Top 5 Mistakes When Using The BRRRR Strategy
What is the BRRRR strategy when investing in real estate? This is actually an acronym that breaks down the steps of a specific real estate investing strategy. This investment model is a popular way for people to invest in properties where they can add value and keep as little of their own money in a deal as possible. The main goal is to have the least amount of personal capital in a deal after the refinance step. This is typically the gauge for the deal being successful or not.
What does each letter of the acronym stand for?
(B)Buy (R)-Rehab (R)-Rent (R)-Refinance (R)-Repeat
Since 2008, we have successfully completed the BRRRR process hundreds of times and have made plenty of mistakes. Here is an overview of those mistakes that we would like to share so that others do not make the same mistakes that we did.
- True Expense Of Carry Cost — Every day is a dollar and projects always take twice as long as you had originally planned for so you must make sure you account for these expenses. There is daily cost of your short term or private money, insurance, taxes, lawn care, utilities, and even security depending on the neighborhood you are in. These costs can add up to sometimes as much as 5% of your overall budget. Don’t forget to account for costs associated with heat if your project is being completed in the winter.
- Knowing What the Refinance Lender Will Expect — Before you purchase a property up front, you need to know who will be loaning you the money on the back end. Even further, you need to know what your refinance lender will require to cash you out. Your lender may require that the property has been rented out for a specific amount of time, or “seasoned”, or have various other requirements. Be sure to check the terms of your refinance closely.
- Taking On Larger Projects — Economic landscape, bank terms, and larger carry costs affect your scalability and risk when a project that takes over 6 months to get to the refinance step. We were able to move the fastest in our journey when we focused on a specific size of property, smaller scopes of work, and clustered projects in one generalized area.
- Not Completing Full Rehab Scope — It took us almost 140 units to learn that we were not doing enough rehab work up front. Four years into our journey we saw that we were getting nickel and dimed on maintenance and taking on way too many capital improvement projects on almost all of the properties. This meant one thing. We were not completing the full scope of work required. We were just doing enough to get a renter in there. This fudged our numbers, our focus, and our tenants experience. Once a project like this has been completed, you really should have minimal maintenance costs and limited capital improvements for a few years as well.
- Overshooting the (ARV)After Repair Value — While using BRRRR or with any rehab project, this is one of the biggest pitfalls in an investors journey. A real estate investor is typically a very optimistic person, but when figuring an ARV you must be the opposite. You cannot influence an appraiser on the back end of your project(LOL-even though this is Chicago) so you need to be sure to control your destiny in calculating how an appraiser will value your property compared to recent sales.
In addition to being conservative on your ARV, you can provide the appraiser with known facts. You should meet the appraiser and provide comparable sales of off market properties you might think will help you.
Things to keep in mind
- Do not provide MLS comparable sales to an appraiser because they may take that personally that you are saying they are that incompetent
- Provide a detailed list of the upgrades you made since your purchase months before
- An appraiser has to justify how you can buy a property for a specific amount and in just 3–6 months the value has jumped such a large percentage. We would even provide the actual cost of the improvements in addition to the detailed list.
Of course there are other mistakes we made and tips and tricks we can share but these are the top 5 we feel will hurt your investment journey the quickest. Reach out to us today to discuss these items in more detail along with other tips we can share.
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Originally published at https://www.gcrealtyinc.com.