BRRR strategy in depreciating market??

Question

Arpan Patel · Answer

It is something to consider however if you have a good debt to equity margin you should be somewhat covered. We aim to keep 30% equity after the refinance. In the last 2 crashes the values did not dip below 30% in our areas so therefore, even if we end up even, rents will still sustain us. Plus, our initial capital is all out so what we are risking is mostly house money.

Daniel O. · Answer

@Pete Paniccia One of the risks of the BRRR strategy is that it leaves you very leveraged, particularly if the properties you are holding do not have strong cash flow. It works so long as property values (or rents) are increasing, but becomes much riskier if markets or rents decline. You are smart to identify this as a problem. You can mitigate this risk by either buying in a market that is not declining, or getting such a killer deal that you have a considerable margin of error / safety. You would have to buy for far below market value and do the repairs in such a way that you still had a good difference between what you had into the place and what it appraises for.

BUT: Given how the economy has been going for the past several years, you really need to ask yourself whether the place you are thinking about will ever appreciate. If the economy hits another rough patch, will values decline even more rapidly?  If so, I would avoid the area because of that risk. You could get good cash flow, but take a real hit when you go to sell the place.

Jeff Wallenius · Answer

@Pete Paniccia either buy with a large spread or diversify to another market. There are plenty of places to invest, don't box yourself in to one area. Any areas nearby more promising?