Yes, many pundits are still warning about a recession in 2024. 

Here’s one example. Richard Duncan did a Macro Watch fourth-quarter update. He pointed out that between 1952 and 2009, all nine times total credit (adjusted for inflation) grew by less than 2%, and the economy went into a recession. 

ITR Economics also predicts a recession in 2024 based on a few key indicators. They have been over 94% accurate one year out since 1985. 

Passive investing pro Jeremy Roll believes a 2024 recession is virtually certain. He believes we’ll see: 

• Job losses
• Consumer spending decreases
• Stock market decreases (most likely crash)
• Federal Reserve rate cuts. It’s very difficult to predict the amount and degree of Fed rate cuts, but typically, recessions do cause the Fed to cut rates to help stimulate the economy. Based on past recessions, the amount of rate cuts that typically occur during the first 12 months once rate cuts begin is 100-125 bps, with additional rate cuts thereafter.

But Does the Economy Even Matter When Making Investments? Buffett Says No

Investing gurus Warren Buffett and the late Charlie Munger have insisted they never based an investment or divestment decision on the economy. They simply sought out solid, undervalued companies with durable products and great management teams.

Though their record shows this is generally true, we know one time when they deviated from this principle. In 2008, Berkshire Hathaway invested $5 billion in Goldman Sachs. This was in September 2008, at the very heart of the financial crisis. 

But they didn’t invest in common equity. They invested in preferred equity. And they made a small fortune from this investment. 

What Are We Up To? 

My firm has been saying for years that we do the same thing in every economy. When multifamily syndicators swung for the fences (and hit it out of the park) in the late teens and early 2020s, we were swinging for singles and doubles. (We cheered them on while they made a small fortune for their investors.) 

When multifamily syndicators swung for the fences (and got into big trouble) a little later in that cycle, we were still swinging for those same singles and doubles. 

But investing in preferred equity is our one exception. 

We are in an unusual window, offering asymmetric risk and return potential. We sincerely believe this is a rare and short window to lower investors’ risk and lock in higher-than-usual projected returns with preferred equity. 

If you’ve been reading my posts for a while, you know why we love preferred equity. Here is an abbreviated list: 

• Immediate cash flow, future upside, and shorter hold time.
• Payment priority ahead of common equity.
• Lower downside risk exposure than common equity.
• No lien, but often gets a personal guarantee from the sponsor.
• Receives depreciation tax benefits (as negotiated). 
• Negotiated control rights in case something goes wrong.
• Negotiated MOIC floor-to-juice returns if taken out early.

Here’s the Takeaway—With a Huge Caveat

I’m going to recommend three assets for your consideration as we teeter on the verge of a potential recession. 

Stick with the basics

In general, I recommend investors do the same thing they would ideally do in a great (or awful) economy: Invest in recession-resistant assets acquired below their intrinsic value (often from mom-and-pop/distressed operators) and now managed by professional operators.

As far as asset types, we like mobile home parks, RV parks, self-storage, industrial parks, and more. 

Look for built-in equity at acquisition

I also recommend acquiring unusual investments with significant built-in equity at initial acquisition. I’m borrowing from Jeremy Roll’s playbook—he taught us about this asset type. 

Recently, we invested in a tax-abated multifamily property. The operator negotiated a complex structure that provided 100% property tax abatement in a high-property tax state. 

This asset was acquired for $80 million. The lender’s appraisal at closing (with the tax abatement in place) was $113 million. The equity invested at closing was $26 million. This equity grew by $33 million (over 126%) on day one, according to the new appraisal. (No, this was not a typo.) 

That type of investment offers nice potential in any market. More importantly, in uncertain markets like these, it provides a wonderful margin of safety between net income and debt payment (long-term, fixed, and interest-only for years, by the way). This margin should be able to absorb financial and operational shocks (like insurance increases, flat rental rates, increased vacancy, and more), but there are no guarantees.  

Invest in preferred equity

Obviously, I’m a big fan. And I’ve discussed why in several prior posts, like this one, another one, and a third.  

Here’s the caveat I haven’t often discussed: We have identified four types of preferred equity: 

• Acquisition (we do this)
• Recapitalization of existing property (we do this)
  • Filling a gap behind new senior debt.
  • Providing liquidity without having to replace the senior debt.

• Development (we haven’t done this, and we don’t plan to).
• Rescue capital (we haven’t done this, and only would in very special circumstances).
  • Buying a rate cap.
  • Refilling debt service reserves.
  • Capital improvements to boost NOI with the hope of refinancing later.

I could write a post on these four types, and maybe I will. But suffice it to say that not all preferred equity is created equal. 

For example, I don’t recommend you get lured by the siren’s song of rescue capital. Sure, it could work out okay. But remember that you’re not looking for the highest returns. You’re looking for the highest risk-adjusted returns. (If you want high returns, why not just play the lottery?) 

Final Thoughts

If a 2024 recession materializes, you may find additional opportunities to buy distressed commercial and residential real estate assets. But don’t count on it being a repeat of 2008. It’s hard to imagine a scenario like that playing out again this time. 

As for us, we’re not holding our breath for these big bargains to pan out in commercial real estate. With over $400 billion sitting on the sidelines, waiting to pounce on these assets, we doubt many of these opportunities will materialize, at least not for most of us.

Get the Best Funding

Quickly find and compare investor-friendly lenders who specialize in your unique investing strategy. It’s fast, free, and easier than ever!

Laurel Durkay, Morgan Stanley head of global listed real assets, joins ‘The Exchange’ to discuss the effects rates are causing on the real estate industry, REITs that cover alternative sectors and more.

Last week, Realtor.com published another version of its ‘‘magic number’’ forecast. The number in question is the mortgage rate number low enough to ‘‘unfreeze’’ the real estate market. 

We know that the market has been in something of a gridlock for over a year now:

• Home prices are very high and keep rising.
• Mortgage rates are high and aren’t showing much of a downward trend.
• There aren’t enough homes to go around, especially those that are remotely affordable.

Something has to give. 

The consensus is that this something is mortgage rates—they’ll have to come down substantially for the housing market to get back to anything resembling normality. 

What’s the Magic Number?

So, Realtor.com asks, what is the mortgage rate threshold that needs to be crossed for buyers to start buying again? Well, the answer depends on who you ask and when. 

Of the 5,000 U.S. consumers surveyed, 22% would consider a home purchase if rates went below 6%. And for 18% of respondents, a rate of below 7% would be good enough. 

Long-suffering millennials and Gen Z buyers are even more resigned to high rates—47% of respondents in the millennial bracket and 37% in the Gen Z bracket would still take the plunge even if rates topped 8%. Basically, buyers in these categories will buy no matter what—if they just manage to save up enough and can find a home to buy. 

Asking the Right Questions

However, there is an elephant in the room with this ‘‘magic number’’ forecasting: It’s not asking the right question. And because it’s not asking the right question, it’s not precise enough in its choice of respondents. 

First-time buyers, daunted and discouraged as they may be by the new reality of high home prices and high rates, will not give up on their perception of homeownership as a dream worth striving toward. But first-time buyers also hold no power in the current real estate market dynamic. The people who do are existing homeowners who aren’t selling. It’s these people who are worth asking for the ‘‘magic number’’ that may give them enough confidence to move and finally release inventory. 

As it turns out, there is a different survey that talks to the right people. John Burns Research and Consulting surveyed existing homeowners last year and found that ‘‘71% of prospective homebuyers who plan to purchase their next home with a mortgage say they are not willing to accept a mortgage rate above 5.5%.’’

Note that the question isn’t about what existing homeowners could afford (all respondents had household incomes of above $50,000) but about what they are willing to accept. And the majority of them, 62%, believe that ‘‘a historically normal mortgage rate is below 5.5%.’’

This perception is factually inaccurate. According to Freddie Mac records going back to 1971, the long-term average mortgage rate is just under 8%. So, first-time millennial buyers actually have more realistic expectations than existing homeowners. 

That, of course, is because 80% of existing homeowners currently have mortgages with a below 5% rate, and a third are on rates below 3%, according to Zillow. It’s more than understandable that many of them have no desire to sell and lock themselves into the current rates (which were at a 7.9% 30-year average as of this writing).

Will the Market Unfreeze Itself Anytime Soon?

The reality is that we are a long way off from the ‘‘magic number’’ of 5.5% that would theoretically release all the inventory that sellers are holding on to. Of course, some people will sell anyway, for one pressing life reason or another. 

Recent research by the Haas School of Business shows that while a 1% increase in mortgage rates reduces moving rates by 9%, once ‘‘the benefit of refinancing exceeds its cost, moving probabilities become unrelated to’’ mortgage rates. 

All that said, the incentive to move has to be pretty high, e.g., a large salary increase. And even then, low mortgage rates often trump wage increases: People tend to stay put if their current fixed rate is low enough.

So, what could truly unfreeze the housing market? One solution could be more portable mortgage products, where a mortgage can be transferred to a new property with the existing rate. Another solution could involve making typical fixed mortgage terms shorter like they are in many other countries. Otherwise, we may see a deeper, longer-term freeze: a 25% decline in existing homeowners moving by 2033, according to the Haas study.

Make Easier and Smarter Financing Decisions

Deciding how to finance a property is one of the biggest pain points for real estate investors like you. The wrong decision may ruin your deal.

Download our What Mortgage is Best for Me worksheet to learn how different mortgage rates impact your deal and discover which loan products make the most sense for your unique position.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

Carly Tripp, Nuveen Real Estate Head of Investments, joins ‘Closing Bell Overtime’ to talk pending home sales dropping in January.

Dave:
Hello everyone and welcome to the BiggerPockets Podcast. I’m your host Dave Meyer, and my friend Henry Washington is here with me today. Henry, good to see you.

Henry:
You as well my friend. Glad to be here.

Dave:
Do you invest in multifamily?

Henry:
I guess the technical answer to that is yes, I invest in small multifamily, so my largest multifamily unit, I have two or three different eight-unit buildings, but I don’t have a building above eight units.

Dave:
But that’s technically multifamily. And just for everyone listening, the traditional cutoff is at four units, and that might sound really arbitrary, but it’s actually not. It comes from lending. Anything that is four units or fewer is considered residential property, and so you can get a traditional mortgage on those types of properties. Anything five or above, usually, you’re going to have to get a commercial loan. So, that’s why we make that designation. And today, we’re actually going to be talking about the big ones. We’re going to be talking about five plus properties and what’s going on with rent there because the commercial market with these bigger properties and the residential market actually perform really differently. Oftentimes, one market’s doing well, the other one’s not. And that’s kind of what we’re seeing right now. The residential market is doing its thing, it’s chugging along, but multifamily, there are a lot more question marks right now about what’s happening and what’s going to happen in the near future. So, we are going to bring on an expert to talk about this.

Henry:
Today’s episode we’re going to be talking to Kim Betancourt, who is the vice president of Multifamily Economics and Strategic Research at Fannie Mae. And she’s going to go over the ins and outs of this asset class and talk to us about what she sees in terms of rent growth, in terms of vacancy, and many other factors that could play into how multifamily is going to do over the next several years.

Dave:
All right. Well said. With that, let’s bring on Kim Betancourt, vice president of Multifamily Economics and Strategic Research, that is a cool title, at Fannie Mae.
Kim, welcome to the show. Thanks for joining us. We are going to jump right into sort of the macro level situation going on in multifamily. Where are we with rents as we’re recording this at the end of February 2024?

Kim:
So, it’s a little too early yet to get rent data for January, and clearly, for February. But where we were at the end of the year, at the end of 2023 was that on a national level we had seen negative rent growth. So, rents were estimating declined by maybe 66 basis points, ending the year at just under 1% year-over-year rent growth. And so what does that mean? Well, normally rent growth tends to be between 2% and 3% on an annual basis. As you can guess, it usually tends to track inflation, sometimes slightly above, maybe slightly below, but somewhere in that range.
So, as you can tell last year, even though inflation was up, we definitely saw that decline in rents. Again, that’s at a national level. It really does depend where you are. I’ve been saying that this is really a tale of two markets. So, in some places there was rent growth and in others, there was negative rent growth. For example, it’s estimated that rent growth was maybe negative by over 3% in Austin just in fourth quarter of last year alone, but was positive in other places like St. Louis and Kansas City and some other places. So, it really does depend where you are. Primarily, it is in markets that seem to have either undersupply, so not enough supply, rent is higher. Oversupplied, a lot of new units coming in online, rent growth has been lower.

Henry:
Do you feel like the slight rent growth decline is due to such a big steep rise in rents after the pandemic? We’re just coming down off that high.

Kim:
It’s partly that. It’s also partly this new supply I’m talking about. So, some of the data that we’ve seen, it shows that, for example, rent growth on new leases has actually been declining. Instead, where the rent bonds have been coming is for people that are renewing their rents. And I believe what that’s due to is that people came in 2021, 2022, they remember getting really sock with rent increases when they changed apartments. And so, what they’ve probably thought is, “Hey, you know what? I’m going to try to stay where I am, even if that’s going to cost me maybe 2% or 3% or 4% of an increase, that’s probably better than what I remember paying.”
Not realizing that actually in a lot of places, especially in a market with a lot of supply, they probably could have not paid as high of a rent increase, but it’s because of that new supply. Again, it depends on what market you’re in. Some markets have seen a lot of supply. We actually estimated that more than 560,000 new units were added last year, which is much higher than we’ve seen last year or the year before 2022, it was about 450,000 new units. And before that, it was under 400,000. So, it’s been definitely increasing.

Dave:
Kim, I’d love to dig into that a little bit. For those of our audience who might not be as familiar with the sort of construction backdrop that’s going on in the multifamily space, can you just give us a little historical context?

Kim:
Yeah, sure. And actually, it’s important to remember the timeline is very different for multifamily new construction versus single family. So, in a lot of times, single family, those properties will go from a hole in the ground to a house that’s built in the matter of a few months. But in multifamily it tends to be a much longer timeline. Now, again, depending what kind of property where you’re located, but on average is anywhere from 18 months to three years, and it’s a little closer to the three years usually. So, that’s a much longer timeline.
So, a lot of these units that are coming online, they were started a long time ago. So, a lot of multifamily builders, they’re having to figure out in the market where they are, when they’re going to be coming online, what are the demand drivers. So, that leads to part of the issue in multifamily where you’ll see that certain markets may get out over their skis in terms of supply, but then what happens is the market self-corrects and you’ll see that just in a few years, a year or two, then that market might actually be undersupplied again. So, it can be more volatile than you’ll see on the single family side. They can sort of turn that on and off a lot more quickly than in the multifamily space.

Dave:
And so, given that timeline, which is super important context for everyone to understand, it sounds like we’re still working our way through this glut of construction that could have started 12, 24 months ago.

Kim:
Right. So, not only are we working through it, but actually there’s still not enough housing, believe it or not, being built to meet the expected demand. Part of the issue is that there’s more than a million units of multifamily rental underway, and that sounds like a lot. But in reality, we still have a housing shortage. The problem is that there’s a lot of new supply in about maybe 20 metros, and within those metros it’s concentrated in a handful of submarkets. So, that’s part of the issue is that it’s not evenly distributed. It’s sort of bunched in these markets where there’s been migration, and job growth, and demographics are very important for multifamily. That’s because the person most likely to rent an apartment is between the ages of 20 and 35.
Lots of people rent apartments, but that’s the majority of folks that rent apartments. And so, when builders are looking at where they’re going to build, they’re looking in metros that have a much younger population. So, for example, Austin has a very large younger population, not only because of the university, but they’ve got tech jobs, it attracts a younger demographic. So, there’s been a lot of building there and especially because they’ve also seen a lot of migration in terms of job growth, especially in the tech sector. And so, that was a market that was terribly big, but over the past few years saw a lot of people coming in, so builders have been really building. So, yeah, so there’s definitely an oversupply and I just want everybody to understand that, yeah, there’s still a lack of affordable housing in a lot of places.
When I talk about oversupply, I’m just talking about when you count up all the units, it’s mostly in this higher end, the more expensive units, but that’s getting built. And of course, I sometimes make the joke, it’s a shame we can’t build the 20-year-old building because that is what tends to be more affordable in a lot of places. But when we’re building new, it does tend to be more expensive and the owners are charging the higher rents. So, you’re absolutely right though about it depends on the market, depends where you are because when we talk about certain markets, we never look at states because a state is big, it’s very different. We’re looking at these different metro areas and they’re not necessarily cities even. They are sort of the metro area because the metro will draw people from a wider radius for jobs and lifestyle, things like that.

Dave:
Kim, thank you for explaining that because something that’s sometimes confuses me and maybe it confuses some other people, is that we hear that there’s this national housing shortage. At the same time, we hear there’s an oversupply. And that sounds contradictory, but when you explain that so much of this is just mismatch, both in terms of class where it’s like they might be really high end properties where what we need is class B or class C properties, and in terms of geography, where we might need housing in the Midwest, but it’s getting built in the Southeast. So, that is super helpful. Thank you.

Kim:
Right, and even in the metro that I’m talking about, it’ll be in a handful of submarkets, so that can also be an issue. Maybe we need it a few miles away, but it’s all being built sort of in the same neighborhood, the same submarket. So, that’s another issue as well.

Henry:
All right, we are getting into the dynamics of supply and affordability, but there’s more to come. After the break, we’ll talk about the demographics of who is renting and why, and what Kim anticipates we’ll see in terms of rent growth over the next few years. Stay with us.

Dave:
Welcome back, everyone. We’re here with Kim Betancourt, vice president of Multifamily Economics and Strategic Research at Fannie Mae. And Kim is taking us through the ins and outs of the multifamily space. So, let’s get back into it.

Henry:
So, what I wanted to ask was most of the new construction is around this A class, and that’s where a lot of the units are getting added, but there has to be some sort of trickle-down effect, meaning that if we’re throwing new A class out there, then that gets oversaturated, then technically what they can ask for rent will be less. How does that impact B and C class in affordability there?

Kim:
No, it’s a really great question, and what that is called filtering. So, as the new stuff comes online, then the older properties that were class A, in theory, now become class A-, B+, B, and the class B becomes class C. And you’re absolutely right, the affordability does move in tandem with. What has disrupted that in the past, when interest rates especially were lower, was a lot of properties were getting purchased as value add. You might’ve heard about that. And so, what would happen is people would buy those properties and they would fix them up and turn them from class B to class A or A-, and class C to class B+, that type of thing. There was quite a lot of that going on. And so that sort of also eroded the amount of class B and C already existing out there.
So, that’s been sort of an issue that we’re trying to sort of catch up with. But now, let’s just talk about our new supply. So, our new supply comes online. We have been moving down a little bit, but because there isn’t enough across the country, when I was talking about that housing shortage, it hasn’t really been enough to move a lot of that supply into the class B and C. On top of that, those rents have also been increasing, so not as high as the class A, but they’ve still been increasing. And actually the delta between class A rents and class B rents has been widening over the past few years. Sometimes we think back to the great recession, and what happened was class A rents fell during the great recession, which was 2009 to 2010, we saw those rents drop. And so, what happened was they dropped enough and the differential between a class A and class B wasn’t so great that some people were actually able to do what we call the great move up.
So, people who been in class B moved up to class A because they could afford it now, same with class C to class B. We’re not having that now because again, that delta between the rent levels of class A and B have really widened out over the past several years due to inflation, higher building costs, the increases in the time to bring properties to market and demand from demographics has really pushed up that differential, especially between class A and B. The other thing that we’ve been seeing is that a lot of folks that would normally be moving into that homeownership, first-time homeowners, that age has gotten older over the past few years. So, now it’s currently at around age 36. But we’ve got a lot of people that are still in that younger cohort as well as gen Zers that they’re in rental now.
Some of those older millennials would like to buy a home, but they’re not necessarily able to buy a home for whatever reason. In many places, there’s not enough supply, interest rates are higher. And a lot of people that have mortgages, especially baby boomers, of which I’m one, we got a really low interest rate when we could refinance a few years ago. So, there’s a big portion of folks out there of homeowners out there that have 4% or 3% or lower mortgage rates, they’re not selling. So, everybody’s kind of like in this holding pattern, but the demographics keep adding people to forming households.
So, especially as we have positive job growth, those people tend to form a new household. So, it’s sort of think about it as sort of bunching up and what’s happening is people are getting stuck in rental longer, and we tend to call some of those renters renters by choice. In other words, they could technically afford to buy a home, but for whatever reason, they are not. And so, instead they’re renting a little longer. And so, that’s also been putting a lot of pressure on supply. Because in the past, a lot of those folks would’ve maybe moved into home-ownership or even renting single family homes, and instead they’re staying in multifamily a little bit longer.

Henry:
Yeah, I mean that makes sense definitely with people who have the lower interest rates, they’re not selling. And it’s interesting to see the average age of someone who rents now going up because more people are now choosing to rent. And so, I would assume that that correlates to vacancy and that vacancy would typically now be a lot lower in these buildings. Is that what you’re seeing across vacancy rates?

Kim:
Well, vacancy rates have inched up because of this new supply. So, as we add that extra supply and it’s taking a while to get people in there, it does push up the vacancy rate. But when you look at the vacancy rate for class B and C, that’s really tight. So, you’re exactly right. That has not been rising nearly as fast as it is for the class A.

Henry:
Okay, so class A vacancy is going up because we just keep adding new supply, but the people in the good old faithful B and C, they’re just locked in, and so you’re seeing lower rates there. Is that what I’m hearing?

Kim:
Yeah, those rates are pretty tight. They’re not moving much, and so that creates a lack of that affordable housing for a lot of folks because people just aren’t moving out if it’s a rent that they can afford.

Dave:
Kim, as we talk about rent trends and what’s going on right now, can we talk a little bit about what you’re expecting for the future? Do you expect this softness of rent to continue as we work through the lag? And how long might this softness continue?

Kim:
Yeah, that’s the million-dollar question everybody asks. Yeah. No, I mean, we are expecting that rank growth will be subdued again. This coming year in 2024. Might improve slightly because we are expecting job growth to be a little bit better than what we had originally been expecting. So, right now we think job growth will be about 1% this year. And we, in the multifamily sector, we tie very much the performance of the sector to job growth. And that’s because, again, a lot of jobs, you start a new job, especially if you’re a young person, you start a job, you tend to form a household when you start that job. Now, it could be with roommates, it doesn’t matter, but you form a household. Then, as the job growth continues, then what might happen is you get a better-paying job and then maybe you don’t live with roommates, you get out on your own.
So, we’re always taking a look at job growth because that forms that household, that first household. Usually a first household people don’t run out and buy a house when they get their first job, they tend to rent. So, we do focus on that. So, that’s been where we expect to see this type of demand. And so, therefore, we’re expecting that rent growth will be a little bit better in 2024 than we did see in 2023, despite the fact that we have a lot of this new supply still coming online. So, that’s the plan, but it’s not great. We’re still thinking 1%, maybe 1.5%, but it’s probably going to be closer to 1% this year, very close to what we saw last year. Now, that said, come 2025, as we start to see that this new supply has been delivered, we’re not adding that much more new supply, then we’ll start to see that rent growth start to pick up.
So, we do expect it to be a little higher in 2025, and then by 2026, it could really start to see some momentum because we’re not putting online all this new supply, and we still have the demographics that I’ve been talking about, the gen Zers, they’re still going to be in that sweet spot of renting that age for rental, and now all of a sudden we don’t have a lot of new supply coming online. So, as that supply that came online last year and this year gets absorbed by 2026 in a lot of places, we could start to really see rents get pushed because there’s not enough supply.

Henry:
Yeah, we’ve talked a lot about the supply and demand and rent growth taking a slight dip, but just because rent growth has come down a little bit, that doesn’t necessarily mean that people can afford the rents of the places that they are. Where are you seeing affordability in terms of these rent declines?

Kim:
Yeah. No, that’s a very good point. And like I was talking about earlier about the class B and C, even though their rent growth has declined, their incomes have not necessarily grown, especially from the rent growth that we saw in 2021. So, we saw that that rent growth really escalated in 2021, and it was still elevated in 2022. And even though wages have increased, we’re still playing catch up, right? Inflation was up and rents were up 10% or higher in a lot of places. I don’t know anybody who got a 10% increase in wages. So, people are still playing catch up. And then remember that we’ve also had inflation. So, it’s not like they’re not just paying more rent, they’re paying more for food and other costs. So, there is still this pressure, especially on that class B and C component, because the wage growth, while positive is not enough to offset the increases we’ve seen over the past few years.

Dave:
But in theory, if rent growth stays where it is, then affordability should come back a little bit given the pace of wage growth right now, right?

Kim:
It should, but again, we’re expecting that because of the supply that we’re probably only going to have another year of this subdued rent growth. And I’m not sure that the wage increases are still going to be enough to offset that increase that we have had in ’21 and ’22. But again, it does depend where you are.

Dave:
Yeah, all this with the caveat that this is regionally variant, but I do think that’s really important for investors to note that they’re just expecting rent growth to slow down for a year. I think everyone’s wondering where valuations and multifamily might go because cap rates are starting to go up, but the one thing that could offset cap rates going up is if rents and NOIs start to increase over the next couple of years. So, I think there’s maybe a bunch of multifamily investors here hoping that you’re correct there, Kim.

Kim:
No, I totally understand that. And I would say most of the data we get from our vendors and lots of other multifamily economists are seeing the same trends. So, we’re actually a little more conservative. I know that some are expecting rent growth to really sort of pop later this year and next year. We’re taking a more conservative view. And it’s because of that tying of demographics, that job growth, and then that household formation. I always think of that as the three legs of the multifamily stool in terms of demand.

Dave:
Got it. And before we get out of here, Kim, is there anything else in your research or team’s work about multifamily, specifically from the investor perspective that you think our audience should know?

Kim:
Yeah. No, if you put on your investor hat, as you were talking about earlier about cap rates and valuations, I would say trading has been very thin when you look at the data. So, price discovery is still sort of… We don’t really have price discovery for multifamily just yet. I do think that if we start to see interest rates come down, that that might spur some of the folks on the sidelines to say, “Okay, at this interest rate, at this cap rate, I can make that work.” But one of the big reasons that I’m not concerned too much about the multifamily sector overall is because of the power of demographics.
We have these people, we have the age group that rents apartments. And so, this is just a timing in terms of new supply and where it’s located. But overall, you cannot deny the power of demographics. And as long as we continue to have positive job growth that leads to those household formations, we’re going to start to need more multifamily supply over the longer term. And that is actually my bigger concern, that we are not going to have that necessary supply, and it’s going to be here sooner than we think.

Dave:
Well, thank you, Kim. We appreciate that long-term perspective. It’s super helpful for those of us who try to invest and make our financial decisions on a longer timeframe. For everyone who wants to learn more about Kim’s amazing research, you should definitely check this out if you’re in multifamily. We will put a link to it in the show notes and the show description below. Kim, thank you so much for joining us. We appreciate your time.

Kim:
Sure. No, it was great. Thank you so much.

Henry:
And if you’re listening to this conversation and wondering what does this mean for me? How should this impact the deals I’m going after? Stick around. Dave and I are about to break that down right after the break.
Welcome back, investors. We just wrapped up a heck of a conversation with multifamily expert Kim Betancourt, and we are about to break down what this means for you.

Dave:
Another big thanks for Kim for joining us today. Before we get out of here, I just wanted to sort of help contextualize and make sense of what we’re talking about here. Hopefully, everyone listening understands that rent growth and vacancies are super important to anyone who’s buying multifamily and holding onto real estate over the long term because that impacts your cashflow and your operations. But what we were talking about at the end was really about multifamily valuations and growth. If you’re familiar with multifamily at all, you know that one of the more popular ways to evaluate the value of a multifamily property is using something called cap rate.
So, the way you do that is you take the net operating income, which is basically all of your income minus your operating expenses, and you divide that by the cap rate, and that gives you your valuation. And the reason this is so important is because the way that NOI grows, one of the two important factors of how you grow the value of multifamily is from rent growth. And so, that is one of the reasons why multifamily was growing so quickly over the last couple of years is because rent growth was exploding and that was pushing up the value of multifamily. Now that it’s slowing down, we’re seeing NOIs flatline. And at the same time we’re seeing cap rate goes up, which not to get into it, that pushes down the valuation of multifamily, which is why a lot of people are talking about multifamily crash and how risky multifamily is right now.
And so, if you sort of zoom out a little bit about what Kim just said, she was basically saying she expects this to continue, that NOIs are probably not going to grow much over the next year, but she thinks after that they might start growing again, which is probably good news for multifamily investors, many of which are trying to weather a difficult storm right now with high interest rates, rising cap rates, stagnating rent. So, just wanted to make sure everyone sort of understands what this means for prices in the multifamily market.

Henry:
It’s also great information for prospective multifamily buyers who are looking to jump into the market and potentially buy some of these B and C class properties that are going to become available, especially with the new A class coming on board. But if you’re going to try to get a bank to underwrite your deal, you’re going to have to forecast, hopefully, long-term and be conservative with that. So, understanding or having an idea of where you think rent growth is going to go, or I should say a more realistic idea of where you think rent growth is going to go, will help you have more conservative underwriting and hopefully keep you out of trouble if you get into a property and it’s not producing the results that you need in a short-term fashion.

Dave:
Very well-said. Well, thank you all so much for listening. We appreciate it. Hopefully, you learn something from this episode. We’re going to be trying to bring on more and more of these experts to help you understand some of the more actionable recent trends going on in the real estate market. So, hopefully, this information from Kim was helpful. Henry Washington, as always, it’s always fun doing shows with you. Thank you for being here. And thank you all again for listening. We’ll see you for another episode of the BiggerPockets Podcast very soon.

There is no right or wrong way to invest in real estate. All that matters is that you’re comfortable with your strategy and positioned to generate a positive return on investment (ROI). However, it never hurts to compare all your options—and that means taking a closer look at short-term vs. long-term real estate investing. 

Short-Term Real Estate Investing

Short-term real estate investing involves buying property to quickly sell or rent for a profit within a short period, typically less than a year.

Types of short-term real estate investments

There’s no shortage of short-term real estate investments to consider, including:

• Fix and flip: This strategy involves purchasing properties in need of repairs, renovating them, and selling them for a profit.
• Vacation rentals: Investors buy properties in popular vacation destinations and rent them out to tourists on a short-term basis.
• Multifamily rentals: Investors purchase apartment buildings or other multiunit properties to rent out the units on short-term leases.

Some of these may work for you, while others don’t. Even so, it’s important to compare the details of each to determine the best path forward.

Pros of short-term investing

Now, let’s examine the benefits of short-term real estate investing:

• Potential for higher returns: Short-term investments can yield a significant profit in a relatively short period, especially with strategies like fix and flip.
• Flexibility: Short-term investing allows investors to adapt and pivot strategies based on market conditions and personal circumstances.
• Market resilience: By capitalizing on immediate market trends and demands, short-term investments can be less affected by long-term market fluctuations.
• Cash flow: Vacation and multifamily rentals can provide steady cash flow through continuous short-term leases.
• Diversification: Investing in short-term real estate can diversify an investment portfolio, reducing overall risk.

Cons of short-term investing

While there are many benefits, there are also some drawbacks: 

• Higher risk: Short-term investments often involve higher risk due to market volatility and potential for unforeseen expenses in projects like fix and flips.
• Increased expenses: Short-term strategies, particularly fix and flips and vacation rentals, may incur higher operational and renovation costs.
• Time commitment: Managing short-term rentals or overseeing renovation projects requires significant time and effort, which can be a drawback for some investors.
• Market dependency: Success in short-term investing can heavily depend on current market conditions, making timing crucial and sometimes unpredictable.

Real estate can be a short-term investment if you know what you’re getting into and have a concrete strategy to guide you. 

Long-Term Real Estate Investing

Many investors find a long-term strategy ideal. This involves purchasing property to hold for an extended period, typically years, to benefit from rental income, appreciation, and tax advantages.

Types of long-term real estate investments

Here are three of the most common types of long-term real estate investments:

• Buy and hold: This strategy involves purchasing properties to rent out over a long period, benefiting from steady rental income and property appreciation.
• Commercial real estate: Investors buy commercial properties, such as office buildings, retail spaces, or warehouses, to lease to businesses over the long term.
• Residential rentals: Investors purchase single-family homes or multifamily units to rent out to tenants, aiming for long-term income and property value appreciation.

Pros of long-term investing

There are many benefits of taking a long-term approach to real estate investing:

• Stable cash flow: Long-term real estate investments can provide a consistent, predictable cash flow through rental income, offering financial stability.
• Appreciation potential: Over time, real estate values tend to increase, allowing investors to benefit from property appreciation when they decide to sell.
• Tax advantages: Owning property for the long haul offers various tax benefits, including deductions for mortgage interest, property taxes, and depreciation.
• Inflation hedge: Real estate investments can serve as a hedge against inflation, as rental rates and property values tend to rise with inflation.
• Leverage opportunities: Long-term investing allows investors to leverage their capital, using mortgage financing to acquire properties and increase potential returns.

Cons of long-term investing

There are several potential drawbacks of long-term real estate investing:

• Capital intensive: Long-term real estate investing often requires significant upfront capital investment for property purchase and maintenance.
• Liquidity issues: Real estate is not a liquid asset, making it challenging to quickly convert properties into cash without potentially selling at a loss.
• Management responsibilities: Owning rental properties comes with ongoing management responsibilities, including tenant relations and property upkeep.
• Market risk: Long-term investors are exposed to market fluctuations that can affect property values and rental incomes over time.
• Regulatory and tax changes: Investors may face challenges such as changes in local regulations or tax laws.

Comparing these pros and cons of long-term real estate investing will help you decide which option is best. 

Choosing Which Is Right for You

There’s no rule saying you can’t be involved with both short- and long-term real estate investing. However, it’s typically best to focus on and master one type before moving on.

Key factors to consider

Here are the most important factors to consider when choosing between short- and long-term real estate investing:

• Market and timing: The choice between short- and long-term investing depends on current market conditions and timing; short-term strategies might favor rapidly appreciating markets, while long-term investments benefit from stable growth over time.
• Investment goal: Personal investment goals and the time required to reach these goals should come into play.
• Risk tolerance: Risk tolerance is critical in deciding between short- and long-term real estate investing, as the former involves higher risks and potential for rapid returns, whereas the latter offers more stability and lower risk over the long run.
• Financial circumstances: Your financial capacity and access to capital greatly influence your investment strategy.

These factors are likely to move to the forefront when making a decision, but also take into consideration any detail that could impact your personal life and finances. 

Final Thoughts

There’s a lot to think about as you compare short-term versus long-term real estate investing. Use all the information available to make a decision that puts you in a position to succeed.

Find an Agent in Minutes

Match with an investor-friendly agent who can help you find, analyze, and close your next deal.

Sheryl Palmer, Taylor Morrison chairman and CEO, joins ‘Squawk Box’ to discuss the state of the real estate market, impact of fluctuating mortgage rates, whether higher rates are keeping buyers away, and more.

David:
This is the BiggerPockets Podcast show 904. What’s going on, everyone? I am David Greene, your host of the BiggerPockets Real Estate Podcast, joined today by my co-host, Rob Abasolo, and if this is your first time listening, well, we are super glad to have you. We’ve got an awesome show in place, and Rob is here to help me bring it to you. Rob, how’s it going over there?

Rob:
It’s good. I’m coming to you from a hotel conference room where I had to kick everyone out. They were running over on the schedule. I was like, “Hey guys, I’m doing a podcast.” And so they’re all standing outside of here and it is very important for this podcast to happen because, David, I feel like this podcast was made for you. We’re calling it The BRRRR in 2024. Does it Still work? Do we need to make tweaks to the strategy? We’re here to give you the inside scoop.

David:
That’s right, I know a thing or two about BRRRR after doing about 50 of them in my career, and I even wrote a book on it which you can find at the BiggerPockets Bookstore. So we’re here today to give you an update on the strategy and how we are applying it in today’s market, and this is so important that Rob, who’s actually extremely conflict diverse, did kick a bunch of people out of a hotel room. Rob, I’m very proud of you and thank you for doing that.

Rob:
It was awkward. It was really, I was like, “Guys, I’m so sorry. You said I could use this and it’s 1:00 PM and I got to go.” And then they’re like, “Oh, we’re so sorry.” So I have to bring it. I have to hold my end of the bargain. So let’s get into today’s episode and talk about the BRRRR.

David:
All right, let’s do it.

Rob:
Let’s set the stage first. So let’s talk about what BRRRR is. We talk about it a lot and a lot of people are like, “Are you cold? Are you talking about the nemesis to Alexander Hamilton?” So David, tell us what the BRRRR is and why is it such a popular real estate strategy?

David:
BRRRR is an acronym. It stands for buy, rehab, rent, refinance, and repeat, and it’s a popular strategy because it is a way that kind of forces you to become what I call a black belt investor in the book. You have to be good at the fundamental components of real estate investing to be able to pull off a BRRRR. That’s why I like it because it forces you to improve your skills. You got to buy a property below market value. You have to be able to rehab that property and add value to it. You have to understand the financing of the property so that you can refinance your capital out. It has to cash flow when you rent it out. And then you have to build systems which allow you to repeat this process.
It grew in popularity because it was a way of acquiring property without running out of cash. So the main benefit of the strategy is that you get capital out of the deal to put into your next deal, but it’s not capital that you had to take out of the bank. It is capital that you pulled out of a property that was pulled from equity that you created through good investing.

Rob:
Yeah, let’s contextualize this a little bit and let’s help people understand the basic premise by putting some numbers here. So let’s say that you buy a property for $50,000. Let’s pretend like, yeah, this is a market where you can buy one for $50,000. You put $25,000 of rehab and work into it, and as a result that property is now worth $100,000. You would then go to the bank and say, “Hey, I would like to do a cash-out refi because this property is now more valuable than when I bought it.” If it does appraise for $100,000, the bank in general will give you around 75% of that equity in a new 30-year amortized loan, meaning in a perfect case scenario, you’re able to get that $75,000 back to pay back your initial investment and rehab budget. Did I explain that correctly?

David:
That is perfectly well said, and sometimes it’s not perfect. Sometimes you bought it for 50 and you thought you were going to put 25 into it but you put 45 into it, so you’re actually all in for 85,000, and in that case, when you go to refinance it and the bank gives you 75,000 but you are all in for 85,000, you leave $10,000 in the deal. But that’s still better than if you had to take the whole $25,000 down payment and put that towards the house, and then even more on top of that for the rehab.

Rob:
Right, right. So this has been a huge strategy really for a very, very long time. The acronym BRRRR was something that was coined, I believe, by the BiggerPockets community. That’s right, right?

David:
Brandon Turner himself.

Rob:
Yeah, okay. That’s what I thought. And so, yeah, it’s a strategy that’s been utilized for a long time, but has there been a moment in time in which the BRRRR strategy worked best?

David:
Well, yeah. The BRRRR strategy allows you to get money out of your deal to put it back into real estate again which means as long as you’ve got new deals coming along, it works great because you’re amplifying how quickly you can acquire real estate. Now it’s also a buy and hold strategy. This is a strategy that you use to keep a property. It’s kind of like flipping, but instead of selling it to somebody else you refinance it and you keep it yourself. That means that it is susceptible to the same challenges that all buy and hold real estate has. So if you can’t find cash-flowing properties, you can’t find BRRRR properties because they have to cash flow when you’re done. And if you can’t find properties to add value to, it’s hard to find BRRRR properties because you can’t add value to the property. And if you can’t find great deals because there’s a lot of competition, it’s hard to find BRRRR properties because you can’t buy below market value. So it really trends with buy and hold real estate.
Now one of the ways that people have sort of adapted along is they’ve said, “Hey, well, buy and hold real estate is really tough, but I’m going to get into short-term rentals.” So they’ve used the BRRRR strategy and combine it with a short-term rental instead of a traditional rental. So when you’re analyzing for rent, you just use short-term rental analytics instead of traditional model analytics, and then people call that the AirbnBRRRR or the BRRRRSTR but really the strategy is a part of it the entire time.

Rob:
It’s been a strategy that’s worked for a long time, but I think a lot of people on the podcast are probably like, “Hey, I’m on board with this strategy, but it’s 2024 and things are a little bit tougher now.” So do you think you could provide a little bit of context or clarity as to how the current market is making the BRRRR much harder than it was in the last, let’s say, 10 years or so?

David:
Yeah, absolutely. It’s harder to find cash-flowing deals because rates went up. So as interest rates have increased, cash flow has gone down but prices have not gone down. So that makes BRRRR tougher, just like all buy and hold real estate is tougher. Another thing is that it used to be that there was tons of fixer-uppers on the market. When I was cranking these things out, doing five a month, I could just go on the MLS, find a bunch of ugly houses that had been sitting there for a long time, write really low offers, put them into contract, and then once I got back my inspection report, figure out if I wanted to move forward with the deal. Well, construction costs are much higher than they used to be, it’s harder to find contractors because everybody wants them, and there’s less inventory to actually pick from because less houses are hitting the market.

Rob:
It really does feel like contractor and rehab… Contractor in the labor force already is hard enough to find, and as a result, rehab costs seem to be much higher than they have been, and then if you’ve been around the BRRRR world for the last couple of years, there was that moment over the last few years where lumber was shooting up as well. It seemed to be shooting up at the same time as interest rates. And so, yeah, all of that just kind of created this weird standstill with constricting the housing supply. So there’s a lot of reasons why the BRRRR has been a little bit more difficult, whereas I think maybe entering now it feels like now the interest rates are starting to go down, so at least we’re trending in the right direction, right?

David:
Yeah, the interest rates are going down which makes it a little bit easier to find a property that could cash flow, but the price of the properties aren’t going down. They’re probably going to start ticking back up again, right? All of the costs of things that go into real estate, like you mentioned the lumber, the materials themselves, the price you pay for the labor to get the person to put the material into the house, that’s all going up with inflation which means that the price of the house is going to keep going up with inflation.
The odd dynamic that I’m noticing is that rents are not keeping up with all those other things because rents have an artificial ceiling put on them. They can only go as high as what people get paid at their job. So as everything we buy becomes more expensive but wages aren’t keeping up with that, downstream of it we find that rents can’t keep up as well, and so that means that even though the prices of these deals are going up, the rents aren’t quite keeping up with it which makes the cash flow harder, and that becomes one of the constrictions acquiring buy and hold real estate and slows you down, and BRRRR’s really meant to speed you up.

Rob:
Yeah. So let’s talk about this a little bit. I want to talk about the inventory or I guess the lack thereof and what kind of major issues that’s presenting for investors today. Can you tell us, is there a specific correlation as to how inventory sort of affects the BRRRR strategy?

David:
Yeah, because inventory affects pricing. The less houses there are, if we’re assuming that demand is constant but supply goes down, the more expensive something’s going to get. There’s also less options for you to choose from because investors forget that they’re competing with other investors. Everybody listening to this podcast, you and me, everyone who reads these books, everyone who’s listening to the other podcasts and the other people that are internet influencers, they’re all teaching people how to go find real estate. So you have more people that are all trying to buy these properties that have quit their jobs or quit pursuing their jobs and now they want real estate to be their full-time hustle that are all going after the same inventory that’s on the market.
In addition to that, you now have stuff that used to hit the MLS that everybody could buy that gets bought before it hits the MLS. You’ve got wholesalers that are sending out direct mail campaigns, text messaging campaigns, cold calling campaigns that are all trying to buy properties before they get to the MLS, before a real estate agent puts them on there. You’ve got big hedge funds like Blackstone that are scooping up a lot of properties and they’re trying to keep it inside their portfolio. That all used to be inventory that hit the MLS and now it doesn’t. So even though on the surface it looks like real estate’s the same as it’s always been, it’s actually very competitive to where it used to be, and that’s why we see so much less supply making its way down to the market that we could buy.

Rob:
Yeah, but what can investors actually do about this? Because everyone wants to break into this. It’s more competitive than ever. Do you have any tips for anyone at home that may be struggling with the onslaught of crazy competition, even in 2024 when, I don’t know, it seems like less people would want to get into this, but the competition still seems pretty high?

David:
Well, there’s two ways. You got to fight your way to the front of the funnel, okay? You can’t just show up and look at houses on Zillow and think that you’re going to get it when everyone else is too. You also have to be spreading the word amongst your specific sphere of influence that you’re looking to buy houses. You got to work just as hard as the other people are that are sending these letters and looking for ways to create funnels to buy off-market deals. You kind of have to make that a part of your everyday life is that everywhere you go and you meet somebody, you say, “Hey, I’m looking to buy houses. If you know anyone that has one to sell, let me know.” That’s a bit of a nuisance. People don’t like doing it. But if you don’t do it, it just means that house is going to go to the person that did. So acknowledging you’re in a competition, even though it’s uncomfortable, is a healthy way to start.
The other way that I’ve incorporated into my investing is that I don’t just look for the low-hanging fruit. We used to be like, “Oh man, look, ugly carpets, ugly cabinets, ugly kitchen. I could buy that thing, switch out that stall shower, make a tile shower, boom, I’ve added equity, I’ve got a flip or a BRRRR if I want to keep it.” Now you got to think a little more creatively. You have to think about different ways to add value to the real estate that you are acquiring, even if you can’t buy it at cheaper prices.

Rob:
So now with all that said, David, let’s ask, I think the main question of the podcast here, the thing that people actually want to know, what they came here for, which is it actually still possible to do a successful BRRRR in 2024. We’re going to answer that question in detail, including strategies investors can use to BRRRR, right after the break.
Welcome back. I’m here with Sir BRRRR himself, David Greene, and right before the break I asked him the question we’re here to answer. Is it still possible to BRRRR in 2024? So let’s jump back in.

David:
It is possible, just like it’s possible to buy a successful buy and hold real estate deal. But are you seeing as many of them, Rob? Are they overflowing with abundance like they may have been five or six years ago?

Rob:
Probably not. No.

David:
Yeah, it’s just going to be harder, right?

Rob:
Yeah.

David:
But it’s harder because it’s a better asset to get into. Everybody’s looking to buy these assets. The price of them is going up. That means that they will be a more solid, long-term buy and hold strategy because it’s going to hold its value, but it’s just going to be harder for you to find these deals. That’s why I’m advising people to start taking the road that other people are skipping. You actually have to treat this like a business as opposed to just looking for something that would be easy and automated and money just flows to you without any work.

Rob:
Yeah, so let me put you into this a little bit from a tactical standpoint, because over the last few years we discuss how the labor force has been such a… It’s been brutal in the real estate world, and that has also been paired with a crazy supply chain shortage which just I think has really made things complicated. So have you seen any in your personal rehab that you’ve done or within your network, do you feel like there’s been any relief at all in the supply chain to open up the goods for the renovation process?

David:
You know, that’s a great question. What I’ve found as the market that was steaming along and crushing it, and every property was gaining equity, and transactions were taking place all the time, and my real estate team was crushing it, my loan team and company was crushing it, and my properties themselves were crushing it, it all kind of came to a grinding halt when those rates went up. It was scary how fast the whole market turned. And so what I found is I had to pay more attention to my portfolio and to the businesses. I couldn’t just let the leader of the business run it because they were not being careful enough with the money they spent, the training that they gave, or the way that the employees were performing. We had to really tighten up on everything.
So I started hiring people to manage my own properties as opposed to outsourcing that to third party property management. The same thing has been true with the deals that I have going on, like for some of the short-term rentals that I have. If you let somebody else buy the materials, they’re going to go buy a brand new pool table for $5,000. But if I put somebody looking on Facebook Marketplace every day for two weeks, we find someone that needs to sell a pool table for $1,800 and negotiate it down to 1,200, right?

Rob:
Yeah.

David:
That’s the principle that I found you have to put into the deals you’re doing. So if you’ve already got a place under contract, it used to be a contractor gave me a bid, I reviewed the bid, I said, “Okay, sounds good.” I put a timeline in when I needed it done by, and that was that. Now I need to be involved in the process. Okay? I’d rather have our team buy the materials and pay them the labor to do it because then we can shop for the cheapest materials or we can look for really good opportunities. James Dainard has done a couple of these shows and he’s talked about the level of detail that he knows in every flip he’s doing and what things cost. That’s the level of attention that you’re going to have to pay to keep your rehab costs reasonable, and for people that aren’t doing that, they’re just going to be frustrated.

Rob:
Sure.

David:
It’s like, where’s all my money going? Well, it’s going to the contractor.

Rob:
For sure, and because they mark up the materials too and their time which rightfully so in many instances. So let’s talk about that. Let’s say, yeah, you bought the property, you’re in this rehab process, it’s the first R in BRRRR. Are there any other tips or tricks for keeping your rehab down? Is there anything else you can do to cut costs, especially if you’re a first timer doing this?

David:
If you’re a first timer doing it, your goal is to learn. So you need to be involved in as much of the project as you can, learning what a contractor does. Once you have a basic idea, you can keep your costs low by managing some of your own subs, and for knowing when you buy a property, what type of stuff you need highly skilled labor to do and what type of stuff can be done from less skilled labor that you can pay less. You really want to avoid getting into the projects that have complicated electrical issues or complicated plumbing issues or have really complicated permit stuff. We’re going to have holding costs that skyrocket because you’re waiting a long time with the deal. You want to get into the kind of projects that need a lot of drywall work, sheetrock work, flooring that’s going to be done, paint, dry rot issues perhaps. That type of stuff can be done by lower skilled labor so that you can save money on materials and then not get hammered when you have to go pay someone a ton of money to do the work.

Rob:
Yeah, I’m a big advocate for maybe taking on some of the DIY aspect on your first BRRRR or your first rehab, simply because I think there’s an intangible skill that you learn from that which could be the actual craft of doing a skill like, I don’t know, drywall or anything like that, but what I think you actually learn is how difficult it is to do something and how much it’s worth to you to pay that kind of thing. Because for me, for the first house that I ever bought, I did a lot of my DIY projects. I knew what was hard, I knew what wasn’t hard. That way anytime I actually worked with the contractor, I was like, “Hey, this $10,000 bid should be more like $2,000 and I’m not too dumb here.” So I think a little experience goes a long way. Are you an advocate for DIY-ing a BRRRR or your first rehab in any capacity?

David:
Well, I’m an advocate for doing whatever you can to reduce your risk when the market’s tough. So for instance, maybe you can’t find a flip property, but can you do a live-in flip?

Rob:
Absolutely.

David:
Right. That reduces your risk a ton. Maybe it’s really tough to find a big BRRRR property where you can get a hundred percent of the money out, but can you find a BRRRR property where you leave some money in but it’s significantly less than if you had bought it and you buy in a great location where it’s going to appreciate, and then three years, you’re going to take all that equity and you’re going to roll it into the next opportunity. You have to compare the opportunities that you’re looking at today with the other opportunities you have today, not the opportunities that you heard about five or six years ago from people that are on podcasts talk about this great portfolio they have when they bought when the market was different.

Rob:
David, something you mentioned that I don’t want to gloss over because I think this is super important, but it seems like the time horizon for a BRRRR has changed, whereas when the market was more flexible, we had a little bit more flexibility with how quickly or how slowly we could do that BRRRR. But do you feel like the timeline has shifted in 2024 with how long one should take during this entire process?

David:
Yeah, and for investing in general, I do think that. In fact, that’s the next book that I have coming out with BiggerPockets Publishing is on this exact topic that we sort of need to change our expectations for real estate and therefore change our strategy. Now there’s less to buy, there’s less meat on the bone, and it’s harder to get cash flow. The whole thing is trickier. Does that mean don’t do it? No. It means to adjust your expectations. So this book that I’m writing is about breaking our addiction to understanding that cash flow is the only reason you buy real estate. Cash flow is one of 10 ways that you make money in real estate, and several of these ways involve long-term delayed gratification.
It’s buying property in the best areas, adding value to those properties, doing what you can to buy beneath market value and incorporating other strategies like reducing your tax burden and buying in areas where the cash flow itself is going to increase because the rents are going to go up more than surrounding areas. When you put all these strategies together in the same deal and then you wait, what you find is you still get incredibly good returns, you’re just not getting them right away.
So I’m trying to get people to stop looking at real estate as the magic pill to help them escape the job they hate or the life that they hate or the fact that they’re struggling with things and look at real estate as being the carrot that you pursue that gets you to step up your game when it comes to the effort you’re putting into work, the skills that you’re building, the education that you’re acquiring, because, Rob, you’ve seen this too, the wealthiest people that we know bought real estate in good locations and they waited a really long time. All the strategies that we talk about here are just designed to get you to that point safely.

Rob:
Yeah. Yeah, yeah, it’s all about also being adaptive and being nimble which is why you’re titling that book Pillars of Stealth, right?

David:
That’s really nice. I like that.

Rob:
All right, so let’s talk about sort of the next R here which is rental, which there’s some parallel pathing that’s going on during the rehab and the rental side of things because when you’re rehabbing you have to sort of know, hey, how nice should I make this rehab or how standard can I make it. I’d imagine there’s a level of analysis that one should do by looking at the rentals in your area or in your neighborhood to see how nice they are and ask yourself, “Am I matching them or is there a delta in actually being a nicer quality BRRRR and will that delta yield me more profit?”

David:
It’s a great question, and the answer is sometimes. There’s three main reasons that I see people rehabbing a house. You’re either rehabbing it to sell to someone else which is a flip, you’re rehabbing it to keep it as a long-term rental, or you’re rehabbing it to keep it as a short-term rental. Okay? So if you’re trying to flip it, you don’t want to make it nicer than the surrounding areas because then you’ll have a more expensive property that the appraiser won’t give extra value to and you won’t be able to sell it for as much as you thought because it won’t appraise. So in that circumstance, no, make your property as nice or maybe a tiny bit nicer than not only the other properties in the neighborhood but you want to compare it to the other properties that buyers have available for sale. You actually want to look at the existing inventory that you’re competing with when your house goes on the market and be a little bit nicer than them, but not a ton nicer.

Rob:
But has this changed though, over the past years? Because I agree that is an underlying principle of the BRRRR, but do you feel like today, nowadays, renters are more demanding? Do they want more out of their rentals? Because I can tell you from an Airbnb or a short-term rental standpoint, the guests are definitely more demanding. I feel like they want this five-star resort kind of thing, and I’m curious if that also transcends over to the long-term rental side of things.

David:
What I’m trying to get at here is that the renter or the guest on Airbnb or the buyer of the flip, whoever your end product person’s going to be is going to compare your property to their other options, and you want to be a little bit better than those options. You don’t want to be too much better than those options because then you wasted money. You don’t want to be not as good as those options because then they won’t choose your property, and you don’t want to be exactly the same as those options because then you’ll be slightly competitive until your competitors do a little bit better. So you have to understand the reason you’re rehabbing it. If you’re rehabbing it to flip, you want to compare it to the other properties available for sale as well as the other properties in the area.

Rob:
Got it, got it.

David:
If you’re doing it for a standard renter, it doesn’t matter if it’s really nice or not that nice. What matters is what their other options look like. If they have a ton of inventory to choose from, yours has to be nicer, but in most markets there’s not enough rental inventory. So if this is just a standard buy and hold rental on a year-long lease, you don’t need to make it super nice. You need to make it super durable so that things don’t break all the time. But to your point, Rob, if this is a short-term rental in a highly competitive market, yes, you need to over-rehab. You need to make it extra nice. You need to make it nicer than the other competition and so much nicer than the rest of the competition that you buy yourself a couple years for everybody to catch up to you.

Rob:
Makes complete sense.

David:
All right, now that we’ve covered a few tactics that investors can use to give themselves an edge to make BRRRR work in 2024, we’re going to get into some good news about how financing options have changed and improved. So stick around and we’re going to get into that soon.
Welcome back everyone. Rob and I are here talking about how the BRRRR has changed and how they can still work in today’s market. So let’s get into the good stuff.

Rob:
I want to get into the next R here which is refinance, and this to me seems like what feels like the biggest crapshoot in the entire system of BRRRR because lots of things are changing. Interest rates are changing. Appraisals are always finicky. You never know what you’re going to get when appraisal. You can have a pretty good idea, and then market conditions and corrections are happening. So tell us a little bit about what the financing options are for people doing the BRRRR strategy today in 2024. Are rates any better? Is there a more positive outlook than there has been over the last year?

David:
Rates are higher than they used to be, but lower than they were recently. So they’re sort of trending in a better direction right now. They’re still historically low, and you actually have more financing options available now than I ever saw before. So you had a couple options. You could pay cash for stuff, which is what I was doing and what most people were doing. You could pay cash with somebody else’s money, like private money which you kind of had to be an experienced operator to get people to trust you with their cash. You could get a hard money loan, which was not very flexible and very expensive, or you could get a conventional type loan and then refinance out of it once you were done, but that was expensive because you had a lot of closing costs.
Now there’s a lot of products like bridge products that we offer where you can go in and you can borrow the money for the purchase and the rehab. Right? You put 15% down on the purchase and 15% down on the rehab and not having to pay for a hundred percent of your rehab is a significant savings in how much money you’re having to come out of pocket for. Those are usually loans that last for a year, sometimes two years. So once you’re done with that project, 3, 4, 6 months later, whatever it is, you can refinance out of it into a conventional loan or into a DSCR loan.
Since the point of buying these properties is to keep them, they’re supposed to cash flow, you can use DSCR loans to help make sure that you qualify for a loan even if you have more than five properties, even if you have more than 10 properties, even if your own debt to income ratio can’t support continuing to acquire properties, which was one of the old throttles of BRRRR is like, yeah, I got deals and I got money and I got contractors, but I can’t keep refinancing out of them because my DTI can’t keep up. Well, now you’ve got a lot more lending options that will allow you to do it. So even though the rates haven’t been as favorable as they were eight years ago, the lending flexibility is much more favorable.

Rob:
Yeah, and for everyone that may not know what a DSCR loan is, they’re a very powerful and beautiful tool. It stands for debt service coverage ratio. Basically what that means is the bank will use the projected rents of a property to approve you for that to underwrite you on that loan. And so, yes, David was talking about the DTI or debt to income ratio. When that maxes out, it’s very hard to get a loan conventionally, but a DSCR loan is really looking more at the actual projection of that rent. So it’s a really powerful tool. It’s a little bit more expensive usually than a conventional loan.

David:
Yeah, it’s usually a point higher on the rate usually.

Rob:
Yeah. But still worth consideration. I wanted to ask because there’s sort of this idea of this concept being tossed around where should we replace the R to an H and pull HELOCs instead of refinancing with the interest rates as they are right now, the BRRRR?

David:
Yeah, that can make sense if you think rates are coming down in the future. If you think they’re going to go down, you can get a HELOC. It’s a lot less expensive as far as the closing costs go, and you can still get your money out of the deal to put into the next one. So HELOCs will make it easier to continue to acquire more properties if instead of refinancing the entire note, you just put a HELOC on the equity, but they increase your risk because most of the rates on HELOCs are going to be adjustable. If rates go up instead of down, well then when you do have to refinance out of the HELOC you’re going to get a higher rate than if you had just done it in the beginning.

Rob:
Yeah, and just one quick caveat here. HELOC stands for home equity line of credit. You’re basically taking a line of credit on the equity of your house which I guess makes sense, that’s why they call it a HELOC. But one thing that’s not talked about enough is the fact that when you take a HELOC on a property, that is a loan in a sense because it’s like a line of credit. So there is a note, a monthly note that you have to pay. So you just want to make sure that you are accounting for that in your analytics, in your analysis of a property. Every HELOC is structured a little differently. I’ve seen five different ways that HELOC payments are calculated. So just make sure that you understand the mechanics of how the HELOC works for your personal bank.

David:
That is right. I guess sometimes we forget to mention that when you take out a loan, it usually involves some kind of repayment. But yes, that’s exactly the case.

Rob:
Yeah, because HELOCs are really powerful and they’re really cool things. In a perfect scenario they can get you out of a bind, but yeah, we don’t ever talk about the possible downsides, one of them also being that if you’re taking a HELOC out on a primary residence, that also adds to your DTI. So just keep that type of stuff in mind as you explore that option.

David:
That’s right. So to sum that up, rates are higher and they’re less favorable than they were in real estate’s heyday, but options and flexibility is better than it’s ever been when it comes to getting loans on properties. You can literally get a really good bridge loan to acquire the property and fix it up, borrow most of the money to do that. If you do the things that we’re talking about now, you focus on adding value to the property, you add square footage, you add bathrooms if it doesn’t have enough, you do a really good job on that remodel, you create a lot of equity, then you refinance out of that into a conventional 30-year fixed rate or a DSCR 30-year fixed rate. It’s actually pretty smooth to the financing where that used to be a big area of concern when you’re trying to scale a portfolio.

Rob:
Sure. And before we wrap today, I did want to ask you, considering that BRRRRs are different today than they were five years ago, than they were 10 years ago, what metrics actually make a successful BRRRR today and how is that different from previous market cycles?

David:
In the previous market cycle, we told everybody get as much cash flow as you can, and that’s the reason that you invest. Well, as cash flow has somewhat dried up, it leaves people with the questions of should I invest in real estate at all because the reason I was told to do it is gone, and I would still say yes, but you’re not going to get the immediate gratification that cash flow provides. You’re going to have to shift to delayed gratification. Now the good news is when you compare the money that you make over a 20-year period of time in appreciation and loan pay down, especially if there’s a value-add component to your real estate, it dwarfs however much cash flow you think you could have made. Okay? Take the biggest, buffest guy that you’ve ever seen, that’s cash flow, and this appreciation is like Godzilla. You can’t really compare it, right?
You have to take that longer-term horizon outlook which is why BiggerPockets has been doing a great job of providing overall financial education. Okay? It’s not about just let me get a couple houses and I’m out of the game and I’ve retired, I’m on the beach with a Mai Tai. It’s about building up your skills. It’s about delaying gratification. It’s about making wise investments that will grow over time. It’s about taking advantage of the tax benefits you get, or about starting a business within real estate and sheltering some of that money with real estate. Look at real estate as an amazingly crucial piece, a cornerstone of an overall financial strategy that you need to put together, and you’ll fall in love with it. If you look at real estate as an individual brick that you can just stand on and have your entire building based on, it’s going to let you down.

Rob:
Absolutely. I think we talk about it often on the show that real estate has several levers, cash flow, appreciation, tax benefits, debt pay down, and depending on the market cycle you’re in, the levers are going to be a little different. So understand that going into it because I always tell people, going back to what you were saying, I don’t know, sometimes people see breaking even on a BRRRR like not a good thing. I’m like, “Guys, in Vegas, they say a push is a win.” That’s great. Breaking even on a house that you got for free, come on.

David:
Well, not only that, they don’t see it as a good thing if they didn’t get more money out of it or if it doesn’t cash flow right away. But if I said to you, Rob, hey, you’re going to do a deal, you’re going to get all of your money out or a little bit of it out and it’s going to break even on cash flow, but you’re going to have created $75,000 of equity. You’re going to be paying off a loan every single month with the renter’s money. The rents are going to go up every single year from where they are today. The value’s going to go up every single year from where it is today, and this is going to save you $50,000 in taxes that you were going to have to pay. Oh, and by the way, if you want to add an ADU to it or another component of it, this deal would work for that. When you finish the basement, that’s going to add square footage, more value, and it’s going to increase a whole new income stream which is going to be going up every single year like the others, and maybe you even short-term rental part of it and you do the other part traditionally. Can you tell me how that’s a loss for you?

Rob:
No, I can’t. I was taking furious notes as you said all of that, and I just, I can’t argue with any of that, David. I would like that YouTube video if I was watching that on the YouTube video. So if you’re watching this on YouTube, hit the like button, hit the subscribe button, leave us a comment down below. And I think that wraps up today’s episode of BRRRR in 2024. Is it still a viable option? The answer’s yes.

David:
Nicely done, brother. You just got to adapt with the times like we always had. I remember at one point, BRRRR was an adaptation, right? When we were talking about it, it was like, what? You could get your money out of a deal? At one point, long-distance investing was an adaptation, right? Well, that’s crazy, you could buy in a different market that’s not your backyard, and there were so many podcasts done on how to do it. We’re still going to have to be adapting, and that’s why you listen to podcasts like this. So thanks for that. Rob, you want to take a shot at my nickname today?

Rob:
Oh, yeah, yeah, yeah. This is Rob for David Sir BRRRR Greene.

David:
Signing off.

Rob:
Signing off, signing off. End scene.