The BRRRR’s first stage, buying a property whose numbers qualify for this strategy, is easily the hardest stage. But that does not make the other stages easy or less complicated.
The rehab portion of the project comes with one major hurtle: keeping the project on time and on budget. Keeping both of these aspects on target is your quickest ticket towards a successful BRRRR.
Here are four tips to help you in this effort!
R is for Rehab
Step 1: Do not use a contractor blindly
Your contractor needs to be your MVP. You need to trust them 100%. A poor match here may cost you thousands in unnecessary improvements and/or holding costs due to things not being done right the first time. You do not want to use a contractor you found online for your first BRRRR.
My best advice when it comes to choosing a contractor as a beginner real estate investor is to hit your contacts and get a rock solid recommendation from someone you know and trust. If friends and family don’t have a recommendation, don’t be afraid to ask the professionals you’ve had help from this far: your lender, lawyer, and agent I am sure will be happy to recommend someone.
When you reach out to the contractor, be VERY open about the type of loan you are working with. Most hard money lenders and rehab loans will allow for a down payment at the start of the project (roughly 10%), and the rest of the funds will be released only when specific draws are made after a certain level of progress is completed. You do NOT want to surprise your preferred vendor with this news.
Step 2: Prepare for the unexpected
If you have never rehabbed a property before, know this: you will run into unexpected issues. It is a written in stone rule of real estate that once a rehab gets going, you will find other issues that were not part of the plan. For this reason, always plan on at least a 10% contingency for unexpected expenses.
For example, if your rehab budget is $50,000, plan on at least a $5,000 contingency fund for unexpected expenses. The good news is that if you’re working with a bank offering a rehab loan, they will automatically bake this into their loan product.
Step 3: Don’t cut corners
While step 4 will tell you to stay focused, this step is a reminder that anything that you identify as not working properly should be fixed during the rehab, and fixes should be by licensed individuals and with quality materials.
For example – if you need a new dishwasher, make sure it is installed by a plumber and a machine that is rated highly. The worst thing you can do is having to replace the dishwasher shortly after the tenant moves in. This goes for all repairs you make: everything is easier while the home is empty.
Remember, your goal is to keep this home forever as a rental, so do not shortchange your future self by cutting corners today!
Step 4: Keep your eye on the prize
Remember: the ultimate goal of the BRRRR’s is to own a cash flowing property without any of your money left on the deal. For that reason, my recommendation is to fully understand what you need to do to the home to maximize its rental potential, but not to go overboard on the rehab.
Doing this will require knowing: 1) what you need to do to the house to demand your projected after repair value (ARV), and 2) what your local rental market demands as far as home features.
Once you know those improvements and the cost associated with them, don’t deviate from the budget for unnecessary reasons.
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