Why your BRRR is going to lose money

56 Replies

Top ten reasons you will lose money on your first BRRRR. This list has been pulled directly from the school of hard knocks

Generally speaking and based on NY building code

1. You think the cheapest house has the most margin

2. You don’t understand the permit process and will do some work that will require a permit and have to undue it later when an inspector catches you.

3. You don’t understand asbestos and demo work. You will find out later when a test should have been done. There will be pain.

4. You can’t see knob and tube wiring when you open a wall. But the inspector can.

5. You think chipping paint on the interior and exterior of a home built before 1978 is no big deal and you will sand it down and repaint it

6. You got a quote on all the apartments to get the place rent ready and missed all the mechanicals

7. You didn’t see any reason to replace all the plumbing, and you don’t know the difference between a copper, lead, and galvanized main line.

8. You didn't know that once you start your BRRRR and an inspector catches wind, you need to update every mechanical system and you have to do it in the proper order. Remember that knob and tube you couldn't identity???

9. You will underestimate the rehab by as much as 50% from the financial side and the time side.

10. My favorite one you will finally find a contractor that can do the work at 65-75% of the cost of your other three quotes. This will be the last happy day of your entire BRRRR.

How to avoid all of this? Traditional financing, light value adds where you leave the equity in the property, and you save for another 7 years to get your second property, and on, and on.

Real estate is a slow long play. People starting with the BRRRR mentality have the wrong mindset from the start.

.

I definitely agree with points 1 and 9. The numbers are important, and have to work, but there is more to it than getting the one with the highest return on paper. You have location, turn overs, quality of tenants, etc. I have yet to do the last R in BRRR and can't see myself personally doing that.

Originally posted by @Matthew Irish-Jones :

@Jim K. Don’t you self renovate? How many of these have you learned the hard way?

Two points: this is western Pennsylvania, and my target area is in southern suburbs just south of the city proper, where the permitting process is nowhere near as stringent as in the City of Pittsburgh proper. But while it is nowhere near as stringent, if you don't toe the line when called upon and you end up on the local municipal code enforcement blacklist, you stay on it, and your name is shared with all the other local municipalities.

I have learned 1,2,4,5,7,9, and 10 the hard way. There's actually very little in the way of asbestos inside the walls of most places here built in the first local building wave 1890-1930. Our biggest issue is the vermiculite insulation in the attics, which was typically added later, in the 1940s and 1950s. Conversely, lead paint is a HUGE issue. But all too many people buy into the mold hustle and don't realize the peeling paint chips are sucking the brains right out of their kids' heads.

@Jim K. You don’t find asbestos in plaster walls? Are you required to test for it?

I would assume we are both in and around rust belt cities that were constructed around the same time period in the 1900’s.

When we find a very old building we have found it in the walls, piping, boiler, shingles, you name

It.

The lead paint issue is real. Most people start to scrape and paint. Then the municipality shows up and tells them it can't go into the air and they are doing to test the soil after. Then the remediation starts, then the costs start mounting… then you lose money in your BRRR and pay for an education.

I probably should have added fire code. I renovated a 7,000 sq for mixed use building and had to fire wall each unit. Double layer of 5/8 drywall encapsulation each unit. That’s a labor intensive endeavor!!

Originally posted by @Matthew Irish-Jones :

@Jim K. You don’t find asbestos in plaster walls? Are you required to test for it?

I would assume we are both in and around rust belt cities that were constructed around the same time period in the 1900’s.

When we find a very old building we have found it in the walls, piping, boiler, shingles, you name

It.

The lead paint issue is real. Most people start to scrape and paint. Then the municipality shows up and tells them it can't go into the air and they are doing to test the soil after. Then the remediation starts, then the costs start mounting… then you lose money in your BRRR and pay for an education.

I probably should have added fire code. I renovated a 7,000 sq for mixed use building and had to fire wall each unit. Double layer of 5/8 drywall encapsulation each unit. That’s a labor intensive endeavor!!

Nope on the testing, again, we're talking extremely loose permitting compared with NY, even more loose permitting outside Pgh proper compared with inside the borders of the actual city. All you have to do to legally call yourself a "home improvement contractor" in the entire Commonwealth of Pennsylvania is register with the Attorney General and take out a $50K insurance policy. Outside of some of the biggest counties, with no training, no certification, no nothing, I could legally call myself a "MASTER PLUMBER" and print up signs/business as long as I was registered as a home improvement contractor and put my number on my vehicle.

Which goes a long way to explaining the low housing prices in the area.

I'm completely serious, Matt. I was raised in upstate NY, the Elmira area. Went to school at SUNYCAB. Pennsylvania's a different world.

Fantastic list Matthew! After more than a decade of BRRRs in Milwaukee I can add a few more items - I paid for it:

11. You take on a house that needs literally everything new and underestimate the accumulative cost effect

12. You bought a small house because it was cheap and now your rent and appraisal are low

13. You bought a house on bad location (or an awkward floorplan) just because it was cheap and nobody else wanted to buy it

14. You do not replace the roof (or HVAC or windows or siding) because there was still some life left, and 2 years later you have to

15. You saved on materials, because you did not understand the difference between commercial grade and cheap (plastic shut off valves can cost you $$$!)

16. You did not want to pay $4,000 to get that huge old dying tree removed, so mother nature did it for you

17. You thought the tenants would actually maintain, weed and mulch a dozend flower beds..

18. You finished the basement, but did not invest in a new sump pump, burried downspouts and improved exterior grading

19. You thought you could save money by replacing only half of the bathroom instead of a full gut

20. You thought you could save money by painting old cabinets and installing new stone tops on them

    I agree. My first BRRRR was a cat piss infested home. I got in over my head, and ended up selling instead of BRRRR'ing. Made out with an additional 80k, but I got very lucky.

    My second "BRRRR" was a 3 unit that I turned into a 4 unit. Paid the city a 5k "impact fee" by turning an art studio into a residential unit, and immediately added 200+k in equity. Best 5k investment I ever made...

    I no longer look for BRRRR's, but instead look for basically turnkey rentals that will cashflow. I'll never do anything like my first one again, but I wouldn't mind the second :)

    Originally posted by @Ryan Randall :

    I agree. My first BRRRR was a cat piss infested home. I got in over my head, and ended up selling instead of BRRRR'ing. Made out with an additional 80k, but I got very lucky.

    My second "BRRRR" was a 3 unit that I turned into a 4 unit. Paid the city a 5k "impact fee" by turning an art studio into a residential unit, and immediately added 200+k in equity. Best 5k investment I ever made...

    I no longer look for BRRRR's, but instead look for basically turnkey rentals that will cashflow. I'll never do anything like my first one again, but I wouldn't mind the second :)

    Both deals you mentioned seemed like you made good money.

    @Joe S. There's a lot of details I left out of the first one. Lot's of sleepless nights, stress, etc. Yes, I did make money. 

    The second deal was a no-brainer, I would do it again in a heartbeat, but those opportunities are rare.

    After going through 3 deals, I realize I value my time and sanity a lot more than making that extra buck. I now just aim to buy one solid property ever 1-2 years in a fantastic area. Then just sit on that property for 15+ years.

    @Marcus Auerbach this is excellent. I could write a novel with ways to lose money on a BRRRR. The key component to a good BRRR seems to be to not make it your first investment. It all seems so easy in the beginning.

    I love your point about sharing your list because you paid for it.  I did not pay a college for my Real Estate Investing education, I paid crooked contractors, I over paid sellers for crap houses, I paid subs, paid electricians sometimes one to do something and another one to fix what the first one did, I paid agents, employees, property managers, cleaners, you name it I paid them up front...  everyone gets paid... The investor and owner gets paid last!!!

    @Ryan Randall I have spent a lot of time and money thinking I was a genius and trying to add units to places.  At least in NY its almost always requires every unit to be "fire walled" meaning every single unit need to be an encased shell with double 5/8 dry wall or... you need a sprinkler system, all of this requires architectural plans and an investment of $5,000 (ish) to find out its cost prohibitive to do it.  

    Sounds like you made out on your BRRRR's. I am still sitting on some BRRRR's I way over renovated. Like I keep saying, have great homes with quality construction and tacked on a 20% education fee to those units LOL.

    @Matthew Irish-Jones

    Knob and tube wiring is easy to spot. Look in the attic or crawl. White insulator are pretty obvious at that point. Now if it's hidden by the previous owner (spiderwebbing) then thats where the issues start. If a home has knob and tube and you are still finding ground wires.. that wire is going to a metal drain for the house. Find the connection if you can. Or the easiest way is to scope the wall during the inspection.

    @Matthew Irish-Jones

    @Marcus Auerbach

    We really should get together and write that book. I suspect Bigger Pockets would be interested in publishing "The Book on How Not to Lose Your Shirt in Fixer-Uppers."

    As far as spotting K&T goes...oh yeah, easy to pie to figure it out if you know what it is.

    Marcus, I can testify to 11, 12 (to some extent, I've been lucky with 2/1s), 13 (oh God, yeah), 14 (HVAC), 15 (builders grade), 19, but 20 actually worked out with some woodworking experience and ability.

    There have been a number of narrow saves in the kitchens because I have and can use a circular saw with a saw guide, a table saw, and a routing table. Basic woodworking is the only reno skill that I came by the traditional way, from my father. He was a hobby furniture maker when he was young and in retrospect, he had the patience of Job with me when it came to learning how to use his tools.

    Thanks for the voice of reason.  Hearing about people closing on 10 deals a year sometimes has me feeling less than.

    "10. My favorite one you will finally find a contractor that can do the work at 65-75% of the cost of your other three "quotes. This will be the last happy day of your entire BRRRR.

    How to avoid all of this? Traditional financing, light value adds where you leave the equity in the property, and you save for another 7 years to get your second property, and on, and on.

    Real estate is a slow long play. People starting with the BRRRR mentality have the wrong mindset from the start.

    "

    .

    How about cost of financing with hard money and refinancing.

    Originally posted by @Matthew Irish-Jones :

    Top ten reasons you will lose money on your first BRRRR. This list has been pulled directly from the school of hard knocks

    Generally speaking and based on NY building code

    1. You think the cheapest house has the most margin

    2. You don’t understand the permit process and will do some work that will require a permit and have to undue it later when an inspector catches you.

    3. You don’t understand asbestos and demo work. You will find out later when a test should have been done. There will be pain.

    4. You can’t see knob and tube wiring when you open a wall. But the inspector can.

    5. You think chipping paint on the interior and exterior of a home built before 1978 is no big deal and you will sand it down and repaint it

    6. You got a quote on all the apartments to get the place rent ready and missed all the mechanicals

    7. You didn’t see any reason to replace all the plumbing, and you don’t know the difference between a copper, lead, and galvanized main line.

    8. You didn't know that once you start your BRRRR and an inspector catches wind, you need to update every mechanical system and you have to do it in the proper order. Remember that knob and tube you couldn't identity???

    9. You will underestimate the rehab by as much as 50% from the financial side and the time side.

    10. My favorite one you will finally find a contractor that can do the work at 65-75% of the cost of your other three quotes. This will be the last happy day of your entire BRRRR.

    How to avoid all of this? Traditional financing, light value adds where you leave the equity in the property, and you save for another 7 years to get your second property, and on, and on.

    Real estate is a slow long play. People starting with the BRRRR mentality have the wrong mindset from the start.

    .

    I think people should BRRR but as a live in honestly. It takes time out and even if you don't make money you end up with a decent place to live and knowledge for when you do a BRRR you don't live in. If I did not own home I would not know how to do half the stuff I will have to do the first week I close on my next property. I will say this though... know that bathrooms are some of the most expensive things you will try to do yourself and messing up a walk-in shower will eat every dime you thought you were saving. Do the demo yourself, Have a pro set the wet areas and tile them then you can do pretty much everything else yourself.

    Originally posted by @Dell J. :
    Thanks for the voice of reason.  Hearing about people closing on 10 deals a year sometimes has me feeling less than.

    "10. My favorite one you will finally find a contractor that can do the work at 65-75% of the cost of your other three "quotes. This will be the last happy day of your entire BRRRR.

    How to avoid all of this? Traditional financing, light value adds where you leave the equity in the property, and you save for another 7 years to get your second property, and on, and on.

    Real estate is a slow long play. People starting with the BRRRR mentality have the wrong mindset from the start.

    I'm pretty sure real estate has always had those who get into it because they think they'll get rich quick. The people who get on Bigger Pockets and ask if there's a way through real estate to quit their jobs and replace all their income and do a lot less work don't really bother me. They honestly just want out of the rat race. When you tell them their dream has some complications they need to look closer at, it's natural that they'll get defensive, even cocky. Even that doesn't bother me.

    But once they've pulled the trigger and screwed the pooch six ways from Tuesday from their home on the coasts with some idiot buy in the Rust Belt because they obviously have the money to do that kind of screwing around with comfortably or a daddy they know will bail them out...THOSE GUYS annoy me when they show up. "Hey, hey, hey, looksa me and my crapshack, the wholesaler says the ARV is half-a-mil, I got it for fifty grand! Gimme some suggestions on what to do with it, wouldja couldja?"

    And God help them if they get lucky the first time. These are the guys that in primitive societies jump on a log at the edge of the village, beat their chest, and claim their semen has magical properties.

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