BRRR- Appreciation or Cash flow more important?

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BRRR- Appreciation or Cash flow more important?

Natalie KolodijBusiness Member
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Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes

Hello Everyone, 

After listening to Brandon Turner's podcast on BRRR the other day I'm wondering what the ideal market is for this strategy?

I was looking at markets with excellent cash flow- however I doubt they will offer much appreciation. 

Will BRRR still work well in this markets, or is it necessary to have the appreciation element for this strategy to work well to build a portfolio?

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David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
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Originally posted by @Natalie Kolodij:

@Justin Tahilramani based on Brandon's webcast it sounded like a key to his strategy involved not holding the properties forver but rather selling 1-2 every year (and repeating) allowing you to bring in large influx' of cash after 5-10 years of holding 

Is is what made me wonder if the appreciation was necessary 

Correct, in a market with little to no appreciation you will want to cycle through your inventory after 5-10 years of holding before CapEx eats into your returns. If you do it in a market with appreciation, you hold and handle the CapEx when it comes, which you are more than compensated for with market appreciation. In this regard, investing in a market with long term appreciation (not just one or two years but averaged over decades) is a lot more passive of an investment. The problems are 1)markets where appreciation above inflation is sustained over decades is exceedingly rare (but they do exist), 2)in these type of markets your initial cash flow will be much lower (but not in the long run with rent increases) as compared to a market with high initial cash flow and no appreciation (negative appreciation after inflation), and 3)markets with long term appreciation by definition are not cheap so you will need some capital to get started. In fact, in such an appreciation market, you can do one of the Rs (cash out refinance) again and again on the same property without needing to constantly buy and rehab if you don't want to (though you still can if you want).

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  • Justin Tahilramani
    Rental Property Investor · Fayetteville, NC · Member since 2014 · 884 posts · 670 votes
    9y

    @Natalie Kolodij - Assuming that the initial numbers work for you, the BRRR strategy will work in both markets. Having good cash flow is necessary going into the deal - appreciation (if any) is icing on the cake....

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  • Natalie KolodijBusiness Member
    Moderator
    OP
    Tax Strategist| National Tax Educator| Accepting New Clients · Member since 2014 · 3k+ posts · 4k+ votes
    9y

    @Justin Tahilramani based on Brandon's webcast it sounded like a key to his strategy involved not holding the properties forver but rather selling 1-2 every year (and repeating) allowing you to bring in large influx' of cash after 5-10 years of holding 

    Is is what made me wonder if the appreciation was necessary 

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  • Dave Van HornPro Member
    Fund Manager · Wayne, PA · Member since 2009 · 1k+ posts · 1k+ votes
    9y

    @Natalie Kolodij

    The potential of a relatively quick flip is really based on the market, so like Justin said...it's mostly icing on the cake if the market allows for it. Cashflow is a necessity.

    Best,

    Dave

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  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y
    Originally posted by @Natalie Kolodij:

    @Justin Tahilramani based on Brandon's webcast it sounded like a key to his strategy involved not holding the properties forver but rather selling 1-2 every year (and repeating) allowing you to bring in large influx' of cash after 5-10 years of holding 

    Is is what made me wonder if the appreciation was necessary 

    Correct, in a market with little to no appreciation you will want to cycle through your inventory after 5-10 years of holding before CapEx eats into your returns. If you do it in a market with appreciation, you hold and handle the CapEx when it comes, which you are more than compensated for with market appreciation. In this regard, investing in a market with long term appreciation (not just one or two years but averaged over decades) is a lot more passive of an investment. The problems are 1)markets where appreciation above inflation is sustained over decades is exceedingly rare (but they do exist), 2)in these type of markets your initial cash flow will be much lower (but not in the long run with rent increases) as compared to a market with high initial cash flow and no appreciation (negative appreciation after inflation), and 3)markets with long term appreciation by definition are not cheap so you will need some capital to get started. In fact, in such an appreciation market, you can do one of the Rs (cash out refinance) again and again on the same property without needing to constantly buy and rehab if you don't want to (though you still can if you want).

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  • Account Closed
    New Albany, OH · Member since 2015 · 12 posts · 4 votes
    9y

    @David Faulkner Excellent post!

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  • Andrew SyriosPro Member
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    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    9y

    Long term, appreciation (and principal paydown) are more important IMO. But short term, you need the cash flow, especially if you don't have a lot of cash reserves.

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  • Kenneth GarrettPro Member
    Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
    9y

    @Natalie Kolodij

    When using the BRRRR strategy appreciation should never be counted on. The cash flow and the investment numbers are the most important thing. The economy can change at an instant. There are no absolutes for the appreciation to continue. Many investors got burned by counting on the appreciation especially the fix n flippers. While they were flipping the appreciation was going up 10-20K. But look what ended up happening, the bottom dropped out it seemed over night and prices plummeted. 50-100K and more. Make sure the numbers work and the property cash flows. You always need to look at the trends of the market to ensure you are reading the market properly.

    Good Luck. 

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Justin Tahilramani  I know full well this is a regional issue.. but I am dead opposite of you.. Appreciation  either forced or market driven is the goal.. cash flow Is the icing.  :)

    and I know I am in the vast minority on this.. but that's kind of how us folks who were raised in the SF bay area think

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  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    9y
    Originally posted by @Jay Hinrichs:

    @Justin Tahilramani  I know full well this is a regional issue.. but I am dead opposite of you.. Appreciation  either forced or market driven is the goal.. cash flow Is the icing.  :)

    and I know I am in the vast minority on this.. but that's kind of how us folks who were raised in the SF bay area think

    You are also probably in the vast minority (in a good way) in terms of net worth ... coincidence? I think not :)

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @David Faulkner  as my partner in my timber business used to say when we had a good month and put 500k into the bank.. its just numbers on paper   LOL..

    I am still here still working but I love what I do..

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  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    9y
    Originally posted by @Natalie Kolodij:

    Hello Everyone, 

    After listening to Brandon Turner's podcast on BRRR the other day I'm wondering what the ideal market is for this strategy?

    I was looking at markets with excellent cash flow- however I doubt they will offer much appreciation. 

    Will BRRR still work well in this markets, or is it necessary to have the appreciation element for this strategy to work well to build a portfolio?

     It works in any market. It should or could be more profitable brrrring in an appreciating market.  Appreciation also can be totally passive. Cash flow for sfrs for the most part is far from passive.  Good luck!

    1Reply
  • Jason Hsiao
    Investor · Pasadena, CA · Member since 2015 · 269 posts · 189 votes
    9y

    The premise of the BRRR strategy is more buy and hold so your cash flow has to make sense first and foremost like @Justin Tahilramani is saying. Correct me if I'm wrong, the last 2nd to last R is refinance, which is more to pull your portion of your equity out so you can continue to do more deals and scale your business, less about flipping and exiting out the property completely. Obviously if you get an offer you can't refuse don't say no haha.

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  • Albert Bui
    Lender · Bellevue WA & Orange County, CA · Member since 2013 · 2k+ posts · 1k+ votes
    9y

    BRRR specifically can work as long as your "all in," for the deal is 75% or less of the After-Repair-Value. This is if you want to receive a return of all your original funds contributed back upon refi.

    The all in in this case would be your acquisition/carry costs/rehab.

    In the PNW you might not be at 75% of ARV initially during the acquisition, however due to such low inventory and high buyer demand you may end up at 70-75% after you're doing rehabbing and renting the unit out.

    0Reply
  • Justin Tahilramani
    Rental Property Investor · Fayetteville, NC · Member since 2014 · 884 posts · 670 votes
    9y
    Originally posted by @Jay Hinrichs:

    @Justin Tahilramani  I know full well this is a regional issue.. but I am dead opposite of you.. Appreciation  either forced or market driven is the goal.. cash flow Is the icing.  :)

    and I know I am in the vast minority on this.. but that's kind of how us folks who were raised in the SF bay area think

    I'm originally from Orange County, CA, so I can absolutely understand where you are coming from! I wish that we all had the appreciation potential that places like CA, OR, and WA have. Unfortunately, out in my part of NC we don't see much in the way of market driven appreciation.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Justin Tahilramani  ERGO your thought process is 1000% correct !!! its cash flow only game no other reason to take on debt and risk is you cannot make money monthly on an asset that never goes up and you have to put capX into it over the years.. makes no sense otherwise..  I guess you could look at it as a forced savings.. if it broke even and your renter paid off your 75k house at the end of 20 years or so you could sell it and get 75 to 80 out of it.. well that's not the end of the world either.. but like we are discussing positive cash flow is the reason to buy assets in a no appreciation to slow appreciating market.

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  • Mike Hanneman
    Investor · Coeur d'Alene, ID · Member since 2016 · 551 posts · 218 votes
    9y

    I have tought of it as this, "Cash flow pays the bills but appreciation builds wealth."

    0Reply
  • Brian Garrett
    Real Estate Investor · Palm Beach County, FL · Member since 2017 · 3k+ posts · 2k+ votes
    9y
    Originally posted by @David Faulkner:
    Originally posted by @Natalie Kolodij:

    @Justin Tahilramani based on Brandon's webcast it sounded like a key to his strategy involved not holding the properties forver but rather selling 1-2 every year (and repeating) allowing you to bring in large influx' of cash after 5-10 years of holding 

    Is is what made me wonder if the appreciation was necessary 

    Correct, in a market with little to no appreciation you will want to cycle through your inventory after 5-10 years of holding before CapEx eats into your returns. If you do it in a market with appreciation, you hold and handle the CapEx when it comes, which you are more than compensated for with market appreciation. In this regard, investing in a market with long term appreciation (not just one or two years but averaged over decades) is a lot more passive of an investment. The problems are 1)markets where appreciation above inflation is sustained over decades is exceedingly rare (but they do exist), 2)in these type of markets your initial cash flow will be much lower (but not in the long run with rent increases) as compared to a market with high initial cash flow and no appreciation (negative appreciation after inflation), and 3)markets with long term appreciation by definition are not cheap so you will need some capital to get started. In fact, in such an appreciation market, you can do one of the Rs (cash out refinance) again and again on the same property without needing to constantly buy and rehab if you don't want to (though you still can if you want).

     Very good and valuable information. Thanks David.

    0Reply
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