What are good BRRR markets for new investors?

Question

Hi everyone, I am a new investor and am looking to complete my first BRRRR deal. I am based in SF/LA and with the sky high purchase prices here, I'm not seeing much based on my budget. Wanted to get started with getting a deal and creating some momentum, would love your help!

What are some good markets in-state or out-of-state to get my first 1-3 deals?

What am I looking for?

Property Type: 1-4 unit SFR

Purchase Price: up to $350k

Type of Purchase: Cash Buyer or up to 80% down payment

Condition: Minor to Medium Rehab (depending on the ROI and comps, could go Major)

Desired Cash On Cash Return: $200+ / month / unitROI %: 15%+ < X

Timeline: 3 months or less

What are you guys seeing out there and based on my criteria, is this doable? Where should I be looking? Also, open to working with wholesalers, real estate agents, property managers, lenders and other investors. Feel free to reach out! Thanks!

Eric Fernwood · Answer

Hello @Toan Dang,

Markets with high appreciation are best for BRRRR. You might think low-cost fix and refinance properties are your best option, but that is not the case. You can pull cash out only once with a low-cost fix and refinance. In a high-appreciation market, you could refinance and pull cash out multiple times over the life of the property. Also, when evaluating markets, ignore the COVID madness times; locations that have been flat for years started appreciating; look at the appreciation rate over the ten years before COVID.

I put together the following table to show the advantage of appreciation vs. cash flow over five years. While this is an oversimplified example (based on a 25% down $400,000 property), you can see the advantage of an appreciating market. We and our clients refinanced and pulled cash out using a refi multiple times.

A common statement I get from people concerning appreciating markets is that you cannot count on appreciation continuing. Not true (except for the boom and bust times. For example, the run-up to the 2008 crash of Las Vegas). Appreciation (or lack of appreciation) is a symptom of long-term underlying economic conditions like job quality and quantity, location desirability, population growth, etc. And, like a large cargo ship, markets have tremendous momentum and do not change quickly. For example, is there a two or ten-year method to transform Detroit into a highly desirable location to live in? No. I see no possibility Detroit will reverse its decline.

So, what can you count on? If you buy in a declining market (any market where appreciation and rent increase are below the inflation rate), your cash flow and home value will decline. Also, if you buy in an appreciating market, your cash flow and value will appreciate.

What is the actual impact of buying in a declining market? People purchase properties for passive income they can rely upon to have a better life. However, inflation is constantly eroding the buying power of money. So, unless rents are increasing at or above the inflation rate, the quantity of goods you will be able to purchase will decrease over time, as will your standard of living. Could you have rent growth and still have declining buying power? Yes. See the chart below.

For example, if the rent starts at $1,500/Mo and increases 4% per year, you've lost 12% in buying power after five years (at the current inflation rate). If rents increase 2% per year, you've lost 57% in buying power after ten years. Inflation is why you should only buy properties in a location where rents and prices are increasing at or above the inflation rate.

Toan, I hope this helps.

Jabari Long · Answer

Detroit.  Atlanta.  Charlotte.  Are all markets I know personally works.  Properties are abundant and fix & flip funding is readily available

Chris Levarek · Answer

@Toan Dang BRRRR's are difficult in overpriced markets. We are essentially at very inflated price points for real estate at present. This means digging deeper to discover those hidden gems priced at working BRRRR acquistion prices. Regardless of your strategy, always buy in markets with population growth, unemployment lower than national average, multiple employers, job growth and rent growth ie. markets in expansion. If you do not, you are simply increasing your risk. If that risk is acceptable, that is up to you.

Here are some ideas and some resources used to find the data : https://www.biggerpockets.com/...

A BRRRR is not based on market appreciation, as some of the comments suggest but at it's base, forced appreciation. This is why you buy cash. Add enough value on a well purchased asset, you can refinance out. However, if you combine the forced appreciation and market appreciation, you are insulate the risk potential of not meeting your refi number that much more.

Obia Uzorka · Answer

For the uneducated the chart you put together looks really exciting, but we all know appreciation really doesn’t work that way. But let’s for a minute agree to disagree that’s the normal progression of appreciation. Chances are the property in question is returning a negative cash flow, market factors can also play a role on that appreciation, political or like New York real estate witnessed devaluation during the peak of the pandemic with people leaving  the cities. There are associated expenses that also impact holding properties for appreciation. My opinion is that those that chase appreciation are not investor but speculators. Because I think 🤔 they’re willing to sacrifice steady income for a payday.

It’s convenient to think the cash flowing property doesn’t appreciate, but we know they do appreciate, not the way a speculator might want. Capital pay down is also glossed over. And like David Greene wrote about brrrr. I think the brrrr method is easier with cash flowing properties                                                                                                                        Here’s my take, without knowing the investors situation and strategy, we can fall into the trap of trying to recommend what worked for us as an investor rather than look at each situation as been different and unique.

For an experienced investor that has more than enough capital to cover negative cash flow, capital appreciation might be something they want, for a newbie you will agree that capital appreciation is the last thing on their mind especially when they’re looking for financial freedom through “passive income” what better way to get excited but to get your first check.

We do know that very few investor will start their investing career without the security of cash flow. If I am bold to say, you included. Cash flow acts as a Safty net, that’s why majority of investors focus on cash flowing assets, everyday experienced investors are looking for best cash flowing assets, self storage, mobile park, Tripple net leases to name a few. I know it will be difficult to pitch a syndication deal that offers no cash flow.

I happen to be a firm believer of Robert kiyosaki assertion “what takes money out of your pocket is a liability” there was a jujitsu analogy that David Greene used in one of the bigger pockets podcasts “a fighter will out of boredom do a back flip when he is winning a fight and that’s when he might get caught with a haymaker” am sure that’s not quite how he phrased it. But investing is supposed to be boring and predictable and when we get comfortable albeit cocky we suddenly believe that focusing on what got us to the dance 💃 no longer suits us. That’s when we do back flips to excit ourselves and invest in negative appreciation properties. We forget that as a newbie you might not qualify for a mortgage to buy these appreciation properties.

My opinion and I stand to be corrected is why sacrifice one for the other when you can achieve both. Except you’re investing in a war zone where appreciation is minimal, there’s no reason you asset will not appreciate.

My name is Obia or Obi of the Obi 1kenobi fame and I am a recovering ❤️‍🩹 fix and flip addict. I love Detroit

Nicholas L. · Answer

@Toan Dang I think this is a great question, and there are lots of good BP threads on it.  See, for example, this one:

https://www.biggerpockets.com/...

And if you haven't yet, listen to Spencer Cornelia's 2-part BP podcast.  Lots of great lessons in it.

What are good BRRR markets for new investors?

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