Other options beside BRRRR

[Justin Gomberg]

Hi Everyone, 

I have a background as a loan officer but I only worked with clients who were refinancing their owner-occupied residence or purchasing a primary residence. Oddly enough it wasn't until I changed careers that I became very interested in Real Estate Investing. After reading and studying like many others on BP, I was introduced to the coined term BRRRR. Luckily with a background as a Loan Officer it was a pretty straight forward concept to grasp.

The part I don't fully understand is this... I do not have the capital to successfully BRRRR. I understand I can use a hard money lender/private lender to pay cash for a property and even the rehab. Because I live in Southern California I have decided to invest out of state and I personally for my first investment do not have the risk tolerance to try and pull off a rehab using a HML/PML on an out of state investment property (possibly in the future I will as I learn more). I have a great job and do not mind spending the money on a 25% down payment for multi-family property and going back to work in order to save more before purchasing another property ( I feel I will learn a lot about the market after my first purchase is rented out while I am saving for another one). My question is for those who do not BRRRR is the concept still the same in regards to finding a house below market value and purchasing the equity with the downpayment? It doesn't make sense to me to buy a property at the top of the market even if the cash flow is good because there is no safeguard in place for if the property lost value. I would love to hear your advice, thoughts, and feedback.

Thank you all so much! 

[Joseph Cacciapaglia]

Originally posted by @Justin Gomberg:

Originally posted by @Joseph Cacciapaglia:

A large percent of my clients buy small fully occupied multifamily properties, and make a 25% down payment. Then they collect their cash flow, and save up for the next deal. This is a perfectly legitimate strategy, especially if you're happy with your day job and are a relatively high earner. My typical client with this profile lives in the bay area, or a similar market, and has a very high paying job in tech, medicine, law, etc. For this type of investor, their time is valuable, and trying to manage a long range rehab may not be worthwhile. They're interested in capital preservation and long term growth.

You don't really have to worry about your property losing value in the short run, as long as you have positive cash flow and aren't forced to sell if there is a slight dip. I wouldn't ever invest money in real estate that I thought I might need in the next year or two. In the long run, you preserve and grow your capital by choosing markets with strong rent growth and appreciation. These two factors have led a lot of California investors to San Antonio and similar markets in the last several years. They're looking for strong population and job growth, along with low asset prices and rents compared to similar markets.

Plenty of successful investors have used this strategy, and let the market and good management improve their equity over time. Then they can cash our refi or 1031 to continue to expand their portfolio. I understand that BRRRR, value add, and other rehab strategies are great for some people, but if you're someone that places a very high value on your time, and enjoy your day job, then they may not be the best strategies for you.

Thank you so much for a great response. I guess I never really put two and two together that even if the property value dips and the subject property is still cash flowing you really do not have to worry about it too much. I plan on holding onto the properties long term anyways. 

Do you recommend only looking for deals below the current value? If the cash flow is strong and the intent is to hold onto the property long term then I guess the value doesn't matter as much if you don't need to sell it during a dip. Am I understanding that correctly? I have no plans of buying a turn-key property. I do not mind doing light value add, I just do not want to do a full-blown rehab on my first one. 

 I believe it's more important to find a property in an area with strong rent growth and appreciation long term, than it is to find one "below market value". If you can force some appreciation with a light rehab or pickup something for slight discount today because people are panicking, that's great, but if you are holding for the long term, the market and sub-market you choose is going to determine your returns more than anything else (assuming you have competent management in place... I know that's a big assumption). Of course, if you're doing major rehabs, you can force a lot of appreciation, and then it becomes a bigger factor than your market overall. However, in those instances, you're really getting paid for your time, effort, and risk, not simply making a return on an investment.