Investing / BRRRR - ing in High Cost of Living Areas

16 Replies

I'm still new to REI and I understand how BRRRR works but it seems like it only works out in low to mid cost of living areas. I'm trying to understand how the expenses for a property in a HCOL area, like the boroughs of New York of areas in California, would be covered after a refi. Let's say a property's ARV is $750k. Acquisition and rehab costs is $600k and you're able to refi at said ARV. Assuming a 4.0% interest rate over 30 years, your mortgage payment is ~$3,000 monthly. That's not accounting for expenses like insurance, taxes (taxes in my area can be $1-$2k a month) , repair & maintenance, cap ex, property management, and other expenses. Are you really renting the property at $4000-$5000? or are you renting just to cover mortgage and insurance? Am I missing something? Outside of BRRRR-ing and using FHA loans, how can someone invest in RE in HCOL areas? How are you guys investing in HCOL areas?

@Kelvin Duen , BRRRR in HCOL areas are very difficult to make work. As you point out, the value to rents is way out of rack. That's because they are both driven by different parts of the RE market.

You're more likely to be able to do it with 3 or 4-unit properties, but even then it may not work. In the town where I live, duplexes can go for $2MM. No way you're getting $10k in rent for each side...

Other ways to invest in HCOL areas is to go bigger. Once you go 5+ units you're in commercial real estate and the values are driven by the income they actually produce. Sure they're going to still be expensive, but they should cash flow, especially if there are value-add opportunities. Try to find an experienced partner to work with.

Thanks for the reply, @Jaysen Medhurst . I've looked at 5+ units as well but as a new investor I'm hesitant about going too big for my first investment. Acquiring off market deals seem like a good route to explore so I'm reading and learning about ways to do that. Being in a HCOL area, what type of properties are you investing in? How are you finding your properties?

@Kelvin Duen , I focus on SE CT where the numbers (especially prices) are far more approachable.

We recently offered on a 12-unit that was on-market. I'm currently spending a lot time identifying off-market properties that meet our criteria and methodically reaching out to owner. You can do this with public sites and searching property records. Takes time, but can turn up some good opportunities. The other approach is to purchase a list from a site like List Source.

I think if you can partner up on your first deal with an experienced investor, going 5+ units is fine. I actually find that less stressful because the valuations are more straight forward.

Where are you focusing your efforts? There's a lot of opportunity Upstate, Western CT, and Western MA.

@Jaysen Medhurst , I've looked into so many areas that it's starting to make my head spin. New Jersey, NY (Poughkeepsie, Buffalo, Newburgh, Rockland), Texas (Austin and San Antonio), Orlando FL, Philly, Southern Vermont to name a few. A lot of traveling to say the least. I just got back from Ft. Lauderdale to take a look at what a friend's cousin is doing down there and to look at the RE market.

I've thought about partnerships but am a bit hesitant. How did you find your current partners?

Partnerships are hard. After my first and last back in the 1980's I swore I'd go it alone and have. l preferred 1-4 units for easier to finance. I sold all my LA property as the numbers don't make sense as a buyer. I can sell at a 9-10% Cap rate in Vt and it is a win-win for both the buyer and me. An example is my 3u at  138 Main St. Springfield, Vt for 250k. Not factored into investment criteria are future value, intrinsic value, historic value, nearly non-existent crime, and friendly small-town charm. 

Being a lifelong Cali guy, I've been robbed at gunpoint, at knifepoint, home burglarized, cars stereos stolen... Here in Vermont I almost never lock my car doors of my trucks only if expensive cargo is visible and I never lock my Mercedes SL500 convertible and often just leave the top down when shopping at Walmart or in town. I've bought houses where the seller never had a key or locked their doors! LOL 

@Darrell Lee , what was it about your first partnership that made you swear off of them? What factors made you choose Vermont out of all other areas?

@Jaysen Medhurst , that's one thing I'm struggling with right now. I can't seem to decide what area to focus my attention. How has your experience been dealing with partners? Would it be ok if I direct-messaged you?

@Kelvin Duen

At least in Southern CA, HCOL areas attract flippers who get to operate on thinner margins than a Brrrr investor if they choose to. Competition drives their margins down to where it's difficult/impossible to Brrrr in those areas. Even my SFH which I have remodeled myself over the years for pennies on the dollar of having the work done fast by a contractor doesn't work in the Brrrr model.

Kelvin I was a 33% partner and we built a new custom spec home in Los Angeles beach area called Marina del Rey. I was the broker, they were the architect and general contractor. They were also partners with each other so I was always outvoted. Plus they controlled the construction money which they refused to provide accounting and kept $60-100k of our partnership money. So no more partners for me.

If your strategy is BRRRR the popular locations in California won't work. It's been discussed numerous times on BP.

You're better off looking at markets in the mid-west, south-east, or small towns not near coastal cities. Multi family will work like previous posts mention. At that point you'll start talking about risk vs ROI.

@Todd Rasmussen , outside of BRRRR investing and flipping, how are people investing in HCOL and VHCOL areas like California and NYC. Are people forcing cash flow by making large down payments on properties? Forcing appreciation on distressed and mismanaged properties still yield unattractive returns. I know there are players in these area who need to park their money somewhere so they buy property, outright, in cash. But what about the other investors?

@Darrell Lee , do you think there was anything you could have done to avoid those issues? 

@Jaron Walling , I'm definitely looking into more affordable markets. I was just hoping someone could provide insight on how people  are currently investing in HCOL and VHCOL areas. More of a curiosity thing for me. 

Yes, avoid partnerships unless I'm the general partner. So I did smaller deals on my own...I left Calif as the numbers for cashflow properties didn't pencil out to me. 

Right now people are buying based on my "Bigger Fool" theory. The numbers don't make sense, but if they can sell for more to a bigger fool, then it works. But eventually the music stops and someone gets stuck and loses out. A rise in interest rates, stock market or r.e. crash, tax laws change, war... RE goes up and down... So I try to buy low and sell high...

@Kelvin Duen

Yes to forcing cash flow. The smaller players that are set on local typically end up as jv investors to someone else. 99% new or small investors we meet are wholesaling, flipping, or headed out of state.

@Darrell Lee , your "bigger fool" theory is interesting. At times I feel that is the case in NYC. But people just continue to buy and buy "high". I noticed your property you mentioned in springfield, vt was a REO. I am getting ready to place a bid on a REO property. Is there anything you know now that you wish you knew before bidding/purchasing an REO?

@Todd Rasmussen , I agree. I feel like I'm heading towards out of state investing.

@Jaysen Medhurst , thanks. I DM-ed you.

REO's I usually paid around 20-30% of the area median market values expecting to need major work as many I bought sight unseen. REO's are hard to finance and I paid cash for all my properties. The small cities/towns still haven't rebounded to their previous highs while the big cities have gone nuts.

The big cities properties are very vulnerable to a market crash. Possible reasons could be if Trump loses the election, the r.e. tax depreciation treatment could be changed, rates could rise, capital gains changed, etc. Whereas my properties provide huge cashflows. So while my properties don't see the rapid appreciation, they won't be as vulnerable to changing market conditions, I hope...

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