Is the BRRRR Method Dead?

18 Oct Is the BRRRR Method Dead?

Sometimes we stare so long at a door that is closing that we see too late the one that is open.

– Alexander Graham Bell

While the BRRRR (Buy, Renovate, Rent, Refinance, Repeat) Method has been around for decades, it really became a movement over the past decade. Interest rates were historically low, property values grew and grew, loans were abundant even for borrowers with shaky credit, and materials costs were reasonable. From mid-2020 through mid-2022, housing values ran up 30 to 40 percent in many areas of the country. Conditions were ripe for even novice investors to buy a property, renovate it, rent it, and then obtain a much higher appraisal value to support a generous cash-out refinance.

Here are the forces working against those attempting to BRRRR now:

1. Whereas interest rates for investors were even in the 3% range in late 2021, the same rates in late 2022 are over 7%. Even if the property appraises high, the resulting monthly payment may put an investor in a negative cash-flow situation if they pull too much money out.
2. Banks are tightening their lending standards. Borrowers with too high a debt-to-income ratio or less than stellar credit may have more limited refinance options.
3. Inflation pushed labor and materials costs higher so renovations will cost more or investors will have to cut corners.
4. An inflationary and recessionary environment could cause some tenants to fall behind on the rent.
5. With property values not increasing – and in many markets decreasing – a lower than expected appraisal value could mean that the investor leaves a lot of their money in the deal instead of pulling it all out. While a smaller loan may help with cash flow, less money out may prevent the investor from rolling the money into future BRRRR deals.

With all these macroeconomic market forces, are the BRRRR days over?

The simple answer is no. While the term BRRRR has been around for about a decade, the concept has been around for over a century. The market ebbs and flows, and the BRRRR Method is a proven path to wealth over time. If an investor is playing the long game (owning cash-flowing properties for years and maybe for life) and they follow basic principles, then they have nothing to worry about.

The more complex answer for the market we are in is that pulling all your cash out of a BRRRR deal on the refinance is still possible, yet it will involve more work and skill. In other words, an investor will have to be selective and buy low. Overpaying for a property now is not an option (it was, to a degree, the last couple of years). Then the investor will need to keep their renovation expenses under control to stay within the budget. The renovation should be conducted in a timely manner to ensure that the property does not sit vacant very long. Then the investor should communicate with their appraiser to provide a detailed list of upgrades plus comparable sales that support the desired value.

I guess you could say that the “easy BRRRR” is gone for now. Novice or reckless investors who buy anything that’s a fixer-upper and then throw money haphazardly at the renovation will not be bailed out by low interest rates and an appraisal value buoyed by a rising market.

Sharpen your skills. Build your network deeper. Stick to a tight schedule. Communicate intelligently with your appraiser. Do these things – and play the long game – and you’ll be just fine. Actually – you’ll be more than just fine – you’ll be really wealthy!

Tai DeSa is a graduate of The Wharton School of the University of Pennsylvania.  He became a full-time real estate investor in 2004 after serving in the U.S. Navy.  Tai has made colossal mistakes in investing (and learned some things along the way).  He has helped hundreds of homeowners avoid foreclosure through successful short sales. Check out Tai’s books on Amazon.com. Tai may be available for coaching and speaking engagements on a variety of real estate topics.  Send an email to tai@investandtransform.com.