Some property owners with record equity windfalls are putting refi money to work by buying second, third or more rental houses.
BRRR – Buy, Rehab, Rent, Refinance, Repeat
Just like institutional investors, newbie investors are hoping to get rich by becoming landlords and leveraging home and rental price appreciation.
The difference in institutional and newbie investors? Institutional investors are financing their investor deals with flexible underwriting and higher rates than conventional mortgages from Wall Street and newbie investors tapping into their own home equity to buy more properties.
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These home equity loans more than doubled in Q4 2021 from one year earlier to $8B, the highest level since 2006, according to Black Knight.
Though there is no quantitative data on how many investors there are, according to Bloomberg, newbie investors are everywhere. This “make-it-big” strategy is flaunted in meet-up groups, get-rich pundits and media. One such media outlet is the podcast called BiggerPockets. BiggerPockets gave this strategy a name” Buy, Rehab, Rent, Repeat or BRRRR.
The higher home and rent prices grow, the faster the BRRRR strategy of stacking one mortgage on top of the last grows.
BRRR Could Become EEK
Greg McBride, chief financial analyst with Bankrate.com, said, “While leverage can turbocharge your returns when prices are on the way up, it (leveraging) accelerates losses when prices go down. If there’s a downturn in the economy and all of a sudden the tenants are (unable to) pay their rent, that creates a cash-flow issue.”
John Burns, founder of John Burns Real Estate Consulting (JBREC), weighed in on the BRRRR strategy. “Young investors are doubling down, refinancing their first investment to get a down payment for their second. It’s like they don’t know there was a downturn in the late 2000’s.”
Institutional Impact on Market Smaller than Impact of Smaller Investors
It’s true that investors are increasing influencing the US housing market as publicly financed, tech-fueled flipping outfits such as Opendoor and rental firms such as Invitation Homes compete for properties. But mom-and-pop and newbie young investors far outnumber large institutional investors.
Even in Phoenix, 32% of single-family purchases in January 2022 were made by investors with fewer than 10 properties, according to JBREC while 12% of those purchases were made by institutional buyers.
History Not Always Harbinger of Future
True, real estate investment ended with a crash in 2008 but 2022 is not 2008. Nearly $10T in tappable home equity is a large cushion for homeowners and lenders. Underwriting for investment purchases is much stricter in 2022 and typically requires a down payment of 20% or more.
Industry prognosticators say there is little to foretell a slowing housing market despite rising rates and global turmoil. Why? The Millennial generation, the largest of all generations, is reaching homebuying age and inventories continue to tighten. And many of these coming-of-age potential Millennial homebuyers without equity will be forced to rent the American Dream instead of having saved enough of a down payment to buy that dream.
One such newbie investor who quit her job as a mechanical engineer to focus on real estate investing said, “I’m always thinking about what happens if there is a downturn. But the housing shortage is so extreme that I don’t think it will be soon.”
This 24-year-old former mechanical engineer now investor bought a fixer-upper with her boyfriend last year for $82,000 and invested an additional $36,000 to rehab it. That house appraised for $185,000; she pulled out $129,5000 with a cash-out refinance to buy other properties. Now this couple owns 11 properties with 20 units.
Another so-called newbie investor at age 31 now makes as much on the three three-family homes he bought with the equity he pulled out of his original home as he does in his construction job. Last month, he got his real estate license to help other blue-collar investors buy in their hometown, a town slated to get its first commuter rail stop next year.
A third newbie said, “I’m growing exponentially off of one refinance…at the end of the day, the only thing that made me real money is real estate. This is the one true fact.”
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Thanks to The New York Times.
taking a page out of institutional investors’ books with the hopes of getting rich of