There’s a subset of FIRE adherents who religiously follow the BRRRR method that has been made famous by the good folks at Bigger Pockets. BRRRR is an acronym which stands for Buy Renovate Rent Refinance Repeat. Essentially, an investor buys a property, renovates it, and puts a renter in it. Renovations increase the value of the property. The investor withdraw the new equity by refinancing the property with the bank then goes on to find another property in order to repeat this process.
When the BRRRR method works, real estate investors make very good money. The investor only undertakes renovations in the belief that they will increase the value of the property and extract equity. If they don’t believe they can do that, then they have no motivation to buy the property in the first place. New tenants are generally found to pay the new, higher monthly rental and that should be enough to pay off the mortgage over time. Good cash flow also puts profits into the investor’s pocket. Refinancing the property at the higher assessed value means the investor can withdraw money to fund the purchase of the next property and start this process all over again.
Great plan for the investor! Great plan for the bank!
Not so great a plan for the people who lived in the property before it was renovated. The previous tenants may not be able to afford the new rental prices. It stands to reason that the investor would not have bought the property and poured money into renovations if she didn’t believe that higher rents could be charged to offset the costs. In other words, the goal is to acquire higher-paying tenants in each unit.
What happens to the renters who cannot pay the new, higher rents?
This is the other side of BRRRR… and proponents of this method never discuss the issue of what happens to the poor people. Some people in society simply cannot afford to pay more for their accommodation. What happens to them?
Again, under the BRRRR method, rents increase after the renovations are done. Existing tenants are always welcome to stay in their units if they can afford the new, higher rental rates. Even those who moved out during the renovations are welcome to return… if they can afford the new, higher rental rates.
Adherents to the BRRRR method don’t talk about what happens to the poor people, or those who have otherwise lost access to a rental unit within their budget. (Maybe the adherents do talk about this privately, but never publicly?) When implemented as designed, the BRRRR method necessarily pushes the poorest renters to the margins. They lose their homes because they don’t have enough money to pay the higher rents. Perhaps it’s naive of me to wish that proponents of the BRRRR method acknowledged this, and maybe consider taking slightly less profit by letting a few of the poor tenants live in the renovated units at their former rental rates.
I don’t have any easy answers for the people profiled in the attached CBC article. The bottom line is that the renters profiled in that story need money to pay higher rents. Hopefully, they get it from someone. Rents are not going down any time soon. It’s difficult to build a nest egg when every penny of income has to be spent on the daily costs of living.
And the solution is…
Presently, I do not have any solutions for people who are already caught in poverty’s trap. Most of my suggestions are aimed at people who have some disposable income, aka: fat to cut from their current spending habits. It’s trite but true – you need money to make money. You might not need a lot to get started, but you do need a little something. You cannot invest $0 because $0 is not enough to buy anything.
For my part, I encourage people to have emergency funds and passive income so that they have a buffer of sorts. Passive income bolsters any money earned through the sweat of your own brow. And if you have enough passive income, then it’s the equivalent of a second salary. Should you choose to rent your accommodation, having passive income increases your odds of always being able to pay for the inevitable rental increases.
Ideally, your regular job pays for your all of your expenses before retirement, while your passive income builds a cushion for you. To be extremely clear, you should also view investing for Future You as an expense to be paid from current income. If your investments do very, very well, then your passive income will continue to grow while also paying for the expenses of your retirement. This will allow you to absorb the increased costs of living after your working years are over. Inflation won’t stop just because your employment income has.
For myself, I love receiving income from dividends and capital gains. Money from my day-job buys me shares in dividend-producing companies. Every month, a little bit of dividend money is automatically re-invested to buy more shares in dividend-producing companies. At the end of the year, I receive capital gains. I’ve been doing this for a very long time. So far, my passive income is almost equivalent to a full-time job at minimum income in my province. It’s not enough to live on, but it’s certainly a good amount to re-invest every year.
The past cannot be changed.
I was fortunate enough to read the book, The Wealthy Barber by David Chilton, when I was a newly-minted adult. That book set me on the path of learning about personal finance. (I think you can still get this book from the library.)
Unfortunately, no one can go back in time and make different choices with their money. The renters in the article need help today. Regretting past decisions won’t help them with their current problems. The impact of the BRRRR method is forcing them to seek new shelter now. The limitations of their funds are preventing them from acquiring a new home that they will like as much as the one they had to vacate. Wondering what could have been done 20 or 30 years ago does not help them today. They are facing the very real risk of losing their homes as a result of the BRRRR method.
My question to you is this. Do the investors following the BRRRR method owe anything to the people that they displace?