In the world of real estate investing, the acronym BRRRR means more than just a sound you'd make in the dead of winter. Instead, the five-letter sound stands for buy, rehab, rent, refinance, repeat. Back before the COVID-19 pandemic came and flipped the real estate landscape on its head, BRRRR was the most reliable way for many investors to make a buck on the properties in their portfolio. Now, thanks to a combination of interest rate hikes, decreasing property values, and changing tax formulas, BRRRR is leaving many real estate investors out in the cold.
While that may be bad news for them, it looks like it stands to spell relief for buyers who have been priced out of the real estate market by investors who have quickly gobbled up many of the properties that would've traditionally gone to first time homebuyers. Here's what a few of the pros we spoke with say it will mean for the future of real estate.
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What Is BRRRR?
According to Doug Carey, president of Wealthtrace, BRRRR is a type of real estate investment strategy that involves purchasing a distressed or undervalued property, renovating it to increase its value, renting it out to generate income, refinancing the property to access its increased equity, and using the proceeds to repeat the process with another property.
This became a popular strategy for real estate investors because it offers several advantages, explains Carey. "First, it allows investors to acquire properties at a discounted price, which can lead to significant gains when the property is eventually sold," he says. "Second, the renovation phase allows investors to add value to the property, which can increase its rental income and overall value."
Third, in the rental phase, investors can make a steady stream of income to help cover the property's expenses and generate a return on investment. "Fourth, refinancing the property can allow investors to access the equity they have built up in the property, which can be used to invest in more properties and further grow their real estate portfolio," says Carey.
How BRRRR Hurts the Market
While it may sound like a win-win — investors are able to fix up homes that may have been bringing local property values down while renters get access to freshly rehabbed living spaces — it has actually reduced the available low-priced inventory for buyers, which often would've gone to lower-income or first-time buyers.
As a double whammy, once these properties have been remodeled and are finally back on the market and ready to rent, they are normally listed at a much higher rate than they would have been before, pricing many of those same people out of the rental market as well.
The Pandemic Has Lowered the Profitability of BRRRRs
The real estate market is at an all-time high, according to Crissi Cole, founder and CEO of Penny Finance, thanks to the buying frenzy created by COVID-19. "It feels like everyone in America bought a house. Why? Rates were low low low, so money was cheap," she said, adding that those lower rates gave investors even more buying power thanks to the lower monthly mortgage payments on their new rental properties. Once the inventory dried up, people were offering way above asking price to be able to get into a new home. "That drove home prices up," she continues, explaining how the increased values went across the board, even hitting those typically more affordable properties. "So, the fixer-upper that you could buy five years ago for $300,000 is now $500,000 to $800,000 depending on the location."
On top of that, Cole says that rate hikes caused mortgage payments to go up along with them, which meant that investors needed to charge higher rental payments. "Who can pay more in rent when wages haven't kept up? There is less money to be made because of this."
In addition to all that, inflation has also hurt investors. "The cost of construction and renovation materials has risen in recent years, which can make the rehab phase of the BRRRR strategy more expensive and reduce potential profit margins," adds Carey.
Renters Can’t Afford to Keep up With Costs Either
"We are in a really tough market for both buyers and renters," Cole explains. "The real estate market is starting to slow, but if you are looking in desirable locations, home prices are still really high, and there is very little supply." In those more high-demand areas where prices have continued to climb, the rental market has had to follow. "For renters, landlords have to make a mortgage payment, and they are passing on the cost of their higher interest rates to renters," she continues, adding that New York City saw a 21 percent increase in rents last year!
Some Good News for Buyers
As to just how much benefit hopeful homeowners will see with many investors pulling back on this process, Carey says that still remains to be seen. He believes that it should help with inventory problems, which will also help drive down home prices since people won't be so quick to pick up those distressed properties, but it's not the fix that the country needs right now.
"The current housing market is still very tough for those who are looking to buy," he says. "Home prices have not fallen back to pre-pandemic levels, but mortgage rates have more than doubled. Until home prices fall much further, it will still be very difficult and expensive for first-time homebuyers."
Fortunately, the news isn't all doom and gloom. According to Cole, there are plenty of programs people can take advantage of right now to literally help get their foot in the front door. "The good news is that there continues to be a wide variety of first-time homebuying programs in the market that allow you to put less than 20 percent down on a property," she says. "The Biden administration has also put into place many tax breaks for homeowners that can help ease the burden of high interest rates and high home prices."
All of these changes combined with what looks to be a promising spring selling season may finally help buyers find their way into their dream home.