Does BRRRR work in low-appreciation markets?

Question

I'm looking at cash flow markets (ex: Cleveland) & have a few BRRRR opportunities in Class C neighborhoods. In low appreciation markets, how effective is BRRRR? I'm particularly curious (concerned) about the refinance step.

For example, suppose a house in a class C neighborhood sells for $50,000. Then Rehab of $10,000 with an avr of $60,000.

In class C and a low appreciating (but high cash flow market), will that property appraise for a meaningful amount above ARV? Enough to get my initial capital of $50K out? Or even all of it?

Alexander Felice · Answer

the key to BRRRR is to create equity.

If you're buying retail and not creating the equity then save yourself the headache of the rehab. So BRRRR would never work with the example you gave, the ideal BRRRR involves you creating 25% equity in the combination of purchase and rehab. You need to pay far below market value for the deal, bring an efficient rehab process to the project, and have your total all-in cost to be considerably less than what it's value is.

Buying in an appreciating market is better than buying in a non-appreciating market, but buying BRRRR for cash flow in a non-appreciating market is a lousy way to go if you're also paying retail. You want to own for 75% or less of the value.

Pete Barrow · Answer

You cannot pay retail for the house and hire out the rehab to a contractor and expect to refi out all your money. Even if a neighborhood is rapidly appreciating, your house is not going to go up that much in the few months it takes you to rehab it.

You need to find deeply discounted off-market deals, rehab well but economically (maybe with your own crew.) The hope is to end up with a rent-ready house where your total investment is well under appraised value. Not easy to do that.

James Wise · Answer

Yes because BRRRR doesn't rely on market fluctuations to create value. It relies on you and your ability to buy a distressed property from a distressed owner at a discounted price.

Pete Barrow · Answer

"I personally wouldn't buy a house if there wasn't some aspect of appreciation."

Same here. Meaningful cash flow is harder to come by than people think. The real money comes when you wake up one day and notice, "Hey, that place is worth three times what I paid for it. I guess it's not a hold anymore, it's a sell."

Morgan Eriksson · Answer

it could work, but not in the example you provided. so say you bought the house for 50k (all cash i'm assuming) and you put in 10k renovations, you would need to after repair value to be around 75k. when you refiance hopefully you can find a lender to loan you 75 ltv. therefore at closing after closing costs the bank would pay you around 56k... Thus you own a renovated rental property for 4k (minus closing costs etc).

appreciation isn't neccessary to have, but it sure is nice! also when you refinance your cash flow will drop. I personally wouldn't buy a house if there wasn't some aspect of appreciation.

Does BRRRR work in low-appreciation markets?

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