Recession in the middle of BRRRR?

Question

BP Community: If an investor is on a short-term, high interest rate loan that helped to acquire and rehab a property, what happens if a recession hits before the property is seasoned and refinanced?

Yang Zheng · Answer

@Brandon Roof @Nate Monson, thank you for your insights on this one. I'm definitely keeping multiple options open on the BRRR property. As I've been talking with more people, I'm also getting more comfortable that if a recession hits we may not likely see the dramatic drop in housing prices we saw in the 2008/2009 crisis. The local area is also a little more recession-proof. All giving us more comfortable. Thanks for your help!

Yang Zheng · Answer

@Nate Monson That anecdote is good to hear (although I'm sure not representative of all situations). This one is in a university area so I think will have a certain amount of protection although not impervious.

@Alexander Felice That's precisely my concern. What if the change in % ARV actually means I have to contribute more equity rather than being able to withdraw equity through the BRRR method. (Side note: We actually had a much higher than expected ARV appraisal come in yesterday and I'm getting more and more comfortable that we've structured the deal in such a way as to withstand some of the ARV deterioration possible during a recession)

Alexander Felice · Answer

biggest immediate worry is liquidity drying up.

When banks start lending at 65% or lower ARV, what is your plan?

How are you paying for the house, HELOC loans will start getting called pretty fast.

This is the most common occurrence regardless of specific market forces that contribute to the changing economy.

Nate Monson · Answer

@Yang Zheng awesome man. On that note too, if your weighing several markets, look for places where there is strong industry (ie. hospitals, universities, state buildings, etc.) My market has many of these and we did not feel 2008 as severely as most of the rest. Good luck!

Nate Monson · Answer

@Yang Zheng Brandon made some really good points that I agree with. Having multiple exit strategies is certainly a way to mitigate your risk. Obviously you can't know what the market is going to do, but before you invest somewhere take a look at the demographics, are people and jobs coming in? Where are local inventory levels for real estate trending? You can make some educated guesses about which way the market is going if you do some research.

You obviously try not to get into that situation, but if you do you may just have to sell and cut your losses.

Brandon Roof · Answer

It's often said when acquiring a property that you always want to have an exit strategy.  As you've mentioned, things can happen along the way that might derail your plans, leaving you in a significantly compromised financial situation.

When I'm considering a property, I want it to be versatile enough for multiple exit strategies.  If I attempt to flip a house and don't get the price that I'm looking for, can I do a lease option instead or BRRRR it?  If those options don't come to fruition, does it still make sense to become a long-term rental?

If things played out in the scenario you have presented, you are likely to have a good chunk of capital tied up in the deal for a number of years, attempting to keep your head above the high interest, and if you are under-capitalized elsewhere you may be forced to sell the property at a loss to recoup as much as you can.

If you're not comfortable with those outcomes with the current BRRRR properties you're considering, you may need to look for others where you could weather the storm of a worst case scenario.