Real estate investors working with private money lenders for house flipping Philadelphia want to know if they should invest now or wait for the economy to move into recession to see how much house prices drop. With more and more economists forecasting a recession in the next year or two, more real estate investors are wondering if they should be investing now or waiting. The BRRRR Strategy is a great way to keeping investing even when the housing market is cooling.
Has the housing market peaked? Housing values in Philadelphia failed to appreciate in the second and third quarters of 2018, but annually they’re still up over last year. The stock market could turn downward and it could even crash, but economists do not believe it will be anywhere near the scale of what happened in The Great Recession. How a turn in the stock market would affect the housing market is not totally clear. It could be more of regional impact, where cities with inflated housing values see the biggest drops while other areas see the kind of cooling down that Philadelphia has started to experience. We’re not forecasting, we’re just observing that it’s uncertain what will happen to the housing market in the next year or two.
Buy now or buy later?
Real estate investors who believe an economic shift is coming and housing values are going to drop fear that if they buy now they will regret it because they will miss out on the better deals that could be coming. This fear is based on the idea that money invested now won’t be available later when prices drop. There is an investing strategy that can help.
The BRRRR Strategy
The BRRRR acronym stands for “Buy, Rehab, Rent out, Refinance and Repeat,” which is one popular investing approach (although certainly not the only one—always do your due diligence to know which one is right for you). By following this strategy, the investor ends up with a rehabbed cashflowing property and recoups most (if not all) the money they put into it.
For example, let’s say you could buy a fixer-upper for $60,000 plus and you estimate that it needs $40,000 for rehab. There’s closing costs, hard money financing, and carrying costs. After the rehab you’d rent out the property and then go to the bank to refinance it. If it appraises for $140,000 and the bank will give you a mortgage at 75% LTV you would get $105,000. After repaying the hard money loan, depending on the variables, the whole deal could have cost you around $5,000. That’s pretty good given that you know have $35,000 in equity and $200 monthly cashflow. Since you recover most of the capital you put into the project (less about $5,000) you are ready for your next deal.
Summary
Rather than waiting to see if housing values are going to drop, by following the BRRRR Strategy you can rehab and rent out new properties, build equity and recoup most of the capital you put into the project so that you’re ready for your next deal.