Thoughts on BRRRR and portfolios going forward

[Roy Gottesdiener]

Hey everyone,

I find myself thinking a lot about strategy recently under current market dynamics, wanted to share with you and hear your thoughts.

Quick intro: I've been investing in real estate for the past 4 years using primariliy BRRRR, managed to scale to 10 rentals and the goal is to generate an income sufficient to cover my living expenses within a 10 year timeframe.

I've been constantly buying properties since 2020, cashing out and moving on to the next, when rates started climbing I just took for granted that cash flow is going to be thinner so I adjusted my underwriting (and expectations) and kept telling myself that the real money maker is appreciation, so a difference between $100 and $300 a month is not critical, so I can keep growing my portfolio doing the same thing I did in 2020 and 2021. 

Then the latest property I bought got me to rethink my entire MO. Some numbers: it was all-in for $208,000, appraised for $295,000, my cash out was for $150,000 (due to the required DSCR), rent $1,750 and PITI $1,300, for a cash flow of around $100, and measly CoC return. Still, I was focused on the almost $100k in equity I created, and how in 10 years it'll appreciate and the principal will be paid down, amplifying my equity growth. But what happened to my portfolio is that in a stretch of one month one tenant moved out so I incurred replacement costs, in another I had to replace the water heater, and another had a plumbing issue. When you operate on thin margins like $100-300 a month, no matter how conservative you are, a month or two like that can obliterate your yearly cash flow from the entire portfolio.

Now the way I see it, BRRRR helped me make money in several ways: 1. Forced appreciation 2. Cash flow 3. Principal paydown 4. Market appreciation. Given the current market and rates, cash flow is lower in leveraged properties and CoC lower and principal paydown is also very insignificant in the first 10 years with high interest rates (assuming I don't plan to hold the properties for 30 years). So that leaves the majority of gains in forced appreciation from rehab and the marekt appreciation by buying in the right place.

All of the above led me to decide to sell that property and realize the equity, and convert it into one property bought in cash, without a cash out refi. It will increase cash flow, reduce leverage, and the only downside is that the total asset value would be 50% lower, so I would get appreciation only on $150,000 and not on $300,000, but overall in the grand scheme of things I think it makes more sense, rather than scraping $100 a month but feel like you're fully optimized and every penny allocated according to the spreadsheet.

I also realize everyone's risk tolerance and situation is different, if I have to sum it up this situation to me feels like a no brainer because numbers wise (trust me I ran the numbers) - cash flow would remain the same (assuming I went on with cashing out and buying more) but with lower debt so more room for error, and where I am "missing out" is debt paydown which again, with these rates is really insignificant, and appreciation on a higher total amount of assets, which I'm happy to give up on for the time being and swap it for greater peace of mind.

What are your thoughts? How are you adapting your strategy? Really interested in hearing.