BRRRR in this Market?

[Courtney Rodes]

I'm reading conflicting information on using the BRRRR method in todays economy (2023). With interest rates higher, is it worth it? Are hard money loans unaffordable now as well? What's the best strategy for real estate investing in a downward market?

[Todd Rasmussen]

@Courtney Rodes

If interest rates are going up, then the principal amount has to go down in order to have positive cash flow. Decreasing the principal of the refinance means you are leaving money in the deal or lowering your holding costs, rehab costs, financing costs, or acquisition costs. One variable doesn't put an entire strategy out of business, it just means you have to adjust a different variable. In our case, it's finding properties for lower acquisition pricing or on creative finance terms that allow them to cash flow still.

[William Ramthun]

Right. The number of opportunities that meet the criteria for the BRRRR method will be less in a high interest rate environment.

[John Chong]

I would focus on finding a good margin deal instead of the rate. They're still out there. 

Keep in mind hard money loans are usually 6-12 month terms with most investors getting out in under 6 months.

When you refi out into the 30 year fixed DSCR loan, go with a lower prepayment option so you can refi again when rates come back down.

Then you'll have a property with great equity and great cash flows. 

[Nicholas L.]

@Courtney Rodes

-there's no best strategy

-yes, BRRRR still works, but you're much more likely to break even on rent. it's still a great way to force equity

[Henry Lazerow]

Most of my clients focusing more on value add to boost rents and create equity but not to do a BRRR right now. They will cash out though if rates fall in the future or as rents increase over time. BRRR's do not need to be done right away. My Rogers Park 4 unit I did a BRRR but 2 years after buying it.

[Nick Maugeri]

Quote from @Courtney Rodes:

I'm reading conflicting information on using the BRRRR method in todays economy (2023). With interest rates higher, is it worth it? Are hard money loans unaffordable now as well? What's the best strategy for real estate investing in a downward market?

In our market, specifically, BRRRR is a true challenge but not impossible. It is going to take a bit longer to find a deal using this strategy in Modesto/Merced but it is doable. Another approach could be a variation of the BRRRR where you refinance at a later date when we are expecting rates to decline based on the information published by the FED. I am happy to connect with you and keep you updated on what our market is doing and strategies that I help other investors with!

[Alex Bekeza]

@Courtney Rodes With interest rates expected to tick down in mid 2024 this could be considered an excellent time to enter a BRRRR.

[Jonah Slove]

Quote from @Todd Rasmussen:

@Courtney Rodes

If interest rates are going up, then the principal amount has to go down in order to have positive cash flow. Decreasing the principal of the refinance means you are leaving money in the deal or lowering your holding costs, rehab costs, financing costs, or acquisition costs. One variable doesn't put an entire strategy out of business, it just means you have to adjust a different variable. In our case, it's finding properties for lower acquisition pricing or on creative finance terms that allow them to cash flow still.

 Hey Todd, still new to this and I am trying to understand what you are explaining about leaving $$ in the deal. Can you elaborate a bit more on the relationship between interest rates and principal?

[Ethan Gidcumb]

Hey Courtney, 

One approach you could take is to plan for the worst-case scenario on any future BRRRRs (i.e. run conservative numbers, use the realistically highest interest rates, etc.). If your property still works as a BRRRR, then it's probably a good deal. I'm hearing information that rates are supposed to be cut next year as well, which will be good for the refinance portion of your project. However, nobody can pinpoint a specific rate for sure, so it'd be best to make sure you are completely confident in the risks you are taking. Hard money loans will likely reflect some sort of change but will always be more expensive when comparing them to long-term rates. So the best way to handle that portion of the BRRRR would be to have a well-thought-out and approved rehab plan for your build, so the refinance is easier.
I hope this helps and you've had success since you posted this 3 months ago!