In the BiggerPockets Forums, so many people are saying, “BRRRR is dead,” or, “It’s dangerous to BRRRR now.”
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.
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?
Here are just a few of the reasons I feel that BRRRR is still a very safe investment strategy:
- 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.
- 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.)
- 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.
- 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.
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:
- 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.
- 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.
- 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.
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.
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.
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.
- Does the property have a yard or an open space nearby?
- Is it located in a safe area to go for a stroll or walk the dog?
- Does the property have privacy from neighbors?
- Does the property have its own entrance or does it share common areas and stairwells?
- Does the property have a nice layout? The option to put in a home office?
- Does the property have clean paint and flooring and decent lighting?
- 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?
- Is the home located in walking distance of essential businesses like a grocery store and/or bank?
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.
What do you think? Are BRRRR investors in trouble? Why or why not?
Join the discussion with a comment below.