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Should Newbies Hold Off on the BRRRR Strategy for Now?

Expertise: Mortgages & Creative Financing, Business Management, Landlording & Rental Properties, Commercial Real Estate, Real Estate Deal Analysis & Advice, Real Estate Investing Basics, Personal Development
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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:

  1. Rapid growth is always the way to go.
  2. 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."

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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

Black casual shoes standing at the crossroad making decision good or bad.

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.

Related: The Beginner’s Guide to BRRRR Financing with Other People’s Money

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.

closeup of human hand with key dropping key into another person's open palm in front of a house

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.

Related: The Pros & Cons of the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) Strategy

Conclusion

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.

Andrew Syrios has been investing in real estate for over a decade and is a partner with Stewardship Investments, LLC along with his brother Phillip ...
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    Andy Borses
    Replied 4 months ago
    Hi Andrew...Thanks for the great advice- I have a question... I am going to be inheriting a property in Laguna within the next 6-12 months and I was planning on selling that property and then using those funds to start investing in real estate...you talk about holding off for the next 6 months so I am thinking that this would be perfect timing to start researching and learning and then see how the market is when I sign the papers...what would you do?
    Brian Wagner
    Replied 4 months ago
    Hi Andy Since you are getting a free house, why not use that house as your experiment to see if real estate investing is for you? Make any repairs needed, get it rented out and maybe even do a cash out refi on it. Use those refi funds to purchase your next one. Doing this while waiting 6 months at least gets your feet wet. I think it's safer when you don't have much skin in the game. Just my .02. Good luck!
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 4 months ago
    I mean, if you inherit the house you inherit the house, nothing to do about timing there. I would recommend a bit of wait and see by the new investors for BRRRR deals and even flips. And yes, I would absolutely agree this is a great time to learn as much as you can. Here's my recommended list: https://www.biggerpockets.com/blog/top-books-new-real-estate-investor
    John Walper
    Replied 4 months ago
    Clear as mud...
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 4 months ago
    In my opinion, it's best for a new investor to wait for 3 to 6 months or so to see if the market has stabilized (and longer if it starts to fall rapidly) before trying to start with BRRRR. Does that clear it up?
    Arturo Matamoros Property Manager from Orlando, FL
    Replied 4 months ago
    Great advice Andrew! I'm interested in seeing how the market is affected in the next 3-9 months. The Orlando market is pretty strong, but I have a feeling a lot of vacation rental owners might get hit hard.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 4 months ago
    I think we all are interested where things are going. It's very entertaining, although I would much prefer if all our livelihoods weren't so intricately tied to its outcome!
    Barry H. Investor from Scottsdale, AZ
    Replied 4 months ago
    ANDREW - Your cautions to new investors comes through loud and clear RE BRRRR investing and I wholeheartedly agree. Flipping can be done, but you need to thread the needle right now. I bought 5 doors in AZ in 2005-2007 (my first foray into real estate) and then 2008 hit. My values went down 60% on average, but I paid cash for the properties. Rents dropped slightly and I barely broke even, but I made it through. What I learned is that Buy/Hold beats all recessions - because rents rarely fluctuate, especially on lower end properties (which mine were). I am not so sure we will have a recession in the Midwest rental market for a myriad of reasons. In Kansas City MO - which I believe is your market, I am seeing Buyer interest in my remodeled turn key SFHs INCREASE rather than decrease right now - probably because I seller-finance and the ROI is 20%+ annually with tenants already in place. In summary, I feel your comments were on point for new investors. The experienced moves required to BRRRR in general are tough to navigate. It is a Buy/Hold environment right now - where Buyers / Borrowers can see their numbers right in front of them. A newbie can take a leap in those conditions IMHO.
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 4 months ago
    Regarding flipping, I would shy away from really big projects and focus on smaller rehabs. Also, don't get overextended. If you can do two at a time but that's pushing it a bit, then just do one for now. Those would be my recommendations at least.
    Ken Bohnert
    Replied 4 months ago
    Hi Barry, where could someone find more information about the Turnkey properties you offer?
    Steven E Lasseigne from Ontario, California
    Replied 4 months ago
    As a newbie BRRRR investor (Haven't bought one yet), I have been evaluating properties buy subtarcting 80% of ARV, subtracting rehab cost then another 20% off. I watched a video of a wholesaler saying (he subtracts the additional 20% before his fee) to protect himself from the whole Covid 19 stuff. Any thoughts if that would work for a BRRRR situation (with out subtracting a wholesale fee of course)?
    Greg Houts Flipper/Rehabber from Bermuda / Atlanta GA / Greenville SC
    Replied 4 months ago
    Hey Steven, the two key factors in your equation above are 1) determining the ARV and 2) estimating the rehab costs. It's a great time to work with wholesalers and real estate agents to help you with the ARV. Get on a wholesaler's investor list (or several) and review the deals they send your way. Run your own numbers and work with a realtor (key part of your network) to help estimate comps. See how close your comps come to what your wholesaler(s) are stating and learn to build your own evaluation criteria (and instincts). You can then look at the pictures of the various properties and start engaging contractors (the other key part of any team for BRRRR). See if you can work with them to get high-level estimates without even seeing a property (via pictures). If you're able to walk a property in-person then even better, since what may look like a $50k rehab on first glance could have hidden gotchas that could cost you 25-50% more. Finally, reach out to banks and develop your lender contacts/network. Speak with them to see what kind of financing they would be able to extend for both initial purchase/rehab and eventual refi. I fully agree with Andrew that now is a time for caution. Just don't confuse that with complacency. This is a fantastic time to build your network and practice your numbers so that you can hit the ground running (with confidence) when you decide to make your first move. Best of luck!
    Steven E Lasseigne from Ontario, California
    Replied 4 months ago
    @Greg Houts. Thank you I will heed your advise
    Keith C. Lender from Central Florida Markets
    Replied 4 months ago
    The issue with BRRR today post Covid 19 lock downs is that lenders have pulled back on LTV's on Cashout ReFis . So anyone looking at buying for cash , putting some money in , getting a tenant in and than cashing out - as it stands today you will only be able to pull out 60% LTV.. Meaning most deals wont pull enough out to be a true BRRR. I have some strategies that will help including getting an HML on it from initial purchase and more than likely in a few months that LTV will go back to 75/80 % which should allow for a more realistic BRRR scenario
    Andrew Syrios Residential Real Estate Investor from Kansas City, MO
    Replied 4 months ago
    That's definitely true. Banks are squeamish right now. From what I've seen and heard, banks are still lending to their trusted customers as normal (more or less), but are very hesitant about new business. Either they are turning them away or want very low LTV's on the loans. I haven't seen any studies about this, but I've heard it from quite a few people.
    William Dauria
    Replied 4 months ago
    Agree 100% Keith!
    William Dauria
    Replied 4 months ago
    Agree 100% Keith!