Would brrrr work in a cheap market?

Question

Here’s my problem. I am looking to invest in Springfield mo and try my hand at BRRRR. I like the area because there’s plenty of run down single families for sale anywhere from 30-50k much of the time (prime candidates for a BRRRR) but then I hit a problem. Properties aren’t only cheap here. So is rent. So even if I bought a fixer upper for 40k put 20k into rehab, all in for 60k got it rented and refinanced and say it comes back for 100k. I get the refi for 75k and get some money out of it! That seems plausible in the area. But the average mortgage of a 100k house here is about 600$ the average rent of a 2bed one bath house up here is about 800. So nice, I cover the mortgage, but what about cap x, repairs, vacancy, and eventual property managers budget? Is this market just not going to leave Me cash flowing rentals? Any advice or critiques of my thinking welcome. I want to build a detailed plan to BRRRR to lvl 1 financial freedom, but to do that I must leave behind at least 200$ pure cashflow a SFR. And I’m not sure if I can do that here anymore. Is it the market or me? What can I do?

Andrew Postell · Answer

@Caleb Scott a couple of things to consider here:

1. Rental Properties are a long term investment - so if you don't cashflow so well this year, that's ok.  Because you will increase rents next year...and the year after...and the year after.  So you will look good later down the line with cash flow. Long term view.

2. Lower valued properties - this is often where many investors start.  Mainly because this is all we can afford in the beginning.  Lowered valued homes are a little harder to get loans on (because many lenders have loan minimums) so make sure you have your lenders lined up.  Also, your expense ratio will be slightly higher as well.  To replace a a ceiling fan, it costs the same whether the home is worth $50,000 or $250,000.  The amount is the same but it represents a higher,

Now, I have done several transactions in Kansas City and they have been very favorable.  Keep in mind that if someone is asking too much for a house - that's not your fault.  If a certain home has more risk, consider lowering your offer to counter the risk associated with that property. I would also encourage you to think about only purchasing 3 bedroom homes.  3 bedroom and 2 baths is ideal, but a 3/1 is pretty good as well.

Anyway, just some things to think about.  I certainly hope you take a shot with one of these properties.  Looking forward to hear how it works out!

Mike D'Arrigo · Answer

@Caleb Scott I would avoid cheap properties in rundown neighborhoods, There's a reason they are cheap. Would you buy in these neighborhoods if you weren't doing a BRRRR? Keep in mind that you'll be holding this property after you refinance. Another thing to consider is that appraisals are difficult in those neighborhoods. What are the comps? You may not get the value out when there are run down properties around it.

Luther Wilson III · Answer

Location, my man.  If you’re going after low hanging fruit..  No, sorry, that wouldn’t even be low hanging.  Allow me to rephrase - it’s bottom of the barrel!  We’ve seen a ton of it in and around KCMO as well.  I’ve had my fill of it over the years and I’ll tell ya - it can be exhausting!  I joke with clients and other investors sometimes…  Going after such deals - whether you’re flipping it or holding it, managing it or just selling it - more often than not - is like opting to do more work for less pay!

My advice: go 2 or 3 notches higher than bottom of the barrel types of properties.   Utilize leverage effectively, reinvest back into the property over time and hold for the long run - (At least 5-10yrs) and then odds might be better for ya.  Also - please have reasonable expectations.  If you’re gonna BRRR then there’s a good chance you may have more money “left in the deal” after you refinance. For whatever reasons, a lot of investors can’t handle this - either that or they don’t have the right capital to be able to pull it off well.

For my clients and other investors that’ll listen - I tell them that if you hold rentals - don’t expect to make much during your holding period…  One sizable maintenance issue can wipe out a year’s worth of cash flow real quick!  If you hire a PM, take care of the property and act as a good steward then you won’t make much during the holding period anyway!

At a later date you can resale, trade up or somehow trade out into something better.  THAT’S where you’ll really see the long term results of real estate investing!   And it’s a lot more forgiving this way too.

Then there’s the creative financing piece as well…  If you use seller financing instead of holding your rental homes as just regular rentals then there’s another opportunity to squeeze more juice out of your deals.

Caleb Brown · Answer

I would target better price points. Springfield has some rough spots and you don't want a crack house. Have you contacted anyone around there? They can help on areas and price points. Would be happy to chat on KC, it's 3 hrs from Springfield

Jason Garrett · Answer

I live in Springfield mo and would love to connect to show what I've found and throw some ideas back and forth about areas and how Springfield markets could work for us

Andrew Wardwell · Answer

Where are you getting 4.5% on an investment property with a loan amount below $100k?

Darius Ogloza · Answer

Your mortgage on $60K at 4.5% is $300/month and the interest component is only about $220 to start.  Where are you getting $600?

Juan V Lopez · Answer

Hey @Caleb Scott, BRRRR would work anywhere as long as the values make sense. As you're seeing in Missouri, sometimes the rents don't justify a BRRRR. In places like California, the purchase prices may be so high that it wouldn't make sense to BRRRR.

My best advice to you is to get clear on what you want (it sounds like you want higher cash-flowing doors), and get to the areas that can offer this. I have a friend who completed 2 side-by-side SFH BRRRRs in Galveston TX and will be cashflowing about $1500/mo on each home. There's areas like this all over the US.

If you continue to hit a wall in your specific market, get outside of your zone and run numbers in bigger markets that have higher rents and higher appreciation. The entry cost might be higher, but you can use hard money (or private money) if you want to get into the market. There's always a way in. Just need to make up your mind on what you want to do an execute.

And who knows – maybe you do a couple BRRRR deals in Springfield, MO to get a feel for the process and then move into larger cash flowing cities.

Would brrrr work in a cheap market?

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