Will BRRRR be back again? (honestly, in A/B class areas)

Question

Is BRRRR still alive? Yes. That is not my contention. If you are willing to scrap your own off market leads, they can be found.

My larger question is, can you find a BRRRR, in the open market, in an A/B class area?

BRRRR is a wonderful buy and hold strategy. We get the question daily, and by all intention, we would love to find BRRRR opportunities everyday for our clients and ourselves. But, in reality, in Kansas City, BRRRR is (essentially) impossible.

Here is why? Inventory from the collapse is way down. Foreclosures are substantially lower. Distressed sellers in a good economy are quite uncommon. AND, buyers are on the sharp rise. A large percentage of this increase is the so called Wall Street investor market. Large funds that are sweeping markets across the nation, buying investment real estate by the thousands. Individual investors are also on the increase. Basic economics shows that a decrease in supply and an increase in demand will change markets. The change is a shrinkage of the margins available.

As this economic compression occurs, the ability to capture 20% discount to REAL ARV shrinks. (Could an agent convince you of a overinflated ARV, sure, not the argument here). Wall street is willing to buy at retail currently. They want inventory and are betting on appreciation. They also have access to 2% foreign investment cash, so their cap rate requirements are easier to hit. This compression, from more demand, less supply, shrinks the available equity that could be earned in a deal.

When the market "softens", will it be back. I contend doubtful. There are still going to be more investors in the marketplace. Wall Street will still be in the marketplace, likely. And, the next recession/slow down/correction, is far less likely to be one based upon real estate.

Regarding market class. C & D market areas, and those that sellers call B markets that are really C markets, will still have less demand, and the potential for a BRRRR. But, should an investor buy that? (Ask me for a copy of my e-book on this)

BUT, investments in long term buy and hold real estate, with cash flow, debt reducing equity creation, and appreciation is STILL a very good business model, even without BRRRR. Dollar cost averaging is still in play. Someone else paying for your retirement can never be beat. Avoiding the influx of chaos on the stock market. Securing assets that are less liquid, and therefore, less impacted by a recession is another great reason. Invest today and invest often for your future.

So, back to the conversation, will BRRRR be back in the A/B class markets?

John Wiley · Answer

William, as one who has been both flipping and holding rentals in the KC market for the last ten plus years, I can tell you that your overview is spot on. From my experience, the classic Buy, Rehab, Rent, Refinance, and Repeat (BRRRR) in Kansas City departed stage left. I am a GM of a medium-sized property management company in Kansas City, Missouri. I work almost exclusively with out of state investors. My clients enjoy stable, performing portfolios in A and B class areas of KC. Our property acquisitions team receives calls and emails weekly from out of state investors chasing BRRRR. Today, it is my experience that to find BRRRR in Kansas City, investors must primarily step into the C and D class arena. However, it is getting much hard to find BRRRR there, as well. When you can find BRRRR in C and D areas, many investors don't take into account the substantially higher ownership costs in these areas. I know these cost that from personal experience as I own a substantial portfolio in these areas which I picked up in 2009 & 2010. For example, sewer lines fail with these older homes (I took a 12K hit just this year at one property in a C area) Let's face it, ownership costs are higher on 75 plus-year-old homes. Add to that the elevated turn-over ratio in C & D, and you can watch your cash flow fly out right out the window. If that was not bad enough, long term appreciation does not occur in C & D areas as it does in A & B class areas. So, is real estate investing dead in KC? Not at all, if investors would stop chasing their tails as they march like lemming's over the BRRRR cliff and rethink their analysis, they would discover you can have both modest cash flow, appreciation, and stability. My most successful clients understand the internal rate of return (IRR); they make the best investment decisions and have the most stable portfolios. Think of the IRR as the rate of growth an investment is expected to generate using both modist cash flow and appreciation. With IRR, successful investors understand that the initial investment is more than likely negative; it is an outflow. You are spending something now and anticipating a return down the road. Each subsequent cash flowing house bought using IRR as a matrix will provide modest positive cash flow and capture long term appreciation at the same time. Why not have the best of both worlds? While the actual return that a given investment ends up providing will often differ from its estimated IRR, an investment with a substantially higher IRR value will give a much better chance of a successful venture. Historically A & B class areas will outperform the riskier C & D areas hands down. John F. Wiley - General Manager Plaid Management

Jeffrey Rice · Answer

I don't know enough to speak to it, but I really hope a conversation starts around this.