Does The BRRRR Strategy Still Work For Toronto Real Estate Investors In 2023?
One of the very first real estate investing strategies that newer investors usually get introduced to is something called the BRRRR method: “buy, rehab, rent, refinance, and repeat,” which got even more popular throughout the pandemic.
Nowadays, with a much more volatile market, we often get asked if BRRRRs still work in Toronto. The short answer is that it could, but be cautious and it’s probably going to take longer to repeat nowadays.
In this video, I’ll dive more into this and then give you our best tips on BRRRRing in Toronto.
Let’s take a look at how a BRRRR is done. Typically, you’d buy a house that needs a lot of work at a deep discount. After putting in renovations to bring it up to a good rentable state, you rent it out and then go back to the bank to get it appraised.
If you get a good lift on the value, you’d be able to refinance the property with the banks. A successful BRRRR would need enough cash pulled out from the refinance so that you can repeat this process with the next property.
What Happened During The Pandemic
Now, let’s take a look at how the numbers worked with the BRRRRs throughout the pandemic. For example, an investor might have bought a run-down property for $900,000. Market comps were around $1M, so the investor got a $100,000 discount because the property needed work.
They ended up putting in $80,000 of renovations to upgrade, and so the actual value add appreciation was only $20,000. But they got lucky and saw huge increases in market appreciation during the pandemic, so the property saw a 30% increase in under a year. Because of this, they were able to get an appraisal of $1.3M and pull out $320,000 to repeat this process again.
The investor might have thought that they did a successful BRRRR here. In reality it was from the hot market so it wasn’t much different from buying just a turnkey property and waiting a year. Either way, the fact is that the big increase in property value in a short period of time helped them get into their next property quickly.
So once you understand all of this, you might see the increasing risk if you don’t BRRRR correctly. If you took on that same renovation in the first example in today’s more volatile market and real estate prices dropped another 10%, you would end up at a loss simply because market prices came down, and the BRRRR definitely won’t work until the market recovers again.
What's Changing In Today's Market
But more recently, we’ve been seeing clearer signs of a bottom out and more buying interest, and from the latest February data, we can see that this is finally taking prices higher and in fact we saw double digit price growth in month over month for 416 houses.
However, the buyer pool who’s driving prices up aren’t actually investors. When it comes down to it, end users just simply wait anymore since they’ve been waiting for months already and when you combine pent up demand with limited listings, prices naturally creep up.
Here’s the interesting bit: BRRRR’s fundamentally don’t work as well in a hot investor market since there’s more demand for homes that need work, which ends up reducing the value-add potential for renovations. The reason BRRRR’s seemed to do well was because for market appreciation.
But now, demand for homes that need work is lower because there’s less buying from investors, and that’s why we’ve been seeing a bigger price gap between renovated end-user homes and unrenovated homes. So for real estate investors who are up to take on projects, this can present a very interesting new opportunity for investors if you are up for big renos in expect for more value-add gain potential.
What You Need For A Successful BRRRR
Let’s say you end up buying a property that needs $150k in major renovations for $850,000. Post-renovations, the property is worth $1.1 million, so the value add is $100,000.
In this market, we’re not expected the same high annual appreciation as before, but it’s safer to assume a 3% long term annual appreciation moving forward in line with inflation. And once you add in the 3% expected annual appreciation, your property value might be $1.13 million in a year’s time.
If you can pull out 80% of the extra property value, then you would have $224,000 of capital to reinvest in the next property. It might still not be enough capital for another BRRRR, but it’s definitely going to get you closer to that point compared to if you were to take on a smaller renovation.
The other important thing is to be prudent about what renovations to put in. With experience, you’ll know what types of renovations to take on and how you can strategically lower your total renovation costs. This kind of knowledge can make a pretty big difference in the value of your renovation.
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