Real Estate Agent · Kansas City · Member since 2023 · 23 posts · 14 votes
What are some of the biggest advantages and disadvantages investors run into when trying to complete a BRRRR exit strategy? Really looking to hear more about the downside so I can proactively help investors with their future properties.
Those who have learned how to implement this strategy seem to stick with it for a very long time so I would like to get more investors onboard with BRRRR plays.
In my opinion the current high-interest rate climate might present a significant challenge for investors applying the BRRRR method, particularly when it comes to refinancing with a DSCR loan. Conventional financing typically requires a 12-month seasoning period before allowing cash-out on value-add properties (correct me if I'm wrong here), leading many to opt for DSCR loans with varying seasoning requirements from the lender. It's critical to understand that DSCR loan rates hinge on credit scores and LTV ratios – visualizing this on a graph with X and Y axes can help. High LTV ratios often lead to higher rates, so without thorough initial analysis of long-term debt rates and market rents, investors may discover their expected cash flow falls short.
For those who can secure properties at significant discounts, the BRRRR strategy allows investors to extract their initial investment and sustain their investment assembly line. However, given the rate environment and the necessity to remain cash-flow positive, it may be prudent to incorporate fix-and-flips or wholesales into the investment approach. By doing so, investors can avoid high LTV cash-outs at refinancing, securing more favorable rates and increasing monthly cash flow. The BRRRR method proves most effective with either low-interest rates or acquisitions made well below market value.
What I find with my clients is finding a property that kind of 'checks all the boxes'. You want something, generally speaking, that needs some work but isn't too much to where you can minimize the risk when it comes to the amount of rehab, but is located in a market that can sustain a good healthy After Repair Value while providing rents that promote a good cash flow in the face of interest rates, property taxes, and insurance costs.
That doesn't include dealing with contractors and the rehab itself where everything comes on budget, to then finding good tenants and timing your financials where you don't sink yourself and have some reserves.
There are a spattering of 'downsides', but as we like to say, if it was easy then everyone would be doing it. It is a GREAT way to build good wealth and grow. Building a good, trustworthy team can really help curb many of these things.
I have a couple of clients in the KC market that do the BRRRR strategy. Advantages are the least amount of money down, and quickest way to get your money back. Improve the property and then refinance to get the equity.
Disadvantages mostly come from a lack of experience or unexpected issues. With any rehab property, how much cost it is going to take to get the property into shape and increase the value of the property is the biggest factor. If they need to put $50,000 into the property and the property only gains $50,000 in value, they are not going to be able to pull any money out, thus the BRRRR strategy is not going to be as quick as it would be if you were able to pull money out once you are done. You still have a freshly rehabbed property that is cash flowing, but may need to wait to gain the liquidity back to start the next project.
Where BRRRR really goes wrong is when you buy a property in the wrong market, the after-repair value is tight based on your cost, and then something pops up throughout the rehab project and you need to put "x" amount more into completing the project. Or you are just inexperienced and fixing the house just cost more money than you were expecting.
In my opinion the current high-interest rate climate might present a significant challenge for investors applying the BRRRR method, particularly when it comes to refinancing with a DSCR loan. Conventional financing typically requires a 12-month seasoning period before allowing cash-out on value-add properties (correct me if I'm wrong here), leading many to opt for DSCR loans with varying seasoning requirements from the lender. It's critical to understand that DSCR loan rates hinge on credit scores and LTV ratios – visualizing this on a graph with X and Y axes can help. High LTV ratios often lead to higher rates, so without thorough initial analysis of long-term debt rates and market rents, investors may discover their expected cash flow falls short.
For those who can secure properties at significant discounts, the BRRRR strategy allows investors to extract their initial investment and sustain their investment assembly line. However, given the rate environment and the necessity to remain cash-flow positive, it may be prudent to incorporate fix-and-flips or wholesales into the investment approach. By doing so, investors can avoid high LTV cash-outs at refinancing, securing more favorable rates and increasing monthly cash flow. The BRRRR method proves most effective with either low-interest rates or acquisitions made well below market value.
BRRR's are Definitely great to do but are a lot harder than before. Regardless of market the hurdles of BRRR's is finding the deals, having a team in place(mainly a GC) and having financing set up for after. Currently if you do find a decent deal interest rates makes it even harder. You are either not cash flowing monthly or leaving money into the deal. The benefit is you have a turn key and occupied property. You can sit on it and let the mortgage get paid down. BRRR's area still awesome but you have to make sure you have your ducks in a row and you'll be analyzing a lot of deals.
Biggest mistake I've myself and saw my clients make (even though I had warned them about it!) is under-budgeting for remodel. Whatever you think the max budget is, add 30% to that. There are ALWAYS surprises when remodeling a home and sinking more money in means it's that much harder to pull it out when ready to refinance!
Another novice mistake is not to account for holding costs. Every month you work on your project is another 1% of your total cost going into holding costs (on average, from experience). If you project drags on for multiple more months than you expected, that could easily run you 5-10% more just by holding!
Make sure your clients understand they should have extra cash reserves to weather the storms.