The housing market has been in flux since the start of the pandemic. Increased demand has sent prices skyrocketing and rents have risen just as dramatically. For real estate investors, this begs the question of whether the strategies you've used in the past are still relevant.
For investors that use the BRRRR Method, the answer is yes. The factors that contribute to the current market have put stress on the process of Buy, Rehab, Rent, Refinance, and Repeat, but the underlying strategy still has the potential to generate cash flow and build wealth through equity.
What is the BRRRR Method?
The beauty of the BRRRR Method is that the acronym describes the entire process in as much detail as you could ever need.
Buy: Acquire a property; typically for an amount no greater than 70% of the After Repair Value (ARV)
Rehab: Make the necessary repairs on the property to bring it up to standard. The Hard Money Co. offers funds to complete your renovations included in your loan
Rent: Market and install tenants into your property. This will generate cash flow and give the banks confidence to help you…
Refinance: Get out of your hard money loan, pay back investors, or reclaim your capital by having a traditional institution refinance your property. This allows you to…
Repeat: Now that you have funds in hand again (and a cash-flowing property), you can reinvest in another property and do it all over again.
This is a powerful way to build a portfolio and can generate meaningful passive income.
How does the current housing market affect this strategy?
With home prices at record levels, it's unlikely that you will be able to find properties available for 70% that are on-market or listed on MLS services. This can put significant strain on your budget and turn once profitable investments into potential losers. There are two ways to overcome this, however.
The first, and most profitable, is to look for properties that aren't publicly marketed. This may mean changing the way that you have traditionally operated. Other sources for available properties include sheriff sales, wholesalers, real estate agents, public records, and more. You may have to get creative, but through extensive research, marketing, and networking, you will be able to find homes that are available for purchase well below prevailing market prices.
While this will require more work than your previous efforts, it will bear fruit in your bottom line. It will also help you develop a valuable skillset for when the market returns to normal. These are skills that won't go away and will make you a better investor.
The second option that BRRRR Method practitioners have in the face of high prices, is to simply pay them. This will reduce your margins, but there is still significant potential to generate cash flows and build effective investment vehicles. Rental rates have risen alongside home prices which means your cash flows may be enough to buoy your payments. Rising interest rates throw another wrinkle into the calculus for your refinance, but with tenants in place and consistent revenue, you should be able to manage those as well.
Ultimately, paying the market price for a home may not put you in a position to generate passive rental income. It does, though, still, give you the opportunity to acquire assets and build your portfolio. This is especially important as property values (not prices) rise in the future. You are putting yourself in a position to truly invest and build future wealth.
Do The Work
The BRRRR Method is still a strong investment strategy, but the margins have slimmed. As with any investment at any point in time, there is an inherent risk. Do the work. If you have considered all variables in your investment equation and put together a comprehensive analysis, there should be little doubt whether or not a given property is worth investing in.
There is never a bad time to invest. There are only changing opportunities. If you find that the way you have typically performed the BRRRR Method in the past is not viable in 2022, consider ways that you can tweak your strategy to account for the current environment. With rising rates and prices, many would-be investors are sitting on the sidelines. If you sat out, and failed to pursue your real estate goals, would you regret it in the future?
As always, reach out to us if you have questions regarding an investment opportunity. Our primary goal is to provide you with the tools needed to excel as a real estate investor and become your long-term partner in this business. We are currently working with more successful investors than ever and strongly believe that you can become one of them.