What BRRRR strategy is this?

Question

So I was listening to episode 150 with Luke Swab.  Brandon was talking about a BRRRR strategy he did a webinar on.  Unfortunately that webinar is from 2015 and from what I've seen they only go back to 2016!  Anyways, He kind of laid out the basics of the strategy.  He said that you start off buying 2 BRRRR's a year, by the time you get to year 5 you should have 10 properties.  He said at that point, you start selling off the 2 oldest properties thus making a decent income every year!  Does anybody have any experience with this?  Or is anybody familiar with this strategy so you can maybe fill in the details for me!?  This sounds like a strategy that could work great!

Whitney Hutten · Answer

@Jessica Parker Correct... it's not the BRRRR that's different, it's when and why you are repositioning the property.  You do have a sequence of returns risk with this strategy should the market be down when you have to sell one (ideally it is minimal).  I write about it here in point #5 (the timeline I project is 30 years... to spread out the SRR).

David M. · Answer

@Jessica Parker

I think its just a strategy that looks good on paper, but not necessarily the best way to go all the time.  I think according to the calculators some form of your return is decreasing around 7'ish years because the principal payments are increasing.  Perhaps 5 years of depreciation unrecapture is enough to swallow (as I don't believe this strategy is doing a like-kind exchange since you are selling high buying lower...).  You can sell the property before you need to update or replace anything else since its only been 5 years.  10 properties is the max number of personal conforming loans...  5 years I believe is the general rule of thumb to own a primary residence vs renting...

So, while its a nice idea, you still have to consider whether more good deals are available.  What is the market doing?  Maybe its not the right time to sell.  Maybe your tenant's lease ends in Oct..  now run the numbers do you sell in the winter market or incur the carrying costs of holding an empty unit until the spring/summer.  Maybe the rental market is rising, just like how residential rents have been rising for the past several years.  If you wanted to really take advantage of the principals of leverage, you have to stay in it even longer especially if the rents are rising.  I haven't run any numbers, but my feeling is that unless you have a seriously strong appreciating market (and/or may high cash flowing property), you are going to breakeven or lose out to transactional/frictional costs as 5 years isn't that long of a time (think back to the rent vs buy timeline rule of thumb).  This may just be my personal "fear," but if you have "good" paying tenants, why kick them out to roll the dice on finding new "good" paying tenants on your next rental?

So, I think any strategy is possible with the right, matching market conditions.  However, I think its pretty rare.  Just my two cents.

Good luck.

Account Closed · Answer

@Jessica Parker That's actually what I do, its not so much that the BRRR is different, he is just employing actual real estate strategy instead of using just the BRRR method. I use this for my investors and myself, it's a solid way to help yourself achieve your real estate goals. If you ever want to connect on the subject, I am always available for a zoom call.

Jessica Parker · Answer

@Whitney Hutten Let's hope if Biden does become President, the 1031 exchange doesn't get eliminated.  That is something I'd definitely like to take advantage of in the future! It sounds like the strategy of selling after 5 years definitely has to be under the right market conditions!  Thanks for the info!  It's definitely sounding like holding them for a bit longer might just be a better strategy as you get more of the equity pay down!

@Dave Foster  Great advice! Thank you for chiming in!  I definitely see now that we will have to have multiple strategies and be able to pivot when needed as the market changes!  I keep hearing the more tools in your tool belt the better!  I guess the same would apply to strategies. :)

Whitney Hutten · Answer

@Jessica Parker Perhaps... You are also storing your money in a hard asset, the tenant is paying down the mortgage for you and you are cashflowing.  In 5 years there may not be that much built up and if you sell to live off the proceeds, you may be consuming your initial investment.  However, in 15-20-30 years, you should have a substantial equity build and can use that build to live off of and have your initial investment back to reinvest.  The only other things to factor in (besides a declining market) is repairs to sell, depreciation recapture, and capital gains. This is why many investors pursue 1031 exchanges (to defer taxes).  Now Biden's tax plan wants to eliminate the 1031 and step up in basis... however, it doesn't mean it will pass... nor does it mean that a future administration won't add it back in.

David M. · Answer

@Jessica Parker

oh, sorry for the second post.  Just as I hit reply my "right, matching market conditions" statement thought of an example...

In the early 2000's, this strategy you mentioned could have started off to working well.  The market was appreciating so well it was common for people to live in a property for 2 years and then move to use the sec121 exclusion.  I don't have the stats handy, but I recall property values were easily going up 50% to 100% in 2-3 years (I believe my little place did).  So, the moving every 2 years to utilize the sec121 exclusion is also a great strategy for building wealth, but you need the right market conditions.

Everybody has some strategy or marketing idea to sell.  There are more strategies out there than you can shake a stick at.  Its up to the investor to utilize the best strategy to meet their personal goals with the current/future market conditions.

Good luck.

Jessica Parker · Answer

Account Closed Thanks for the reply!  I'd definitely be up for hearing more about your strategy! :)

@Whitney Hutten Thanks!  You always have the best articles!  What other risks would apply to this strategy?  I can definitely see if the market is down it would not be an ideal time to sell.  I'm assuming this strategy would probably only really work well in a market that is appreciating?

@David M. Thanks! Those are some great points and definitely gives me something to think about! If the rental market is appreciating every year and you have a good tenant in place, it would definitely be hard to turn around and sell it and like you said, probably not the smartest idea!  I have a lot more research to do I see!  I'm just trying to figure out what is going to be best for our strategy starting out!  I want to be able to sell our current bread business in the next 2 years and replace it with real estate.

Dave Foster · Answer

@Jessica Parker, as you can see from these seasoned investors there's a myriad of strategies (and considerations that have to go into using those strategies) I'd just add a little disclaimer here - a strategy is not a recipe.  It is situation dependent. Which is why you hear @Whitney Hutten projecting 30 years but remaining flexible to pivot to a different strategy when the market dictates it.

The strategy you describe was perfect for 2011 - almost now.  Appreciation was so great.  But when appreciation stagnates you're still going to have the prep costs, the sales costs, and the tax on profit you'll have to consider if you go the periodic sales route.

This is why @David M. is talking about the strategic use of the 1031 - it can at least eliminate the tax portion of those sales costs so you can reinvest the full amount of your equity if and when you need it.  David I love your 121 strategy - that's exactly how we financed 10 years on a sale boat - from tax free real estate sales by living in them.

The first BRRRR strategy (or at least the first time I saw it called this - it's been around forever) does not project back end sales.  That's a different discussion.  It was for accumulation and building of cash flow through purchases financed by refinances.   But what ya gonna do if interest rates.

The market will change and you have to change and adapt with it. Key take away - use the strategy that works now and get started :)

What BRRRR strategy is this?

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