BRRRR plus Possible Downturn

[Nick Coons]

I'm an avid consumer of the BP podcasts, and to some extent the content on these forums. So I understand that any buy-and-hold strategies don't generally care about short-term market conditions. When asked "if the market is down, do you buy?" or "if the market is up, do you buy?" or "if the market is X, do you buy?" the answer always seems be a resounding YES. Buying deals is a good strategy any time, and blips that last a few months or a few years don't matter in the grand scheme of holding something for 10+ years. Timing the market is tough, so don't bother. That all makes sense to me.

My question is regarding something like the BRRRR strategy, or any strategy really that involves getting a short-term loan (like hard money) to purchase something, rehab it, then refinance to hold.

So.. theoretical: Purchase a property in April 2022.. it takes three months to rehab.. in June of 2022, the market dips 10% in a quick correction (might recover in a few months or a year, but isn't relevant now), rehab completed in July 2022.. can't get the appraisal needed to refi out of the HML because of the down turn.

Given that timing the market isn't really a viable strategy, I'm trying to think of ways to protect against this possibility. Here's what I've come up with so far:

1) Find better deals. In an appreciating market (particularly where I'm looking to invest, Phoenix), this is very difficult. While something like 65% of ARV would be great, the reality is that something at 85% of ARV is pretty standard, and 80% of ARV is considered amazing.

2) Have more cash on hand (either my own, or a partner that'd be interested in tying up some capital for years). I'm basing my initial assumptions on a HML with 10% down, then a refinance at 75% LTV (this is where a market downturn could negatively impact my forced appreciation efforts). So perhaps this means putting 20%+ into the HML (or at least having the cash available just in case I need to put it into the refi).

3) Sell as a flip. While a downturn could eliminate the ability to do a 75% LTV refi without putting in more cash, that doesn't mean the property is upside down (that would have to be a crash as bad as or worse than 2007/2008, which I don't think anyone expects, so I don't think I should be taking precautions against this), which means I should still be able to sell it for a profit (which also gives me more cash available for my next deal to implement strategy #2). I actually came up with this thought as I was writing this post, so perhaps I answered my own question (because I wasn't a big fan of #1 or #2 :-) ).

I'm interested in what others' thoughts are on this.

[Marcus Auerbach]

The real estate market does NOT behave like the stock market: it moves a lot slower and you can see in the leading indicators when things are about to change.

ARV gets determined using comps from the last 6 months. Thats always an issue in spring, because most comps are from last years fall market. So I would not worry too much for a 90 day BRRRR project - the market has to slow down, before it can change direction.

On top of the data I can also tell by the client sentiment: we have currently about 60 active buyers and they are all in agressive shopping mode. Many of them will buy in the next 90 days. Those will become comps that will be used in the following 6 months.

To me, it would be great news to see the market cool off a little so we don't have to compete with 15 other offers. That will be the first sign and very obvious to any agent (or team) who writes a lot of offers. It is much easier to compete against 3 other buyers than 15! 

I look at the data monthly and I add my personal observations in the Milwaukee market and then post a monthly market update on my YouTube channel: a slow down in competitive ness and even a slight increase in inventory is definitly something I am looking for!