A short while back, I wrote a piece defending the BRRRR method in the face of some criticism that the coronavirus and subsequent lockdowns had “exposed” the strategy as far too risky and overleveraged.
These criticisms are misguided. But they are only misguided if you do the BRRRR strategy correctly—namely, be all-in on a property for no more than 75% of its ARV so you can refinance out what you have borrowed to purchase and rehab the property.
Instead of the BRRRR method being exposed, the coronavirus recession (or whatever this recession will come to be called) has exposed two different terrible ideas:
- Rapid growth is always the way to go.
- Cash reserves are unnecessary.
Both of those have definitely been proven false. I finished that article with this recommendation:
“Don’t plan on growing like crazy right away. Real estate investment is a ‘get rich slow scheme,’ and the way to do that is to grow at a consistent and steady pace while building your systems and saving up a cash reserve along the way.”
Furthermore, you should demand better deals right now and implement stricter criteria. But this leads to a further question: Is now a good time for a new investor to use the BRRRR method?
Issues a New Investor Should Consider
The following opinion goes for most forms of real estate investment, particularly buy and hold. But it is most applicable for those using a private loan to finance their BRRRR deal and then refinancing out with a bank at the end.
Overall, my broad answer (with many exceptions) to whether a new investor should be trying to buy a BRRRR deal right now would be no.
At time of writing, the economy is in complete disarray with unemployment at extremely elevated levels, massive Federal deficits, a substantial number of business closings, and extreme partisan divisions to boot. The stock market is still down despite unprecedented actions by the Federal Reserve, and while the real estate market is currently stable (actually increasing slightly), it will likely go down soon enough.
Needless to say, the economy is in bad shape. I don’t believe the doomsayers, but I do believe it will be a long road to recovery.
So, is this really a good time to start?
I would not immediately say no. But I would be very hesitant to say yes. As BiggerPockets founder Joshua Dorkin has warned before, “You almost always lose money on your first deal.”
If that’s true under normal circumstances (and my experience also says it generally is), it’s all the more true in a declining market. It’s very difficult to catch a falling knife, so to speak.
Even if you bought perfectly right for a BRRRR deal (75% all-in), by the time you go to refinance with a bank, the market may very well have declined 5-10%, which would ruin the “BRRRRing out” all by itself.
Of course, no one can predict the future. Maybe the real estate market will continue to be stable throughout this recession. But given the current economic data and historical patterns, this would seem to be highly unlikely.
Thereby, if you are a new investor who has no or little margin for error, I would definitely recommend holding off for the next three to six months to see where the dust settles and how well the economy is recovering. After all, the absolute best time to buy is at the trough right as the recovery is beginning, not at the peak right before the decline. (Of course, knowing when you are at the peak or trough is not an easy thing to do.)
If you can’t afford to take much of a loss, it would be best to work on building up your cash reserves right now. In addition, you should be networking and reading a few books (my recommended first 10 to start with are here) rather than jumping into the market.
The same applies if you don’t have much money to bring to the closing table when you refinance if the property doesn’t appraise where you need it to in order to “BRRRR out” and pay off the private loan. Yes, in such cases, you still have enough equity to flip the property. But we cannot be certain there will be much of a buyer’s market by then, given where the economy currently stands.
One caveat to this: don’t use this as an excuse to procrastinate. There is a real risk for new investors to just become obsessed with learning and never get around to actually taking action. Right now is not the best time to take action in my humble opinion, but that doesn’t mean you can make this a permanent state of affairs. Reassess the situation in a few months, and if the economy is recovering well, it’s probably time to jump in.
Should Anyone Look to Buy?
The main piece of advice I’ve given during this crisis is to be more cautious and make your buying criteria stricter. This holds for new and seasoned investors alike. But seasoned investors will generally be better at evaluating what is a good deal, how much rehab expenses will cost, and so forth. So for new investors without much in reserves, investing now is basically not being cautious.
On the other hand, if you are new to investing and have a good amount saved up in reserves, investing now is something to consider. I would not go so far as to recommend it. (Unless, of course, the deal of the century comes your way, in which case you should jump no matter what your cash reserve situation is.)
But if you can afford to lose some money on a deal and it won’t break the bank, it’s not something I would preclude either. Indeed, the most valuable thing you get from those early deals is often the experience, not the profit.
The big thing is to be more careful and demand better deals right now as we wade our way through this recession and all the economic uncertainty that surrounds us. You want to avoid risk in a volatile and likely falling market. And experience reduces risk. Unfortunately, experience is also something that new investors don’t have.
Therefore, I would recommend being very cautious approaching BRRRR (or any other form of real estate investment, for that matter) as a new investor for the next few months, until the economic outlook becomes more clear.
If you can afford to lose a decent sum of money, OK. Don’t let me stop you. But if a sizeable loss would really hurt right now, it would be best to hold off until we’re through the worst of it.
What useful lessons did you learn on your first BRRRR deal?
Share your experiences in the comments below.