Changes to the BRRRR Method in 2023
It’s no secret that an increasing number of real estate investors have been turning to the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat) as their go-to investing strategy. However, seasoned investors who have been BRRRRing for a while now might be wondering about the future of this method and how it will continue to evolve in the years ahead. While the BRRRR method has proven to be a reliable and effective strategy for many, changes in the market and industry as a whole could potentially impact its effectiveness in 2023 and beyond.
Here are 4 crucial factors that real estate investors should carefully consider as they navigate the ever-changing landscape of the BRRRR method:
Increased BRRRR Competition
As more investors turn to the BRRRR method as a means of generating income, the competition for good deals is increasing. Investors will need to be more creative and strategic in their approach to finding and securing investment properties.
Unfortunately, simply hopping on the MLS and buying a property at its listed value won’t work anymore. Higher interest rates result in more expensive debt service payments, leading to decreased cash flow. Unless a strategy is implemented for buying on-market deals at a lower price point, it’s unlikely that buying a property at its listed value will provide enough equity that will allow you to fix up the property, force appreciation, and refinance at a higher value to pull cash out.
Instead, investors need to learn how to go deeper in their sourcing strategy by purchasing off-market deals and properties at steep discounts, as well as evaluating what actually constitutes a good deal for a BRRRR.
With changes in the lending industry, it may become more difficult for investors to secure the financing they need to purchase and rehab properties. Investors will need to have a strong financial strategy in place and be prepared to adapt to changing lending practices.
For example, one change that has impacted investors is the extension of seasoning periods. The seasoning period refers to the length of time a bank requires a property owner to hold a property before accessing its equity through refinancing or restructuring. Banks are in the business of making money, and they make money through interest payments. If a property owner buys a property and refinances it immediately, the bank doesn’t make much money, other than the fees charged to create the loan.
In the past, the typical seasoning period was six months, but this has changed recently. Property owners who buy properties on conventional loans now have to hold these properties longer before refinancing. They have to wait a year now instead of six months, which could limit their ability to buy a BRRRR. If an investor has to wait an extra six months, that means six more months of expensive interest payments before they can refinance, and you not only have to find a way to cover those extra costs, but it diminishes your end returns.
Shifting Market Conditions
The housing market is always changing, and investors will need to stay informed about market trends and adjust their strategies accordingly. Changes in interest rates, supply and demand, and other market factors can impact the success of the BRRRR method.
In tougher economic times, there are often more situations where people may need to sell at a discount, creating potential opportunities for investors to find these discounted properties and execute an effective BRRRR strategy.
However, in 2023, the BRRRR method now requires more work than in previous years in order to be successful. Investors should be prepared to put in extra effort to find these deals, such as looking in new market areas, as it’s not a great time to rely solely on traditional sourcing methods.
Changes in government regulations and policies can impact profitability of rental properties and the ability to use the BRRRR method effectively. Staying up to date on changes in tax laws, zoning regulations, and other new federal and state policies that could impact their investments is imperative to not getting caught in an unexpected legal mess.
To stay ahead of the curve, experienced real estate investors need to re-evaluate how they are utilizing BRRRR. This may mean exploring new strategies, building strong relationships with lenders, and staying informed about changes in the market and industry.
Backflippers have a unique advantage when it comes to BRRRRs, as our suite of tools can help you save hours of time researching and analyzing potential properties, so you can close on deals quickly and spend more time sourcing new investments. Additionally, as a Backflip member, you have access to our borrower-friendly capital that you can use to not only finance, but also refinance your BRRRR property. With a streamlined, tech-enabled loan application, you’ll get financing options that are tailored to your strategy, and terms that allow you to focus on creating value for your business and reinvigorate your local community.
In conclusion, while the BRRRR method has been a successful strategy for many investors in the past, it is important for experienced real estate investors to stay informed and adaptable in the changing landscape in 2023. By being proactive and creative in their approach, investors can continue to generate income and build wealth through the BRRRR method.