Is your BRRRR going to work?

Buy

As if you haven’t heard this saying already here it is again; in real estate, you make money when you buy. Most banks max out their refinances at 75% of the ARV. It’s crucial to buy a good enough deal so that you can afford the purchase, rehab, lender fees, and closing costs and still be under 75% of the ARV. This is the #1 issue that tanks the BRRRR strategy; paying too much on the buy. You’ve got to nail down you ARV and get it right. If you don’t know how to comp a house, have a realtor(s) take a look. And if you really want to cover your base here, hire an appraiser for a few hundred bucks. It may end up saving you thousands.

Rehab
Since we’re trying to stay under 75% of the ARV, we need to keep this rehab number as low as possible. Your rehab needs to match the neighborhood. There’s no sense putting in top line finishings in a house that’s going to rent for $500. And conversely, if you’re in a nice neighborhood you may have to go top of the line granite and stainless steel appliances. Either way watch out for big ticket items like roofs, electrical, plumbing, and HVAC. This is the #2 issue that tanks BRRRRs; going over your rehab budget. If you don’t know how to estimate repairs you may want to hire an inspector or GC to go to the house with you. Same as above, it will cost you a few hundred bucks, but it could save you thousands.

Rent

As an investment property, your lender is going to feel much better about the loan if you have income coming in. Properly screening your tenant on the front end will save you (and your wallet) a lot of headaches down the road. Have a minimum criterion and stick with it. Income, credit score, clean background, no evictions, and whatever else you feel comfortable with. Make sure to stick to the lease, run your property like a business, not a hobby. If this isn’t your personality, you can still be very successful as an investor, hire a property manager to do the dirty work.

Refinance

Many investors head to the Wells Fargos and Bank of Americas of the world to refinance and are often disappointed. These massive institutions have their box and if you don’t fit, tough rocks. Your best bet here is to keep the banks you talk to small and local. The fewer branches the better. At these banks you can talk to an actual decision maker. Show them your property, show them your plan, have your tax returns, income statements all ready to go. Have it concise and organized so they don’t have to ask for anything. The impressions you make matter, give them confidence that they’re making a good investment in you and your property. A couple things to watch out for here; will they cash you out (loan more than what you’re into the property for) and do they have a seasoning rule (you need to own the property for X amount of time before they’ll loan)?

Repeat

Now that you’ve done one and it worked, there’s a natural itch to keep going. Get as many as you can as fast as you can. Pump the breaks. The key to repeating the process is learn from your mistakes, figure out what you can do better, and don’t move too fast. Don’t buy a property, go through all the steps, and then at the end realize you paid too much and the BRRRR isn’t going to work. Buying houses is good, but buying good deals is better. That never goes out of style.