2024 Q1 Multifamily Update – The death of the BRRRR

We all love the BRRRR strategy.  Improve a property, then refinance to repatriate all your equity (down payment + upgrades) and recycle into the next project.  This has been an incredibly powerful wealth creator for me and many of my colleagues over two + decades.  This strategy is officially dead in Canada for any value-add apartment building in Canada.

Well not quite, but it is on life support. So, what happened?  To summarize it comes down to two factors, lenders, and the Canada Mortgage and Housing Cartel, aka. CMHC.

Let’s start with the lenders.  Thinking of buying a 12 suiter for your first multifamily purchase?  Good luck. Funding has almost completely dried up for smaller multifamily assets, and it is extremely difficult to find a lender today who will fund if the loan is under $1M.  Combine this with the fact that less lenders are even competing for multifamily loans these days (largely due to the CMHC monopoly), makes this an incredibly challenging time for investors. Conventional lenders are out there, but rates are high in the 6%+ range with a maximum amortization of 25 years shrinking loan values substantially.

All lenders, CMHC and conventional have unofficially dealt the death blow to the BRRRR and will not recognize appraisals until you have owned the project for at least 2 years.  A profitable BRRRR depended on short term interest only financing (6 to 12 months), and the ability to refinance to pay out your renovation costs plus your initial equity – but no more…

So, if the BRRRR strategy is dead now what are sophisticated investors doing? Is there a new fast path to millionairehood?

First let’s look at how we got here in the first place.  In the early to mid 2000’s during the housing recover CMHC offered very favorable financing to investors who were willing to renovate older multifamily buildings in healthy vacancy rate markets. Interest rates were dropping quickly, and rents were rising, a perfect storm for savvy investors.

Back in 2005 it was standard practice to borrow 85% loan to value at 18% interest, and then refinance with CMHC and pull all your equity + improvements in as little as 6 months!  It was coined as the fast path to millionairehood. Investors were able to buy several buildings in a year with very little of their own money invested – times were good indeed.

This strategy worked well with conventional financing as well, and I preferred the buy and hold strategy vs. the BRRRR as it carried less risk, and I could still refinance at the 5-year point.

CMHC began implementing punitive when it was revealed that the agency was participating in so called ‘renovictions’, forcing tenants out as owners improved their assets. The moves were slow at first, making investors get an appraisal to receive the refinance funds, and then placing limits on the use of the refinance cash (only new rentals or improvements could be used).

As the housing crisis deepened the federal government decided to focus on new construction and implemented even stricter conditions to their insurance.  Premiums were raised, and you could not refinance unless the debt was with an approved lender. This eliminated short term BRRRR lenders, as well as vendor take back mortgages (VTB’s), forcing investors to get creative with increasing levels of risk. CMHC doubled down again requiring you to be with their ‘approve’ lender for a minimum of 24 months….

The final straw is that almost ZERO lenders will recognize an appraisal if is less than 2 years old, regardless of rents and improvements.

This is absolute insanity – Me, the investor who has taken all the risk and forked out all the cash cannot reap the benefits of my work by refinancing with long term debt on a great asset … BUT CMCH will roll out the red carpet for a NEW investor who can buy with 5% down.

Case in point – The 18 suiter I bought in Fort Saskatchewan for $125K per door, was recently appraised at $185/door, pretty good right? Well virtually no bank will recognize the new valuation as I have only owned it for a year, BUT a new investor can borrow 95% of the appraised value and scoop up the property…

CMHC is plain and simply a corrupt bloated monopoly who has cornered the market, especially in new builds, and does what it wants when it wants.

Don’t kid yourself, if your business plan depends on CMHC to make a profit, it is a plan that is doomed to fail.

But there is hope for investors with a solid plan and are willing to stick it out.  I have returned to the conventional lending universe with great success and I will be talking all about it this Thursday, April 11th at 8pm ET (5pm PT).

P.S. With the BRRRR strategy is dead in ALL provinces, I have personally made a dramatic shift in my investment strategy for my western Canadian markets, but what about Ontario and other rent-controlled provinces?  Tune in this Thursday, April 11th to find out as I go head-to-head with Ontario Multifamily colleague Quentin D’Souza – There are only a few spots left so please register today. You will receive a recording, but you must register.

Register for Multifamily Masterclass 3 – Forced Appreciation EAST vs. WEST