Are you using the BRRRR strategy? Remember this advice when rents fall

  • Kumar Sadaram has a real estate portfolio of over 50 properties.
  • Sadaram used the BRRRR method, which may become less viable in certain markets.
  • He shared with Insider this week how to reduce downside risk while using the strategy.

The BRRRR method – that is, buy, rehab, rent, refinance, repeat – is a proven method of real estate investing that has helped countless investors scale up their portfolios.

That’s how Kumar Sadaram, a New Jersey-based investor, has bought more than 50 properties since 2012.

But it’s a different market environment today than it was a decade ago. Home prices finally bottomed out in 2012 after the mid-2000s housing bubble, and investors have been able to ride a wave of price appreciation ever since.

Today, house prices are falling. After rising 45% nationwide — and even more in certain areas of the country — from January 2020 to June 2022, home values ​​fell 4% from June to October 2022, according to the S&P CoreLogic Case-Shiller US National Home Price NSA- the index. Rents are also falling in markets around the US.

case shiller housing price index

The trajectory of US house prices since 2000.

Federal Reserve Bank of St. Louis

Falling home prices and rents create a frightening environment for real estate investors, especially those looking to scale up using strategies like the BRRRR method. Falling rents put investors at risk of defaulting on their mortgage payments; and falling home prices mean investors can pull less money out of their properties when refinancing, and can cancel out some of the value created from renovations.

But Sadaram remains convinced that the BRRRR method is the best way to build a portfolio, even in today’s market. He still uses it himself, he told Insider.

“We should not be afraid of what happens in the market,” he said. “No one has a crystal ball, no one will ever be able to tell where the bottom is.”

Sadaram’s best advice for using the BRRRR method in today’s market

However, there are some things investors need to keep in mind in the bearish environment, he said.

For example, Sadaram said to stay away from markets that have seen the highest price appreciation in recent years. Instead, focus on regions that are more under the radar, he said. For Sadaram, it is the southern part of New Jersey.

“You have to look at the markets that haven’t been the poster children of the post-COVID world,” he said. “It’s not the Phoenix market, it’s not the Florida markets, it’s not the Austin, Texas market. But there are still a lot of markets in the country where things haven’t gone crazy.”

Themes to identify in an attractive market include a healthy economy where rent levels are supported by the area’s median income, he said.

He then said that looking at markets where rents have not increased much in recent years will help prevent downside risk.

“I invest in markets – and also advise people to enter markets – that are very reasonably priced, where the downside is very small,” he said. “The markets I’m not talking about, the rents aren’t ridiculous — they haven’t gone up from $1,000 to $2,000, like in a lot of Florida markets I’ve seen.”

According to data from Rent., some of the most stable markets over the past year include Philadelphia, Pennsylvania; Washington DC; Dallas, Texas; and Boston, Massachusetts.

As long as the guarantee on a deal is good and investors can break even on a property’s monthly costs — and the property is in an area with very low downside risk — Sadaram said he recommends going ahead with the purchase. He said to use the 1% rule, where the monthly rent should be 1% of the cost of the property.

While many investors aim for positive monthly cash flow on properties, Sadaram said the opportunity should come down the road when interest rates are lower.

“If you enter the market today, where it at least breaks with the very high financing costs, you will eventually have the ability to do a refinance at any time and make the deal better for you from what it is today,” he said. “But if the deal itself isn’t self-sustaining for you today, it raises questions about how you’re going to sustain for an extended period of high interest rates.”

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