So is the Brrrr strategy a bad time to use now?

Question

I posted this in JD's thread but got lost among the masses

Ive just started a couple years ago. All ive done is brrrr. I have my 5th unit about to brrrr in a couple weeks. With this low interest rate, im thinking great. I typically buy at 50 to 60% of the arv. 25% equity position day 1 after refi. Cash flow $400. I have 10k in cash reserves per property. I also have another business with more cash reserves. Am i doing something wrong amidst this downturn? Serious question really. I feel i can leverage and brrrr up to 10 then start paying them off. What would you more experienced  investors do in my position?

Lee Cruz · Answer

@

Evan Polaski

Im hoping it doesnt come down to that. The market im in is pretty stable for the most part. Really not sure how its going to turn out. Last week during rent applications i had over 80 inquiries and a dozen applicants. 3 i was really debating on who i was going to pick (nice problem to have) as they all had solid incomes and were families. That indicates to me the viable tenant profile is still strong.

@Marc Winter @

Dan Heuschele

Thanks for  your reply. Im at 75/25 ltv at 30 year amortization. 180k appraisal leaving 135k mortgage and 45k equity. Rent $1250 cashflow $400.  Pulling downpayment and renos as i bought low and renos were cheap. All the older investors i know swear on paid off properties. They laugh at the leverage model. I agree to an extent, but during the growth phase i need the power of leverage. My first milestone is 10, marinate for a bit and maybe 20. Im single family house kinda guy. Median homes around here is $300k

Frank Wong · Answer

You got to be very precise in this environment and have reserves.

Dan H. · Answer

@Lee Cruz If I could find properties as you described in my market, I would not let this virus scare slow me down.

If you have the cash flow you indicate the rents are not super low.  You have a fair amount of equity in each as they would seem not to be cheap Midwest units.  Lets go with worse case scenario and you have to sell one to cover things because things are really bad.  Would that be the end of the word?  You bought great.  You did a successful value add (rehab).  If you sold you would be a forced flipper and still have made money on the RE.

In my market, I cannot find anywhere close to as low below ARV as you indicate.  in addition, with my conservative cash flow numbers I have minimal positive cash flow (and once my projections were cash neutral at the time of the refi - That RE cash flows around $850/month now).

Because my numbers are much tighter than you numbers, I am being cautious right now.  Of my 3 large investment categories, 2 have been decimated.  RE is doing the best of the 3 and my STR revenue is down ~50% for March.  I am optimistic on my LTR revenue and forecasting only 10% down but at this point the LTR is pure speculation and a trust in my tenants.  Remember that is by far the best of my 3 investment categories.

Even with my investments having taken a beating, if I had an opportunity as you described in my market there is no doubt I would be attempting to attain it.

Good luck

Marc Winter · Answer

@Lee Cruz, the important number is how leveraged are you on the refi?  If you can, refi.  If you don't refi and you can afford it, leave the cash in the property at least until we are out of the woods with the pandemic.

I did BRRR before it was cool, refi'd out at 65% ltv, 15 yr amortization.  Those mortgages are mostly all paid off now, and it's a great retirement program.

It should work for you, too.  Unless the sky falls and we all die.  At that point, I'd get pretty bummed out.

Stay safe and healthy!

Evan Polaski · Answer

@Lee Cruz, it is really all about your outlook and risk tolerance.  If unemployment goes to 20%, as some are predicting, and you consistently have 1-2 units vacant, what does your cash flow look like?  If you lever up to get to 10 units, how's that effect cash flow with 1-2 units vacant at any time?

Personally, I don't think we are headed to a true, long term 20% unemployment rate.  I get that a lot of service sector people are temporarily (I hope) out of work, but I think in a month or two things will be back to normal, at least in terms of businesses reopening, servers, bartenders, etc back to steady work.  In that scenario, a little more risk is justifiable, but my outlook is not the same as everyone's.