Popularity of the BRRR method skyrocketed in 2021 as Canadian home prices soared. I argue it was always a strategy with real estate investors.
Original Article Source Credits:
https://www.canadianrealestatemagazine.ca/
Article Written By:
Heather McDowell
Link to Original Article(s):
https://www.canadianrealestatemagazine.ca/news/investor-101-making-brrrr-strategy-work-for-you-335328.aspx
The BRRRR strategy involves buying a property that is undervalued or distressed, rehabilitating it to increase its value, renting it out to tenants, refinancing the property to access the equity and use the funds to purchase another investment property, and then repeating the process with the newly acquired property.
This strategy allows investors to recycle their initial investment capital and build a portfolio of cash-flowing properties that generate passive income and increase in value over time. However, it requires careful analysis and execution, as well as access to financing and the ability to identify and acquire suitable properties.
There is something called the 70% rule that states that “an investor should not pay more than 70% of the property's after-repair value (ARV) minus the cost of the repairs needed to bring the property up to market standards.” In other words, the investor should aim to purchase the property at 70% of its expected value after repairs are completed, minus the cost of repairs.
The 70% rule is a conservative guideline that helps investors ensure that they can make a profit on the property after factoring in the cost of repairs and other expenses. However, it is important to note that the rule should be used as a starting point and not as a hard and fast rule.
Some of the biggest risks to the BRRRR strategy include:
Overestimating the After-Repair Value (ARV): If an investor overestimates the ARV, they may end up overpaying for the property, which can eat into their profits and make it difficult to refinance the property.
Underestimating the Cost of Repairs: If an investor underestimates the cost of repairs, they may end up spending more money than they anticipated, which can cut into their profits.
Focusing rehabilitation costs on ARV to force appreciation rather than a focus on increasing rental income: When an investor focuses on appreciation to figure how much refinance they can get, they are doing a lot of speculation. Instead, they should take into account how the renovations can help increase rental income, which is a safer measure to refinance your home.
Difficulty Finding Qualified Tenants: If an investor is unable to find qualified tenants to rent out the property, they may experience extended vacancies and cash flow problems.
Market Downturn: If the real estate market experiences a downturn, property values may decline, making it difficult for investors to refinance their properties or sell them for a profit.
Financing Issues: If an investor is unable to secure financing for the property or the refinancing process, it can hinder their ability to execute the BRRRR strategy.
Unexpected Costs: Unforeseen expenses such as property taxes, insurance, maintenance costs, and repairs can cut into an investor's profits.
Last year in 2022, investors who bought at the beginning of the year and wanted to implement the BRRRR strategy, took a bit of a hit. When interest rates started rising and property prices started dropping, people who utilized the BRRRR strategy had a hard time refinancing. The estimated ARV no longer held its value. Selling below the ARV means they would have lost money. Instead, the only thing they could do was rent the property out and wait till the market comes back up.
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