Quote from @Stuart Udis:
@Arron Paulino I've posted on this many times over the last year and my advice normally falls on deaf ears. Most haven't taken their properties acquired through the BRRRR method full cycle and gone through the sale process you are experiencing. I am not anti-BRRRR, or believe its a bad strategy. The problem most encounter is placing too great of an emphasis on the return of capital at the end of the renovation process. In fact most new BRRRR investors prioritize whether they can receive 100% of their capital back through a refinance over all other deal metrics and being laser focused on that particular objective often leads to investing in the lowest tier neighborhood where it is easier to complete the BRRRR process.
The reason why you're struggling is quite simple, all you have to do is ask yourself who the buyer is if and when you sell. As you've found out based on the portfolio sale, its another investor. Makes sense, why would an investor like yourself pay the same amount as you when there's a ton of inventory in a low barrier of entry neighborhood. They can simply replicate exactly what you did in the first place. This is the part most miss.
If you are going to complete the BRRRR method in a lower tier neighborhood, select a neighborhood with the fundamentals that indicate the neighborhood will transition to a neighborhood where home ownership will become more prevalent. When that shift occurs you will experience appreciation that can actually be realized in a sale because you are no longer limited to selling your real estate to other investors. These neighborhoods exist and aren't difficult to spot but most ignore the characteristics because they are hyper focused on whether they can achieve their BRRRR refinance and ignore everything else.
Most begin by purchasing lower tier real estate because the price points align with capabilities. There's nothing wrong with that and It's often impossible to jump from the lower tier properties to more expensive real estate after the first round trip because most fail to make a profit. Don't be afraid to purchase the lower tier real estate the second go around if you are focused on the correct fundamentals. Perhaps you have to leave some of your money in the deal, but if you hit it correct and the neighborhood appreciates you will do quite well. Investors ask how do I scale....well that's how you scale. You acquire real estate that has meaningful appreciation that can be realized, not merely buying a bunch of doors in stagnant markets with appraised equity that's can't be realized when the property is sold.
Your advice is very sound and makes sense. In my case, I am encountering this problem and did not effectively perform the BRRRR as best as I could have. I was so locked in on the cashout refinance portion of the BRRRR and kind of brushed off the part of what if I do actually have to sell, which I am in now. The lower-tier neighborhood entry was easier but then came the risk of needing to sell if it didn't perform.
I agree. I think the buyer has to be another investor willing to pick up where I left off. I was able to get interested buyers (investors) under contract, but a couple ended up backing out either due to the appraisal contingency, inspection, or lack of funds which are all common reasons. It is tough to go through the whiffs on these contracts, but I am understanding this is part of the process and need to really get my emotions out of it.
You are really hitting the nail on the head. I'm really kicking myself on being obsessed with the cashout and blinded by all of the other factors that come with the deal. I think once I get my footing again I'll do more research on better locations that appreciate and hold onto that appreciation with future growth.
The appraised equity really is putting me out and stuck with settling for what the going rate of the current market is. I am definitely happy I at least got started in my real estate investing journey and am taking away knowledge I would have not had if I just stumbled with the what-ifs. It is the downside of investing right now for me but know I'll be able to pick it up once I focus more on the correct fundamentals.
