! I'm talking with my lending team almost daily and there are still options as of today to cashout depending on your situation. Only time will tell, but if a seller doesn't have to sell right now (which they don't due to stimulus and the forbearance options) prices are going to drop yet... now after September, maybe.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 17 days ago
    I fully agree. Covid-19 only "killed BRRRR" for those who were doing it wrong (no cash reserves, little or no equity afterward, too much debt, no cash flow etc.)
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 16 days ago
    When the tide goes out as they say!
    Ruben Cruz
    Replied 17 days ago
    Hi Whitney, can you please elaborate a little more on this "By using the equity in the home to cover these expenses up front, I can lower my operating expenses going forward and increase my cash flows" Thanks Ruben
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 16 days ago
    Sure, Ruben. When I buy a home say for $50K, and put $25K of work into it and push the ARV to $100K, I can do a rate and term refinance and pull my $75K out. If can take care of as many things in that $25K as possible, the home's equity covered that repair (not my cash). The more I can repair in the construction budget, the less I have to repair later down the road.