Skip to content
BRRRR - Buy, Rehab, Rent, Refinance, Repeat

User Stats

1
Posts
0
Votes
Keenan Meitner
  • Financial Advisor
  • Wisconsin
0
Votes |
1
Posts

BRRRR vs 20% down with declining housing prices

Keenan Meitner
  • Financial Advisor
  • Wisconsin
Posted Jul 1 2022, 07:24

Just starting out with real estate investing and have a question.

With interest rates on the rise, our area has had a readjustment with housing prices and they have started to decline.

My question is does the BRRRR strategy still work in a declining housing price situation?

My initial thought on BRRR in declining market, is that we'd be fighting declining housing prices while trying to force value upwards through rehabbing

The plan was to use our own money for purchasing property and rehabbing. (Approximately 150,000.) 

The second question to ask is: Would it make more sense to take the cash and BRRRR or purchase a larger multi family (4+ unit) with 20% down that is currently underpriced for rent, considering declining housing price environment.

Our overall goal is to continue to increase cash flow overtime through acquisitions to achieve financial independence. We are not looking to invest for appreciation.

Thank you for all of your help!

User Stats

2,259
Posts
2,330
Votes
Kevin Sobilo
  • Rental Property Investor
  • Hanover Twp, PA
2,330
Votes |
2,259
Posts
Kevin Sobilo
  • Rental Property Investor
  • Hanover Twp, PA
Replied Jul 1 2022, 08:10

@Keenan Meitner, you might be correct. However it depends on what kinds of deals you are looking at.

In a market that is going up fast almost EVERYTHING works for a BRRRR in terms of value-add rehab (perhaps not on cash-flow after refi tho).

In a stable market a lot of BRRRR deals are with severely distressed properties. Those are ones where only cash investors can buy them because they are not functional homes that could be financed and bought by a retail buyer. So, the buy price is below market. This means there is MORE room to add equity with a rehab.

In a declining market, the same kind of scenario should work fine if you are rehabbing in a timely manner because the market is unlikely to change much in the couple months you are rehabbing the property before refinancing.

Certainly you need to underwrite deals more carefully in a stable or declining market as opposed to a rapidly appreciating market. 

User Stats

2,606
Posts
2,978
Votes
Scott E.
  • Developer
  • Scottsdale, AZ
2,978
Votes |
2,606
Posts
Scott E.
  • Developer
  • Scottsdale, AZ
Replied Jul 1 2022, 08:12

You're asking a handful of questions that unfortunately nobody will have the answer to, because nobody has a crystal ball.

With that being said, yes it will be much more challenging to pull off a BRRRR in a declining market.

Doing a BRRRR on a single family home is a very different strategy than getting into multifamily and forcing appreciation through renovations and raising rent rates.

I don't think it is a good plan to rush into anything in this environment. Looks at deals every day, underwrite deals every day, pay close attention to inventory, days on market, price drops, etc. If you're already seeing home prices decline in your area, might make sense to just hang tight. Don't want to catch a falling knife.

BiggerPockets logo
BiggerPockets
|
Sponsored
Find an investor-friendly agent in your market TODAY Get matched with our network of trusted, local, investor friendly agents in under 2 minutes

User Stats

7,765
Posts
6,120
Votes
Andrew Postell
Lender
Pro Member
#1 Creative Real Estate Financing Contributor
  • Lender
  • Fort Worth, TX
6,120
Votes |
7,765
Posts
Andrew Postell
Lender
Pro Member
#1 Creative Real Estate Financing Contributor
  • Lender
  • Fort Worth, TX
Replied Jul 1 2022, 08:28

@Keenan Meitner these are all REALLY important questions.  They are certainly the RIGHT questions - but we might have to type a novel here to respond correctly.  So just for sake of time let's cover some general concepts if you don't mind:

1. BRRRR method - The BRRRR method does get spoken about in "different" ways. Generally speaking we are buying "off market" properties with this strategy. And generally speaking we are BUYING and REHABBING at 75% of the ARV. That means BOTH steps do not exceed 75%. Remember, this is a risky method. Something might go wrong with my rehab. Maybe my ARV calculation is off slightly. And in your scenario - maybe property values change. BUYING and REHABBING at 75% allows me to have enough equity to mitigate those risks. Now, you might be saying "Well, how do you find off market properties that fit that scenario?" And that's an entirely DIFFERENT novel to type out. But the concept is that 75% is the goal. Could you do it at 80%? Sure, just know you are 5% more risky than what most of us will do. And maybe that's ok but just know that risk piece as you go into it.

2. Risk - now there is risk to all of this.  Stocks have risk.  Crypto has risk.  Real Estate has risk.  Even just keeping you cash in the bank has risk - and we know that you are losing 8% of your money each year right now if you just keep your money in the bank.  So the alternative here - what do you have that's better than real estate?  If you have something better, let us know!  We have a 5,000 year history of real estate - it's never been worth zero.  You cannot say that for any other investment asset.  Now, it's more money to get started in real estate.  I mean, I can by a stock for $5.  Kind of hard to do real estate with just $5.  We only want you to invest in real estate if you feel comfortable.  

3. Headlines - be very careful of headlines right now.  Negative news always sells better.  Always.  There have been headlines such as "Listing prices are down"....and listing prices going down does not mean that values are down.  There's been headlines such as "Foreclosures are up compared to last year"....and last year there were no foreclosures. So of course they would go up this year.  All sorts of stuff like that occurs.  I would certainly guide you to lean on RANW or WRA for data.  And maybe you have done that.  Your market is significantly different than any other market in the US.  

4. Appreciation vs. Cash Flow - If you do only want cash flow and not appreciation then housing pricing going down shouldn't be a big deal.  Appreciation is one of the 3 income sources we count on with real estate.  I would encourage you to use it in your numbers.  Without it all of your numbers are going to be very different than the rest of our numbers when we analyze properties.  RIght now, it's very hard to have a single family home cash flow at all.  Even a duplex might not have very good numbers (market specific of course).  Real estate is long term growth.  This is not a "get-rich-quick-scheme".  Some people teach real estate as if you can just sit back and collect "mailbox money"....that's not the right way to teach it.  At least in my opinion.  If you have millions of dollars to invest - ok, that works for you then.  But for the rest of us with limited means we have to work at it very hard, over a long period of time, to make it work.  Appreciation, cashflow, and principle buy down all add up to very good numbers over time. Just think about it in that perspective.

Anyway, I know these are direct answers to your questions but I hope that it helps in some way.  Thanks for posting!

Guaranteed Rate Logo

User Stats

9,187
Posts
4,340
Votes
Andrew Syrios
Pro Member
  • Residential Real Estate Investor
  • Kansas City, MO
4,340
Votes |
9,187
Posts
Andrew Syrios
Pro Member
  • Residential Real Estate Investor
  • Kansas City, MO
ModeratorReplied Jul 1 2022, 08:53

You need a better deal in a declining market, although I think for the most part the declines are exaggerated. The nice part is it's much easier to find deals in a softer market whereas it was really, really tough just a few months ago.

User Stats

4,852
Posts
3,012
Votes
Mike D'Arrigo
Pro Member
  • Turn key provider
  • San Jose, CA
3,012
Votes |
4,852
Posts
Mike D'Arrigo
Pro Member
  • Turn key provider
  • San Jose, CA
Replied Jul 1 2022, 14:09

@Keenan Meitner I personally wouldn't try to do a BRRRR in a declining market. There's not guarantee that you'd get your money out of it. What makes you think that prices are declining in your market? Are prices declining or is it just the rate of appreciation that is slowing down? Also, are you looking at median prices or average? Median is a better metric. Averages can be swayed if their is a shift to lower priced homes being sold.