Navigating a Changing Market with BRRRR Here’s how to use the BRRRR strategy to lead to profitable investments.
by Mitchell Zagrodnik
B y textbook definition, the United States entered a recession in 2022 when the economy shrank for two consecutive quarters; howev - er, there are several other factors considered when deeming a period of time as a recession. Even with the two negative quarters, the labor market and consumer spending are still strong. Because of that, it’s hard to compare the current period with other recessionary periods. Still, many experts believe a reces - sion is unavoidable. When it is going to happen is a matter of opinion. Since mid-2022 when the Federal Reserve began issuing substantial rate increases, the market has slowed considerably. Yes, these increases are meant to combat inflation, but their impact on the real estate market has been sub - stantial. Typically, in a recessionary period, the market shifts from a seller’s market to a buyer’s market due to slowing demand and drop - ping home values created by the rising rates. Usually in a recession, the Fed would lower rates to incentivize spending to help get the economy going. In the current sit - uation, since the goal is to combat inflation, rates continue to rise. Because of our current economic uncertainty, investors should do their research to stay ahead of the
game, looking for ways to reces - sion-proof their investment strategy and create long-term profits. WHAT IS THE BRRRR STRATEGY? Investors have heavily used the BRRRR investment strategy during the past decade. The acronym stands for Buy, Renovate, Rent, Refinance, Repeat. Investors looking for a property to buy often search for one that is considered distressed and needs a good amount of rehab to make rent-ready. The rehab often consists of improvements meant to increase the overall value of the property. Remodeling a bathroom or building a brand-new kitchen are just a couple examples of how investors can add significant value to their properties. Once the rehab is complete, the property is ready to rent. For the strategy to be a successful investment, you have to ensure it cash flows. You can achieve this by making sure the tenant’s rental payment is more than your monthly interest payment. Keep in mind as well that you are more likely to get favorable funding terms from your lender when the property is rented, so search for quality tenants for these properties. That
vetting process can even begin during the rehab stage. Then, when the property is cash flowing consistently, you can do a cash-out refinance and go on to fund your next investment. That cash-out refinance is based on the new ren - ovated value, allowing an investor to take advantage of the instant equity they just built by refinancing. The BRRRR method has become an industry staple for investors because it allows them to consistently grow their portfolios and continuously add to their passive income. The ultimate goal for each property is to refinance so you can roll over the equity from the property and get your next venture up and running. Maintain contact with your private lender about these projects as well. Depending on previous experience, they will often require a down payment in the 15%-25% range as well as funding the entire renovation. Then you can do the refinance portion after the rehab is complete—all under one roof, with minimal documents required and quicker closing times. STILL A RELEVANT STRATEGY? Compared to today, interest rates were significantly lower for the first seven to eight years BRRRR was
10 :: INVESTOR REVIEW :: JUL-AUG 2023
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