The Resurgence of Home Flipping and the BRRRR Method: Insights from Dave Meyer of BiggerPockets

In recent years, home flipping and the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) method have faced significant scrutiny within the real estate investing community. With rising interest rates and cooling home prices, many investors have been hesitant to engage in these strategies. However, according to Dave Meyer, a housing market expert at BiggerPockets, a resurgence is on the horizon. As the Federal Reserve is expected to cut interest rates, lowering borrowing costs for investors, the landscape for home flipping is changing.

The Changing Economic Landscape

The Federal Reserve’s monetary policy has a profound impact on the real estate market. Over the past couple of years, the Fed has raised interest rates to combat inflation, leading to increased borrowing costs for investors. This environment made it challenging for home flippers to achieve the post-rehab appraisals necessary to justify their investments. Additionally, the higher interest rates cut into profits when it came time to refinance properties.

However, Meyer is optimistic about the future. He predicts that the Fed will begin to lower interest rates, starting as early as September 2023, with additional cuts expected throughout the year. This shift is likely to reduce borrowing costs for real estate investors, making it easier to finance home purchases and renovations. Lower interest rates could also provide a minor boost to home prices, increasing the likelihood of favorable appraisals after rehabs.

The Profitability of Home Flipping

Despite the challenges posed by rising costs, home flipping profits have been on the rise since early 2023. According to data from ATTOM, profits from home flipping jumped significantly in the first quarter of 2024, reversing a downward trend that began in 2022. Meyer notes that already-renovated homes have seen more price appreciation than those requiring repairs, creating a wider margin for home flippers in many markets.

Data from Remodeling indicates that renovations are yielding a higher average return on investment this year, increasing from 60% in 2023 to 75% in 2024. Meyer emphasizes that properties needing work are experiencing a more significant price correction, which can create opportunities for savvy investors willing to put in the effort to renovate.

Market Resilience Amid Economic Concerns

Meyer acknowledges that he was initially skeptical about home flipping due to fears of a larger market crash. However, he points out that home prices only fell by about 5% from June 2022 to January 2023 and have been recovering since then. With concerns about a housing crash subsiding, Meyer believes that home flippers can expect smoother sailing moving forward.

Interestingly, he highlights that in four of the last six recessions, home prices actually rose. This resilience suggests that even if the U.S. economy enters a recession and unemployment rises, the housing market may remain stable. Meyer argues that the housing market is less volatile than the stock market, making forced selling on a grand scale unlikely.

The BRRRR Method: Opportunities and Challenges

The BRRRR method has gained popularity among real estate investors as a strategy for building wealth through rental properties. However, Meyer warns that there are still roadblocks to successfully implementing this strategy. Rising labor costs and the price of goods can significantly impact the profitability of a project. Investors must be diligent in forecasting these costs and ensure they are conservative in their underwriting.

Meyer advises investors to account for potential increases in labor costs over the duration of a project. For instance, if a rehab project takes six months, labor costs may rise during that time, affecting the overall budget.

Expert Opinions on Home Flipping

While Meyer is optimistic about the resurgence of home flipping and the BRRRR method, other experts remain cautious. Zillow’s Chief Economist, Skylar Olsen, has expressed concerns about the viability of home flipping in the current market. She emphasizes that high borrowing rates can significantly cut into a project’s profits, especially when considering closing costs. Olsen suggests that longer-term investment strategies may be more favorable in today’s economic climate.

Conclusion

As the Federal Reserve prepares to cut interest rates, the prospects for home flipping and the BRRRR method are looking brighter. With rising profits and a favorable market environment, investors may find renewed opportunities in these strategies. However, it is crucial for investors to remain vigilant, accounting for rising costs and potential market fluctuations. As the real estate landscape evolves, those willing to adapt and innovate may find success in the world of home flipping and rental property investment.