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The Upcoming BRRRR Bubble – 2021 and Beyond

After being a Real Estate Investor and Consultant in the Indianapolis market for nearly a decade, I have helped several real estate investors build portfolios of residential rental properties. The Buy, Rehab, Rent, Refinance, and Repeat (BRRRR) investment model was been around for decades but has recently been popularized by the Bigger Pockets community and various investors and authors. The BRRRR model is quite powerful and can be very effective, but inexperienced investors tend to overleverage their positions and do not realize the danger they put themselves in.

What is BRRRR

The basic concept of BRRRR investing is to

  • BUY – Identify and purchase properties at costs well below market value. The greatest position for most BRRRR properties will have enough cash to acquire the property without a loan. These properties will likely require some level of renovations.
  • REHAB – Force equity into the property by renovating and/or upgrading the property. Many BRRRR investors will pay cash for these activities as opposed to taking on interest-bearing debt.
  • RENT – Find a suitable tenant to move into and lease the property after rehab is complete. This puts the property into an income-producing state.
  • REFINANCE – Borrow money against the property to liquidate some or all of the initial investment. Many investors hope to cash out the majority of their investment and possibly mortgage more than their initial investment.
  • REPEAT – Recycle the cash from the refinance for another project.

Problems with the BRRRR Method

Many new real estate investors do not understand the ongoing costs of owning, managing, and maintaining rental properties. Some investors will mortgage their property and nearly the entire rental price, leaving very little room for cash flow or build up cash reserves for future problems. While the property may generate enough income to pay the Principal, Interest, Taxes, and Insurance (PITI,) it may not be enough to cover any other problems. Frequent problems faced with rental properties are

Properly Positioning your Investment Portfolio

I’ve worked with dozens of real estate investors in our market to educate and best position them for success. They have to understand the real costs of owning rental properties as well as the amount of leverage being used. When properly positioned, I have seen many investors make a 100+% Return on long-term Invested capital in 5-7 years, but I have also seen investors who were over-leveraged and had to sell their rental properties at a loss in just a year or two.

When building a BRRRR deal, the most important things to consider are

The Upcoming Bubble

With the recent Covid-19 pandemic, we are seeing reports of millions of Americans that are still unemployed, millions of homeowners in mortgage forbearance, and millions of tenants several months behind on rent and utilities. Many of these tenants live in rental properties with mortgages and many of those investment properties maxed out their loan to value opportunities when refinancing the properties. I expect that we will see millions of investors lose their homes to foreclosure over the next couple of years as another housing market bubble pops. This will not likely by as bad as the previous market collapse, but it will create opportunities for those who are best prepared.

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