BRRRR Strategy in a Recession or worse.

1 Reply

In a good economy, the BRRRR strategy has enabled probably thousands of people to leverage themselves into financial independence.

I think less people have thought about what happens if the economy weakens substantially.
A. How will the BRRRR Strategy work when rents cannot be paid?
B. How will the BRRRR Strategy work when you go to refinance and appraisals come in lower and lower?
C.  How flexible or fluid will you really be when banks/lenders are not as eager to lend?

It seems to me that so many people using the same strategy of leverage (and it is a strategy of leverage) will prove costly in a down market. I can imagine a domino-like scenario of houses being offloaded by the investors as they struggle to manage so many monthly mortgage payments.

The strategy assumes and takes for granted a good economy.

As of right now we own our rentals free and clear. I like the idea that we can adjust the rents to whatever level we need to keep the renters in the space, and we will more often have a positive cash flow. We have a built in cushion for absorbing an economic downturn. This idea that I should leverage my equity so that I can squeek by a $100or$200 positive cash flow (in a good market) seems like a recipe for disaster.

My personal opinion is more investors should seek out private investors rather than mortgage their assets.  I understand that mortgages are cheaper money(for now), but do you really need to pull out 75%???  Assets can become liabilities very quickly if the market changes.

I think there are some that should be doing the BRRRR Strategy and many who should not be.  

Sorry to be so pessimistic but I feel like someone has to mention it.

Joe D

@Joe Donohue

All valid concerns which is why I invest only in large B/C class 100unit+ apartments with long term fixed rate debt. The economies of scale and control will give you many advantages over a BRRRR.

I don't have a BRRRR myself but I would think you'd need good tenants with "recession resistant" jobs and be in a workforce B/C class area. The appreciated value of your 2-4unit would drop, but you could maintain your cashflow as long as you have good tenants.

In regards to your debt, it will be difficult to refi when the yield curve is inverted and banks aren't willing to lend. In that case, make sure you have at least two 1 year extensions carved out with your lender.

Hope some of that makes sense. Everyone should be paying VERY closely to the market right now with crashing bond yields, trade wars, etc.

In the meantime, apartments are doing just fine. 🤗 ... unless your A class

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