Is BRRRR effective in the Houston area?

Question

While discussing various strategies with another investor friend, I suggested that I’d like to do a 1031 exchange, taking my equity and rolling it into a smaller home to start my BRRRR endeavors. His advice was to hold my current property and continue acquiring single family homes with low money down for owner occupied and move around until I’ve maxed out my mortgaging capabilities. After insisting the BRRRR method was what I wanted to go after, he said he had friends that were unsuccessful with this in the Houston area. Does anyone have any experience with BRRRR in northern Houston? Spring, Humble, Atascocita? Any advice would be truly appreciated.

Kevin Bazazzadeh · Answer

@Sam Peterson I won't speak to 1031s as I have no direct experience, @Dave Foster can give you more insight there. You can make the BRRRR strategy work in Houston, but it depends on the deal. I'll give you an example last year of two houses I bought - one I kept and did a cash-out on in August, and one I ended up flipping and selling in September.

1. Flip: PP $185K, needed about $15K to make rent ready. It would have rented for $1,800 a month. With a cash-out, I could have pulled my initial investment out, but I would have been losing several hundred dollars a month to expenses. I am ok doing a BRRRR and taking a break-even when CAPEX and repair numbers are considered but not one that is losing money every month. I could have decreased my LTV to something like 58% instead of 75%, but then I would have left 10s of thousands in the deal just to break even, which isn't a good COCROI. Instead, I sold and made ~$45K profit. I do have to pay taxes on the income, but some of that I can offset with expenses from other rental properties.

2. Rental: the one I kept as a rental had a PP of $55K and cost $140K to rehab. It appraised for $310K. On it, I did 75% LTV and pulled out $27K on top of my original investment. I rented it for $2300 per month. Now, the market rent over there is $2,100 for a house in that condition but I was able to get to $2,300 because it had an additional large detached garage. Instead of just including that, I offered to rent it for an additional $200 per month. It was a huge selling point as there are a lot of folks that want a shop, or need a storage unit for their stuff and the cost is at least as much per month.

I have a 7.5% interest rate loan on the rental. It is break even deal with just PITI, not including repairs or CAPEX...now you may be wondering why I would do that when I just said above I wasn't ok taking a break even deal. The reason I am ok with that is because I just spent $140K and updated everything - electrical, plumbing, roof, HVAC, windows, etc. so costs should be minimal for a while. In addition, I also have the $27K I pulled out on top of that as debt (which isn't taxed) which should cover any costs for the next decade (assuming I still have the property and haven't done a refi)

BRRRRs are harder to do right now because of high interest rates, higher median sales prices, and increased insurance costs, but still possible with the right properties.

Andrew Postell · Answer

@Sam Peterson yeah, everyone will have an opinion here and it's important to know what's right for you specifically.  Can the BRRRR Method go wrong in Houston?  Sure can.  It can also go wrong in ANY city/state in the country.  Can you be successful with the BRRRR Method in Houston.  Absolutely!

Generally speaking you will need several things to successfully complete a BRRRR:

• ARV - being able      to calculate the Value on your own (meaning, without the wholesaler      telling you the value) is really important.  This is especially hard in Texas since all the sold comp information is private.  Having this skill is critical to your success.
• Repairs - You will likely      need to know how to budget the repairs as well.  Getting a      contractor can be extremely frustrating especially if you need to make an      offer without even looking at the property.  How do you calculate      repairs without a contractor?  You may need to lean on other      local real estate investors in the beginning.  Or maybe even      just focus on properties with a very light rehab?
• Lenders - You will need a      lender on your BUY step and on your REFINANCE step.  And I would      HIGHLY recommend to read this article I wrote for Bigger Pockets on      how to find good lenders that you can find HERE. If they are good, they should be      absolutely definitive on rate, terms, costs, etc. Trust me, many lenders      will tell you they can do this...but it's very rare to find lenders that know how to advise you on it. When I first      started BRRRR'ing my properties lenders would tell me the BRRRR Method was "illegal"....it's      not, they just didn't know anything about it.
• Finding Properties - and this is the      absolute hardest step of anything right now.  So network like crazy      and find some good resources.  It's going to be hard...but if it were      easy then anyone could do it.

Hope all of that makes sense but feel free to reach out with any questions.  Thanks!

Jake Baker · Answer

@Sam Peterson

If you are looking to BRRRR you may want to consider getting a HELOC instead of a 1031 or cash out refinance.

Assuming you have a good rate, you will want to keep that in place and utilize that equity tax free.

Dave Foster · Answer

@Sam Peterson,  I don't think the two approaches are mutually exclusive.  Or even substantially different.  Whether you start with the property you have now and refinance to purchase and rehab and rent and refinance a second property.  Or whether you sell and 1031 into a new property to rent and then refinance to purchase another property.  It's really the same mechanisms.

the biggest difference between these two approaches is that if you 1031 you will get to use 100% of the equity to purchase that next property.  But there is a glitch in your plan.  In order to defer all tax in a 1031 you must purchase at least as much real estate as you sold.  So your plan to go from your current property to a smaller one could leave you with a tax bill for the difference.

One answer would be to sell this property and do a 1031 but purchase two new properties as replacements.  This is a BRRRR dream!  And it also accomplishes what your friend was saying in adding numbers to your portfolio

Many investors will use a BRRRR framework along with periodic 1031s to maximize available cash and buying power.

Sam Peterson · Answer

Thanks for the details of your two properties Kevin. That was a great comparison run through. Time to put together a game plan.

Kyle Taylor · Answer

What website are you getting this info from?

Sam Peterson · Answer

Thank you to all who replied. After some digging, I feel like the HELOC would likely be the preferred route for funding my next project. It looks like there are a few lenders that will lend a HELOC on a single family investment property, which previously I thought was not possible. Now it’s time to do the ground work and start digging for a successful property makeover! Let me know your thoughts and opinions please. I’m glad I posted my idea. If you all hadn’t spoken up, I wouldn’t have thought to shift gears.

Jacob Sherman · Answer

BRRR is effective in all states . Its all about how much did you acquire for and how much in renovation . Make money when you buy not when you sell . have to have enough room

Liam Maher · Answer

Houston is a little expensive, especially when combined with current rates but there are some BRRRR deals that can work with decent ARVs...just as a quick example, here's a ranked list of properties by BRRRR in Houston - there's a few that potentially make sense but not a huge amount of choice. If there are some good/cheaper suburbs outside the city limits that might be better

Is BRRRR effective in the Houston area?

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