BRRRR Strategy in the Houston Market

BRRRR stands for buy, rehab, rent, refinance, repeat. The strategy has been popular for years and Houston is one of the better major US markets to run it. It also is not the easy money the internet suggests. In a higher rate environment, the math is tighter than it was three years ago. Here is what actually works in Houston in 2023.

The Five Steps

Buy a property below market value, usually distressed. Rehab it to a rent-ready standard. Place a tenant at market rent. Refinance based on the new appraised value. Pull most or all of your capital back out and repeat the process on the next deal. Done well, you build a rental portfolio while keeping most of your capital in motion.

Why Houston Works for BRRRR

Three reasons. First, deep inventory of distressed and dated single-family properties in inner-loop and near-loop neighborhoods. Second, strong rental demand at workforce price points. Third, a competitive lender market for DSCR-style refinance loans on 1 to 4 unit residential properties.

The Rate Environment Problem

With higher rates, the refinance step is the place where deals break. A property that cash flowed at a 4 percent rate may not cash flow at 7.5 percent. Run your numbers at the rate available today, not the rate that was available in 2021. If the rent does not cover principal, interest, taxes, insurance, and a real management and maintenance reserve, the deal does not work.

Houston Neighborhoods That Support It

Sunnyside, Trinity Gardens, Acres Homes, parts of Independence Heights, and pockets of the Northside still have entry-level distressed inventory and workforce rental demand to support BRRRR. The further inside the loop you get, the harder the rent-to-price ratio becomes.

The Appraisal Trap

I have lived this one. The deal pencils on paper. You buy, you rehab, you place a tenant. The appraiser shows up for the refinance and uses comps from six months ago that are 10 percent below where the market is now. The bank bases the refinance on the appraised value, not the market value. You leave more capital in the deal than you planned.

The fix is to underwrite conservative. Build the deal so it still works if the appraisal comes in 5 to 10 percent below your projection. The deals that survive a tough appraisal are the deals worth doing.

How to Execute

• Pick one Houston BRRRR neighborhood. Learn it block by block.
• Pre-approve with a hard money lender for the buy and rehab.
• Pre-approve with a DSCR lender for the refinance. Confirm their seasoning rules.
• Build a scope of work with a real contractor, not a guess.
• Underwrite at today's rate, not yesterday's.
• Verify rent comps with active listings, not just leased comps from six months ago.
• Plan for 90 days from purchase to tenant in place. Build extra into hard money interest.

Where to Learn the Houston Version

Coffee & Construction Houston regularly walks BRRRR deals on real BEDDIEO and partner projects. The room is The Construction Lounge. The firm is BEDDIEO Construction & Design. You can also see my work as a Houston broker and developer.