Will BRRRR still work if interest rate keeps increasing?

9 Replies

I love the BRRRR strategy and want to implement that towards my next deal. However, with the interest rate keeps raising, is the BRRRR strategy still going to be effective? Wouldn’t you run into the situation that you will no longer have a positive cash flow after you refinance with a higher rate that causes a higher monthly payment?

Jason Chen

    Jason, that is a great Q as it looks like the Fed will hike rates three times just in 2018. The real Q is the gap between appreciation in your target market and lending rates increasing or decreasing and by how much. If there's inflation all prices rise so in theory rents should rise, expenses should rise and of course your refi will rise.

    I've been searching high and low for strategies to deploy when appreciate slows or becomes depreciation, and there's not much out for the real estate. In stocks etc. you can simply short or use options to hedge your investments.

    How do you short real estate? That means sell it now and buy it back later.

    The best answer so far is that rents should hold firmer than values during a downturn so BRRRR might become rent and hold WITHOUT refi. Then the 1st mortgage's interest rates become paramount and should be locked in with the lowest fixed rate via the best possible DTI in combination with the highest possible credit score/s and lowest debt.

    A business entity with credit like a LLC is one strategy to move credit around and eliminate personal debt.

    Howdy @Jason Chen

    Many BRRRR investors use Commercial or Portfolio loans (with higher interest rates and shorter terms) for their refinance loans. It's just a matter of analyzing your deals based on higher rates up front.

    Hi @John Leavelle , thats exactly my point, with a higher rate and shorter terms, your monthly payment will increase and some deals that will provide enough cashflow with the original loan might not give enough cashflow or even negative cashflow with the refinance loan. 

    Jason Chen

      Higher rates should push down property prices. Additionally higher interest rates will increase the annual cost of living index. Assuming all landlords are not mom and pop operations rents should be increased annually to keep up with inflation. When landlord costs rise, tenants pay.

      My rents will continue to rise annually dependant on the cost of living index.

      @Jason Chen

      Yes, if you did not account for the higher rates in your initial analysis.  If you used the higher rates to meet your Cash Flow criteria to begin with then it should not be an issue.  

      Once you get to 10 Conventional loans you will have to deal with this issue anyway.  Why not plan for it in advance.  If you get the lower rates/better terms, great.  More cash flow for you.  If not, then, you have already anticipated that outcome.

      Bottom line:  Develop your exit strategies using the most conservative approach (higher rates).  If it doesn’t Cash Flow using them then maybe you need to relook at the deal before committing cash to it.

      @John Leavelle

      So how much higher rate do you think is reasonable to be used in the initial analysis? 

      Jason Chen

        @Jason Chen

        Find out what some local Portfolio Lenders Offer.  Use that as your secondary higher rates.  Or you can go with something like 5%/30 years for the loans.  That is what I currently use for analysis.  Although, I actually get better rates for now.  You just have to shop around to find what works for you.

        Originally posted by @John Acheson :

        Jason, that is a great Q as it looks like the Fed will hike rates three times just in 2018. The real Q is the gap between appreciation in your target market and lending rates increasing or decreasing and by how much. If there's inflation all prices rise so in theory rents should rise, expenses should rise and of course your refi will rise.

        I've been searching high and low for strategies to deploy when appreciate slows or becomes depreciation, and there's not much out for the real estate. In stocks etc. you can simply short or use options to hedge your investments.

        How do you short real estate? That means sell it now and buy it back later.

        The best answer so far is that rents should hold firmer than values during a downturn so BRRRR might become rent and hold WITHOUT refi. Then the 1st mortgage's interest rates become paramount and should be locked in with the lowest fixed rate via the best possible DTI in combination with the highest possible credit score/s and lowest debt.

        A business entity with credit like a LLC is one strategy to move credit around and eliminate personal debt.

        Do you really want to short real estate or just do an interest rate hedge?  The movie big short tells you how to short real estate - CDS.  

        To hedge interest rates, well that can be done with treasury bond futures or IRS.  These are off course more complicated than shorting stock.

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