I must admit that BRRRR investing is one of my favorite real estate investing strategies! It’s BRRRR or bust, isn’t it? But what if this investment strategy is not for you?
Maybe you work long hours, travel often, or have a young family at home. Maybe you don’t have the time (or desire) to navigate the challenge of searching below-market deals, negotiating hard money or private money loans, dealing with contractors, and refinancing to get your money back. .
Does this mean that you can never invest in real estate? Definitely not! There are still ways to buy a ready-to-rent property and build your wealth. However, doing so will cost you more. Oh, dilemma!
But, let me ask you this question: If you plan to keep the property forever, does it really matter Should you choose to pay retail for a property from the MLS or a turnkey provider?
Know your risks in buying retail priced property
A few years ago, I started building my buy-and-hold portfolio with turnkey providers or paying retail close to the MLS. I was working full time, had a young family at home, was the guardian of two family members, and had an aging mother who needed care. I was lighting the candle at each end (and a few times in the middle).
I knew that real estate was a proven investment model that almost anyone could replicate with success. And I was determined to get into real estate to build my family’s wealth and financial independence.
Fast forward a few years, I’ve changed my investment strategy to an almost all-BRRRR model. Let me tell you why. The benefits you get with BRRRR investing are massively supercharging all three The Four Principles of Conservative Investing,
- capital preservation Most if not all of your money can be refinanced back.
- cash flow By giving more returns with most of your money from one transaction.
- Appreciation By forcibly taking over the property’s equity (instead of waiting for the market).
Now, I don’t regret one bit in real estate paying retail prices.
However, you need to be more diligent about your market and assets to reduce your risk. Because the biggest difference with a retail purchase is that you are risking your personal capital into the project rather than forced equity in the property as you would be in BRRRR. However, you can still pull all these levers of conservative investing even though You buy the property retail.
let’s explore!
Connected, 3 Reasons My First (Retail-Price) Bargain Has Become My Favorite
how to reduce that risk
Ask any seasoned investor how to minimize risk when buying property, and you will get a long checklist of do’s and don’ts. Basically, though, there are three major ways to reduce your downside when buying a property (especially when paying retail prices).
capital preservation
You want to be in a market that supports your investment strategy. The number 1 way to stack the investing cards in your favor is to evaluate your market. and submarkets for the following criteria:
- Decreased unemployment (more people have jobs to pay your rent)
- increasing population (hiring more people)
- good job diversity (should an employer be poof, your tenants have other jobs to secure)
- Good supply and demand (rent is really needed)
- located in a B-Class Submarket
When you have more of your own capital invested in a deal, research how many ways you can get out of the asset if you need to, such as:
- long hold
- sell retail
- sell to an investor
- Sell to your tenant with the option to lease
- convert to a short term rental (vacation or corporate)
The more exit strategies available to you, the better you are able to protect your capital.
cash flow
Cash flow is queen! Still, I see many investors sacrifice cash flow for the hope of future appreciation — a very risky proposition if you don’t know what you’re doing. Cash flow will maintain your portfolio in a down market and give you options. When buying retail, make sure your income comfortably exceeds all expenses, such as:
- Underwriting that rents are at least 125 percent of the property’s expenses (known as the DSCR or debt service coverage ratio). When your DSCR is 1.25 or better, you’ll have a better chance of continuing to buy properties with financing.
- Securing a long-term, fixed-rate loan on the property to lock in low costs so you’re not forced to sell in a down market.
- Accounting for all owner expenses (including potentially losing the homestead exemption) such as HOA, utilities, insurance and taxes.
- Appropriate reserves to be set aside for vacancy, maintenance and capital expenditure. Most buy-and-hold investors go south in their analysis No Segregation of appropriate stores. You will have a vacancy. The water heater will shut off after a day of being turned off. Tenants will ruin the dishwasher or refrigerator. it’s a matter of If No When, Also, if you plan to hold forever, you will need to replace the mechanicals at some point during your hold period.
Connected: Protect your real estate investments and finances with strategic reserves
Appreciation
When you are buying property retail, appreciation is usually what the market will give you, and that is icing on the cake. Know that any equity locked up in the property (your down payment plus market appreciation) is illiquid. You can only access equity through a HELOC or sale. Therefore, evaluate the value of your assets periodically to see when harvesting equity to get up to speed with your money makes sense.
a case study
My first out-of-state rental was in a solid B-class area of Indianapolis, Ind. I bought the property for $120,000 and rent it for $1,250. After setting aside all expenses and reserves, I was clearing about $250 a month in cash flow. Was this $250 a month life changing money for me? Not really, but I sure as heck wasn’t complaining! Over time my plan was to add over 20 sources of income this way—and keep growing.
I quickly realized that the biggest risk with buying property retail was my ability to weather the housing market. Should the market drop even 10 percent, I would have lost almost 50 percent of my capital in that Indianapolis deal!
But… can I In fact lose that capital?
If I sell the asset in that down market, I will only lose that capital. This means that the cash flow covered my expenses on the property. And because I had a long-term, fixed-rate loan, I wouldn’t be forced to sell. It’s not just blind luck.
In the case of this Indianapolis property, the home’s value actually increased by $148,000 in two short years. I took out $23,000 after expenses on the sale, almost double my initial investment of $24,000 with the appreciation return alone. (For grins, if I’d BRRRR’d this project, I’d probably have cleared closer to $54,000 on a $0 downpayment).
You See, i engineered my luck by buying a B class property In a solid rental market that cash flows well. I also had a fair chance for appreciation, and more importantly, when I could sell it.
conclusion
Buying property retail is a viable option for investing in real estate, especially if you don’t have the desire or time to invest through a different model like BRRRR. Remember, no one will care about your money as much as you do. Buying property retail means you have to be clever in securing a good deal in a larger market.
How has been your experience of buying retail property?
Share with a comment below!
Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
