The BRRRR method is a popular strategy in real estate investing. It combines house flipping and rental property investing into one. Here’s what it stands for:
Here’s a quick look at the method: first, buy a nasty property with a personal loan. Then flip it and rent it out to a good tenant who will pay on time. Afterward, you refinance your personal loan with a mortgage. You now own a rental property.
If all goes well, you now have a steady flow of cash from a tenant and a low mortgage payment. On top of that, you can sell the property when you want to sell it. There’s no pressure to sell since you’re effectively making income. Now you can wait until the market is good to sell the property.
But that’s not the only advantage. In some cases, this strategy doesn’t even require you to invest your own money. Ideally, the initial loan will cover the cost of the property and fixing it up. Plus, you can take advantage of long term capital gains tax, unlike house flippers.
Let’s walk through the steps of the BRRRR method for a close-up of the process.
Similar to house flipping, you’re looking for a property that’s way below market value. Remember, you’ll be putting money into this property to fix it up, but it shouldn’t require an exorbitant amount to repair. Take your time in choosing the right place.
Buying the appropriate property for the right price can be tricky, especially if it’s your first time. One of the most important factors to consider is the refinance (step 4). Banks usually only refinance a house at 75% of its fair market value.
Here’s an example of how you want the math to work out:
• You purchase a house for $65,000.
• You put in $10,000 of repairs.
• The value of the house becomes $100,000.
• When you refinance, the bank gives you a loan of $75,000.
• You can use the new loan of $75,000 to pay off the initial loan.
Of course, money doesn’t always work out this neatly. Sometimes repairs cost more than you anticipated. Sometimes the appraisal is lower than you expected (An appraisal is an estimate of how much your house is worth). The point is you want to do your homework before buying a property.
Here’s a basic math equation to help you calculate a purchase:
Remember to give yourself some buffer room. Most people tend to go over budget than under budget. This equation is only gives you a ballpark calculation.
It’s also important to keep in mind your long term goal when using the BRRRR method. You’re flipping the property, renting it out, and securing refinancing. In other words, don’t get lazy after you purchase a property. Get busy renovating.
Your first goal in rehab is making the property functional and livable. No one wants to rent from a slumlord. Plus, if you don’t put work into the property, chances are your appraisal will be low. Don’t skimp on rehab. Make sure it’s up to code and meets market standards.
There are a lot of options when it comes to renovating a property, but which ones do you choose? Here’s a dead simple principle to apply: make the renovations that will add more value than they cost. Let’s list some major examples:
• Add a spacious bedroom. If you add a bedroom you’re effectively increasing saleability. Instead of marketing a 1-bedroom rental, you can market it as a 2-bedroom rental. Also, people love having a spacious bedroom.
• Convert a half-bath to a full bath. Having a bigger bathroom (and more bathrooms) really appeals to renters and buyers. If you only have one bathroom consider adding another.
• Open up the kitchen. Nobody likes a cramped kitchen. Can you eliminate a wall and give it more countertop space?
• Add outdoor aesthetics. Paint trim, add window shutters, etc. These can seem insignificant, but they make a huge difference. People are human, and first impressions have an impact on renters and buyers.
Generally speaking BRRRR investors aren’t flipping luxury homes. Chandeliers, hot tubs, and granite countertops will cost more money than they make. Focus on items that give you more bang for your buck, such as
• Refinishing hardwood floors.
• Using two-tone paint.
• Adding tiles.
Now that your property is beautiful, it’s time to find a tenant. Banks usually will not refinance a property unless it’s occupied. So it’s natural to do this step first before refinancing.
The last thing you need is a lousy tenant who will skip payments and wreck the place. You poured a lot of time and money into this house and you need a steady flow of monthly cash. So screen your tenants carefully.
Always notify your tenants before an appraiser visits the property. You can usually leave a note and give them a courtesy call before the appraisal. Keep in mind, local laws may require different timings and methods for notifying tenants.
Make sure you give your tenants enough time to clean up their apartment. If they won’t be at home during the appraisal, kindly ask them to remove their pets during that time.
It is extremely important to understand the details of this step before purchasing any properties in step 1. As mentioned earlier, there are some things that can go wrong with this step. Do as much homework as you can ahead of time.
Different banks offer different seasoning periods. This is the period of time you must wait before refinancing a house. The shorter the better. In some cases, a bank is willing to refinance as soon as the property is appraised. In other cases, banks will make you wait a year.
Not every bank will offer cash out when you refinance your property. Some will only pay off the debt. You’re looking for a bank that offers cash out.
You will have to research and find a bank that’s right for you. Start by networking through other investors. If real estate investors are using certain banks, chances are you can use them too.
Once you find a bank you need to approach the lender in a professional manner. Remember, these people are giving you a loan. Make sure you’re taking all the information they need regarding the property.
If you execute the method appropriately, you can pull all your money out of a property and invest it in another property. The BRRRR strategy is great for buying solid rental properties with cash flow. Long term it’s great for accumulating rental properties.
Alternatively, you can sell your properties if you need money. This decision depends on your personal preferences and location. Some markets favor the rental business while others favor flipping houses. And there are pros and cons to both.
Selling a house brings in a small windfall that can be used in emergencies or to invest in more properties. The downside, of course, is that the property will no longer give you monthly cash flow from a tenant.
Keeping rental properties provides income for the rest of your life. You’ll eventually have to do maintenance and find new tenants. But this is significantly less work than flipping houses. As you get older you’ll probably want to make money from rentals rather than flipping houses.
You’ll have to decide what’s best for you.
Risks of the BRRRR Method
Like any investment, there are risks with the BRRRR strategy. Some of these were already mentioned, but let’s list them out.
• Costs and time for renovation could be high. Before buying a property try your best to estimate the costs that will go into renovations. These are guesses, so it’s wise to overestimate the costs of repairs. This way you have flexible money in case they cost too much.
• Banks may not approve refinancing. Always keep in mind that refinancing can be a difficult step. A part of the solution is to play the numbers game. Approach several banks. The more banks you talk to the more likely you’ll find one that approves refinancing.
• The appraisal could be too low. Appraisers are human and make mistakes. You could expect a house to be appraised at $200,000 and it might be appraised at $180,000.
Unfortunately, there’s not a lot you can do to change an appraisal. The best course of action is to have backup money in case the appraisal is low.
Before making any major decisions always do a lot of research and have backup money. The BRRRR strategy comes with a contingency plan. If you can’t refinance your loan you can at least sell the property. It’s not ideal since you’ll likely pay higher taxes, but it’s a way to lessen the financial blow.
Is the BRRRR method right for you?
Real Estate Could Be Dominant Asset Class This Decade
If you own real estate, you could be in for a decade of prosperity, says Ritholtz Wealth Management’s Ben Carlson.
After plunging during the Great Recession, homeownership rates are once again steadily climbing higher. This made Carlson believe that “There is a real possibility real estate could be one of the dominant assets of the 2020s.”
He acknowledges that many view owning a home as a terrible investment.
“There’s certainly an argument to be made for that claim when you consider all of the ancillary costs associated with homeownership — property taxes, upkeep, maintenance, insurance, renovations, landscaping, closing costs, etc. Owning a home involves more consumption than almost any investment on the planet,” says Carlson.
There’s data backing up that view, says Carlson, citing the Shiller home price index over the last 100+ years.
“From 1900 through 1996, the total real return for U.S. housing was 10.7%. That’s an annualized gain of 0.1% over the rate of inflation for 97 years! Then from 1997-2019, real housing prices were up 57% or around 2% per year. And those numbers include the fallout from the housing boom and bust.”
No doubt, real estate has lagged other asset classes of late.
Carlson, however, says there are four distinct reasons that he expects real estate to outperform for the rest of the decade.
1. Millennials — Even though the millennial generation is slower to hit milestones than previous generations, Carlson argues that they will eventually get around to accomplishing those milestones, like buying a house.
“Young people are settling down later in life because they are going to school for longer…But millennials were going to begin doing adult things eventually. That means buying houses, even if it comes later in life than it did for their parents. Millennials are now the biggest demographic in the country and will dominate the most common ages in the country for years to come.”
2. Interest rates — Interest rates are historically low, making houses more affordable.
“Lower borrowing rates have kept things more affordable than most people realize,” says Carlson. “If the Fed has their way it sounds like rates are going to stay low for a number of years.
3. Supply — There likely aren’t enough homes available to meet demand.
“The hangover from the bursting of the 2000s housing bubble is still being felt when it comes to the supply of homes in this country,” Carlson said. “New single-family homes for sale are finally on the rise but are still barely at the levels seen in the early-2000s while existing home inventories basically went nowhere for the entire 2010s.”
He says if new home construction doesn’t keep pace with demand, existing home prices will surge higher.
“If builders don’t start making more homes available, prices will keep rising to account for the increase in demand.”
4. Work from home — a massive shift that was sped up by the pandemic.
“There could still be a nasty transition period as employers and employees alike realize they don’t all need to live and work in big cities to be productive,” Carlson said. “Untethering employees from a specific location will allow them to move to more cost-effective areas and potentially change the housing dynamics for a large group of people.”
He doesn’t believe there will be a “death of big cities” like many are predicting. However, he does think that the pandemic has dramatically shifted employers and employee expectations for where work needs to occur. And if remote work becomes the norm, it could dramatically shift housing needs of millions of workers.
Coldwell Banker Reports Most Number of $1 Million+ Transactions Worldwide in 2019
Coldwell Banker affiliated agents conducted more transactions of homes priced at $1 million+ than any other national real estate brand in 2019.
MADISON, N.J., March 5, 2020 /PRNewswire/ — Today, Coldwell Banker Real Estate LLC, a Realogy (NYSE: RLGY) brand, announced that Coldwell Banker® affiliated agents conducted approximately 27,600 transactions of homes priced at $1 million or more in 2019, more than any other national real estate brand. On average in 2019, this equates to approximately $144.4 million in sales every day by the Coldwell Banker brand in $1 million or more luxury homes, with an average sales price of $1.9 million.
All $1 million+ properties listed with a Coldwell Banker affiliated agent have access to a best in class suite of marketing tools under the Coldwell Banker Global Luxury® program. Affiliated agents in this program are equipped with a wealth of knowledge and resources to succeed in a competitive luxury market. These resources include: the brand’s distinguished luxury certification course; an alliance with the Institute of Luxury Home Marketing, which provides industry insights for the program’s existing research assets like The Report: 2020 Global Luxury Market Insights, A Look At Wealth: Millennial Millionaires; and a best-in-class domestic syndication package for luxury properties plus international syndication of $2 million+ listings through the program’s relationship with List Hub Global.
Ricardo Rodriguez, the top-producing Global Luxury Property Specialist with Coldwell Banker Residential Brokerage in Boston, Mass., takes pride in the brands tools like “The Report,” that help him stay up to date on industry trends. He commends the Coldwell Banker Global Luxury program for always making the latest industry data easily available and believes that this knowledge has given him a winning edge with clients.
Another powerhouse real estate group, The Kehrig Team, made the jump from Compass to Coldwell Banker Real Estate in early 2020 for the brand’s committed leadership and focus on agent success.
Click to Tweet: We’re the best in the business for another year in a row! @ColdwellBanker affiliated agents conducted approximately 27,595 transactions of homes priced $1 million+, in 2019, more than any other national real estate brand https://blog.coldwellbanker.com/1-million-transactions-2019/
“Knowledge is power. Industry professionals need access to the best tools to help them be successful, especially in today’s competitive landscape. As it enters its fourth year, the continued growth of the Coldwell Banker Global Luxury Program can be attributed to our affiliated agents’ tenacity for learning, impeccable service to clients, and support from all levels of leadership. We’re excited to help create opportunities for Coldwell Banker Luxury Property Specialists and their high net worth clients.”
– Ryan Gorman, president and CEO of Coldwell Banker Real Estate LLC
“The Coldwell Banker Global Luxury® program stands out as a premier marketing program for Coldwell Banker Real Estate, connecting our affiliated agents to the most prestigious and noteworthy clientele. Now more than ever, the talent in the Coldwell Banker network continues to show its expertise and value. Understanding the complexities of selling high-end homes is a skill that few possess – but time and again our agents prove their dedication to the details and exemplify what it means to be service-oriented.”
– Craig Hogan, vice president of luxury for Coldwell Banker Real Estate LLC
If you would like to know more about what it means to be a Coldwell Banker Global Luxury Specialist, visit cbglcareers.com.
About Coldwell Banker Global Luxury®
The Coldwell Banker Global Luxury® program legacy traces its roots to 1933 and has been a world leader in luxury real estate since. Coldwell Banker Global Luxury Property Specialists are an exclusive group within the Coldwell Banker organization, making up under ten percent of independent sales associates affiliated with the brand worldwide. Coldwell Banker affiliated agents conducted 27,595 transactions of homes priced at $1 million or more in 2019, more than any other national real estate brand. This equates to $144.4 million in sales every day with an average sales price of $1.9 million in this category. Coldwell Banker, the Coldwell Banker logo Coldwell Banker Global Luxury and the Coldwell Banker Global Luxury logo are registered marks owned by Coldwell Banker Real Estate LLC. Each franchise is independently owned and operated.
About Realogy Holdings Corp.
Realogy Holdings Corp. (NYSE: RLGY) is the leading and most integrated provider of U.S. residential real estate services, encompassing franchise, brokerage, and title and settlement businesses as well as a mortgage joint venture. Realogy’s diverse brand portfolio includes some of the most recognized names in real estate: Better Homes and Gardens® Real Estate, CENTURY 21®, Coldwell Banker®, Coldwell Banker Commercial®, Corcoran®, ERA®, and Sotheby’s International Realty®. Using innovative technology, data and marketing products, best-in-class learning and support services, and high-quality lead generation programs, Realogy fuels the productivity of independent sales agents, helping them build stronger businesses and best serve today’s consumers. Realogy’s affiliated brokerages operate around the world with approximately 190,000 independent sales agents in the United States and more than 112,000 independent sales agents in 113 other countries and territories. Recognized for nine consecutive years as one of the World’s Most Ethical Companies, Realogy has also been designated a Great Place to Work and one of Forbes’ Best Employers for Diversity. Realogy is headquartered in Madison, New Jersey.
|Athena Snow||Rachel Braude|
|Coldwell Banker Real Estate LLC||G&S for Coldwell Banker Real Estate LLC|
|[email protected]||[email protected]|
SOURCE Coldwell Banker Global Luxury
U.S. Home Flipping Increases To Eight-Year High In 2019 While Returns Drop To Eight-Year Low
IRVINE, Calif., March 5, 2020 /PRNewswire/ — ATTOM Data Solutions, curator of the nation’s premier property database and first property data provider of Data-as-a-Service (DaaS), today released its year-end 2019 U.S. Home Flipping Report, which shows that 245,864 single family homes and condos in the United States were flipped in 2019, up 2 percent from 2018 to the highest point since 2006.
The number of homes flipped in 2019 represented 6.2 percent of all home sales in the nation during the year, an 8-year high. That was up from 5.8 percent of all home sales in 2018 and from 5.7 percent in 2017.
While flipping activity rose, profit margins continued dropping. Homes flipped in 2019 typically generated a gross profit of $62,900 nationwide (the difference between the median sales price and the median paid by investors), down 3.2 percent from $65,000 in 2018 year and 6 percent from the post-recession peak of $66,899 in 2017.
“Home-flipping profits across the U.S. dropped again in 2019 as the business of buying and selling houses absorbed its worst year since the housing market was mired in the fallout from the Great Recession. This happened as the cost of buying properties continued to rise faster than gains on resale,” said Todd Teta, chief product officer at ATTOM Data Solutions. “That’s not to say that the home-flipping industry is tanking or losing its allure for investors because home flipping rates are higher than they’ve been in eight years. But profits did continue to decline again for investors.”
The typical gross flipping profit of $62,900 translated into a 40.6 percent return on investment compared to the original acquisition price. That was down from a 45.8 percent gross flipping ROI in 2018 and down from 51.4 percent ROI in 2017. The latest typical return on home flips stood at the lowest point since 2011.
“While the gross profit figures do not include the cost of rehabbing the properties, which will serve to reduce profitability, the measure itself is something that Roc Capital focuses on heavily in its underwriting process. Roc delinquency figures have remained static year over year, however we do see a broad increase in nationwide lis pendens filings by lenders in the fix and flip space that exceeds the volume growth evident in this report,” said Maksim Stavinsky, co-founder and COO of Roc Capital.
“For 2019, the YoY increase in lis pendens filings in this space was greater than 50 percent, with most of that increase occurring in the second half of the year, and the first two months of 2020 shows a further 30 percent or greater increase in lis pendens filings over 2019. While actual losses from delinquencies have been low across the space, historically rising delinquencies have been a precursor to losses, so prudent underwriting is more important than ever in this environment.”
Home flipping rates up in 64 percent of local markets
Home flips as a portion of all home sales increased from 2018 to 2019 in 122 of the 190 metropolitan statistical areas analyzed in the report (64.2 percent). The largest annual increases in the home flipping rate came in Laredo, TX (up 103.5 percent); Raleigh, NC (up 59.8 percent); Charlotte, NC (up 44.1 percent); Fort Smith, AR (up 43.2 percent) and Columbus, GA (up 40.5 percent). Metro areas qualified for the report if they had a population of at least 200,000 and at least 100 home flips in 2019.
Aside from Raleigh, NC, and Charlotte, NC, the biggest annual flipping-rate increases in MSAs with a population of 1 million or more were in Atlanta, GA (up 39.1 percent); San Antonio, TX (up 37.2 percent) and Tucson, AZ (up 34.2 percent).
The biggest decrease in annual flipping rates among MSAs with a population of 1 million or more were in Seattle, WA (down 16.9 percent); Indianapolis, IN (down 9.1 percent); Grand Rapids, MI (down 8.0 percent); Rochester, NY (down 5.9 percent) and Baltimore, MD (down 4.8 percent).
Home flips purchased with financing dip while those bought with cash climb
Nationally, the percentage of flipped homes purchased with financing dipped in 2019 to 43.8 percent, from 45.9 percent in 2018, but was up from 42.9 percent two years ago. Meanwhile, 56.2 percent of homes flipped in 2019 were bought with all-cash, up from 54.1 percent in 2018, but down from 57.1 percent in 2017.
Among metropolitan statistical areas with a population of 1 million or more and sufficient data to analyze, those with the highest percentage of flips purchased with financing in 2019 included Virginia Beach, VA (67.6 percent); Seattle, WA (55.9 percent); San Diego, CA (53.7 percent); Boston, MA (53.6 percent) and San Francisco, CA (52.9 percent).
Typical home flipping returns drop closer to post-Recession low points
Homes flipped in 2019 were sold for a median price of $217,900, with a gross flipping profit of $62,900 above the median purchase price of $155,000. That gross-profit figure was down from $65,000 in 2018 and from $66,899 in 2017. With purchase prices rising faster than profits on investor-bought homes, the 40.6 percent return on median sales prices versus purchase prices was down from 45.8 percent in 2018 and from the post-Recession peak of 51.7 percent in 2016.
Among the 53 markets with a population of 1 million or more, those that saw the smallest gross flipping profits in 2019 included Raleigh, NC ($23,000); San Antonio, TX ($31,756); Phoenix, AZ ($33,641); Las Vegas, NV ($34,300) and Houston, TX ($36,375).
In those same markets, the lowest 2019 returns on investment on the typical sales were in Raleigh, NC (10.5 percent); Austin, TX (13.7 percent); Las Vegas, NV (14.7 percent); Phoenix, AZ (15.1 percent) and Dallas, TX (18.7 percent).
Average time to flip nationwide is 178 days
Home flippers who sold homes in 2019 took an average of 178 days to complete the flips, down slightly from an average of 179 days for homes flipped in 2018.
Percent of flipped homes sold to FHA buyers increases
Of the 245,864 U.S. homes flipped in 2019, 14.4 percent were sold to buyers using a loan backed by the Federal Housing Administration (FHA), up from 13.1 percent in 2018, but down from 16.2 percent in 2017.
Among the 190 metro areas with a population of at least 200,000 and at least 100 home flips in 2019, those with the highest percentage of 2019 home flips sold to FHA buyers — typically first-time homebuyers — were Stockton, CA (29.9 percent); Merced, CA (27.7 percent); Visalia, CA (27.4 percent); York, PA (27.4 percent) and Lakeland, FL (26.4 percent).
Thirty-four counties had a home flipping rate of at least 10 percent
Among 678 counties with at least 50 home flips in 2019, there were 34 counties where home flips accounted for at least 10 percent of all home sales last year. The top five were Portsmouth City/County, VA, in the Virginia Beach metro area (13.9 percent); Prince George’s County, MD, in the Washington, D.C., metro area (13.5 percent); Macon County, TN , in the Nashville metro area (13.4 percent); Shelby County, TN, in the Memphis metro area (12.5 percent) and Clayton County, GA, in the Atlanta metro area (12.3 percent).
Nine zip codes had a home flipping rate of at least 25 percent
Among 6,675 U.S. zip codes with a population of 5,000 or more and at least 10 home flips in 2019, there were nine zip codes where flips accounted for at least 25 percent of all home sales last year. The top five were 78538 in Hidalgo County (McAllen), TX (34.3 percent); 35005 in Jefferson County (Birmingham), AL (29.1 percent); 93212 in Kings County, CA (south of Fresno) (27.8 percent); 38109 in Shelby County (Memphis), TN (27.3 percent) and 10467 in Bronx County, NY, (part of New York City) (26.3 percent).
High-level takeaways from the fourth-quarter 2019 dataset:
- The 56,945 home flips in the fourth quarter of 2019 were completed by 24,096 investors, a ratio of 2.36 flips per investor.
- The share of homes flipped in the fourth quarter of 2019 that were purchased by investors with financing represented 39.6 percent of all homes flipped in the quarter, down from 44.2 percent in the previous quarter and from 45.9 percent in the fourth quarter of 2018, to a three-year low.
- The median gross flipping profit on home flips in the fourth quarter of 2019 was $62,500, which represented an average 39.1 percent return on investment (percentage of original purchase price), down from 40.1 percent in the previous quarter, to an eight-year low.
- Home flips completed in the fourth quarter of 2019 took an average of 170 days, down from 174 days in the fourth quarter of 2018.
ATTOM Data Solutions analyzed sales deed data for this report. A single-family home or condo flip was any arms-length transaction that occurred in the quarter where a previous arms-length transaction on the same property had occurred within the last 12 months. The average gross flipping profit is the difference between the purchase price and the flipped price (not including rehab costs and other expenses incurred, which flipping veterans estimate typically run between 20 percent and 33 percent of the property’s after repair value). Gross flipping return on investment was calculated by dividing the gross flipping profit by the first sale (purchase) price.
About ATTOM Data Solutions
ATTOM Data Solutions provides premium property data to power products that improve transparency, innovation, efficiency and disruption in a data-driven economy. ATTOM multi-sources property tax, deed, mortgage, foreclosure, environmental risk, natural hazard, and neighborhood data for more than 155 million U.S. residential and commercial properties covering 99 percent of the nation’s population. A rigorous data management process involving more than 20 steps validates, standardizes and enhances the data collected by ATTOM, assigning each property record with a persistent, unique ID — the ATTOM ID. The 9TB ATTOM Data Warehouse fuels innovation in many industries including mortgage, real estate, insurance, marketing, government and more through flexible data delivery solutions that include bulk file licenses, property data APIs, real estate market trends, marketing lists, match & append and introducing the first property data delivery solution, a cloud-based data platform that streamlines data management – Data-as-a-Service (DaaS).
Data and Report Licensing:
SOURCE ATTOM Data Solutions
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