Why your BRRR is going to lose money

Why your BRRR is going to lose money

Matthew Irish-JonesBusiness Member
Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes

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.

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Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
4y

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

    See this reply in the discussion

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    • Joe SplitrockPro Member
      Moderator
      Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
      4y

      I didn't read any of this in the BRRRR book...

    • Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
      4y

      spot on!  and sadly from my POV all this churn of older homes is destroying the older home stock that should be preserved as guess what - they dont make that kind of home anymore.......  and the materials used to make it are no longer available (old growth timber, dimensional lumber , etc etc etc) 

    • Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
      4y

      Great list and great discussion.

      I guess my favorites are what I would call goldilocks BRRs.  They are close, but need some efficient and strategic upgrades or a little repurposing.  One of my Rs is definitely repurposing a room, basement or strategy (turning into a sober living home or MIL / 2 unit, etc) but try to stay out of the code and planning/ permit offices. 

      Just inherently being a bad handyman vs full contractor / rehabber can have it's advantages. Paint, flooring and resurfacing are my specialties. I'll stay in my lane and out of the permitting realm altogether 9 times out of 10. 

    • Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes
      4y
      Originally posted by @Matthew Irish-Jones:

      @Jim K. I quit my corporate 9a-5p with a guaranteed pay check to work full time for myself 5a - 9p Mon-Sun with no guaranteed income!!!  

      I don't mind working for myself 5am - 9pm Monday-Sunday with no guaranteed income versus working for the Man in any way. I suffer from a severe case of stickittothemaneosis, I really do. It's deep in the blood, my father had the same sickness himself.

      But I'm not on here telling people my life is sunshine and roses when it doesn't rain and champagne and caviar when it does.  I eat my shame sandwich on a regular basis, just like everyone else.

    • Matthew Irish-JonesBusiness Member
      OP
      Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
      4y

      @Jim K. Same here. I am a workaholic so might as well work for myself all day every day with the hope its worth something some day. I learned in business what I learned from BRRR's you get to take on all the risk, everyone else gets paid first, and you get the reward if there ever is one. Nothing is guaranteed.

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    • Jay HinrichsBusiness Member
      Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
      4y
      Originally posted by @Steve Vaughan:

      Great list and great discussion.

      I guess my favorites are what I would call goldilocks BRRs.  They are close, but need some efficient and strategic upgrades or a little repurposing.  One of my Rs is definitely repurposing a room, basement or strategy (turning into a sober living home or MIL / 2 unit, etc) but try to stay out of the code and planning/ permit offices. 

      Just inherently being a bad handyman vs full contractor / rehabber can have it's advantages. Paint, flooring and resurfacing are my specialties. I'll stay in my lane and out of the permitting realm altogether 9 times out of 10. 

      A lot of my clients have really gravitated to the Wholetail type scenario.. I know I was one who thought when the BRRR book and hype came out that there was going to be a herd mentality and a rush then a lot of folks who just did not understand the risk especially the west coast folks trying to do this mid west rust belt where ever but remotely .. it can work but if it does not it can set a person back big time.

    • Matthew Irish-JonesBusiness Member
      OP
      Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
      4y

      @Joe Splitrock if you want a copy of my book it will cost you $150,000.  I need to recoup my losses somehow. 

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    • Matthew Irish-JonesBusiness Member
      OP
      Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
      4y

      @Jay Hinrichs yes wholesaling... that is the other easy quick way to get rich in Real Estate.  At least with wholesaling usually you will only lose time before you quit, unless the state sues you for illegally transacting Real Estate. 

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    • Jay HinrichsBusiness Member
      Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
      4y
      Originally posted by @Matthew Irish-Jones:

      @Jay Hinrichs yes wholesaling... that is the other easy quick way to get rich in Real Estate.  At least with wholesaling usually you will only lose time before you quit, unless the state sues you for illegally transacting Real Estate. 

      NO U misunderstood my comment.. My clients come to me so they can OWN the asset.. then they do the Buff and fluff not full blown rehab and then exit..  NO wholesaling as in assinging contracts I dont do that..  I fund stuff for those guys but I close on everything i am involved with .   What I was able to demonstrate to these clients that is if they let me help them actually close on them they can make far more money just doing a tad of work and waiting 60 to 90 days to resale then to constantly be flipping contracts..   Very few in the wholesaling game that do not scale into very high overhead operations make it long or do more than create another high stress lots of work JOB. 

    • Gainesville, VA · Member since 2021 · 82 posts · 72 votes
      4y

      @Jim K. I would buy it. I am pretty good and knowing what things entail but a detailed book by people who have uncovered these problems in real life would be awesome

    • Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes
      4y

      BUFF AND FLUFF MILLIONS:
      From Zero to Hero in Light Renovation and Resale, All the Insider Secrets You Won't Learn Anywhere Else!

      BP Contributors:

      Matthew Irish-Jones
      Marcus Auerbach
      Ryan Randall
      Mary M.
      Steve Vaughan
      Jim K.

      with Foreword by Jay Hinrich, Afterword by Joe Splitrock

      Bigger Pockets Press 2022, $150.00

    • Jay HinrichsBusiness Member
      Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
      4y
      Originally posted by @Jim K.:

      BUFF AND FLUFF MILLIONS:
      From Zero to Hero in Light Renovation and Resale, All the Insider Secrets You Won't Learn Anywhere Else!

      BP Contributors:

      Matthew Irish-Jones
      Marcus Auerbach
      Ryan Randall
      Mary M.
      Steve Vaughan
      Jim K.

      with Foreword by Jay Hinrich, Afterword by Joe Splitrock

      Bigger Pockets Press 2022, $150.00

      Good one JIm...   U would be amazed at what a trash out and deep clean can do for a resale .. 

    • Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
      4y

      @Jim K.

      @Matthew Irish-Jones

      I’m in Pa also, I renovate myself (and for a living)

      I don’t run into any of those issues with lead or asbestos.

      Back in 2009 I took the lead remediation course, became certified, and never once put in in practice. There was no one to police renovations. And your average run of the mill code inspector doesn’t have the authority to police it either. An average window replacement job would have gone up $100/window just to “keep the dust down”. People weren’t willing to pay it.

    • Matthew Irish-JonesBusiness Member
      OP
      Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
      4y

      @Matt M. You don’t run into any issues meaning what? There is no lead or asbestos or you just don’t test for it?

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    • Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
      4y

      @Matthew Irish-Jones

      We don’t have to test 

    • Matthew Irish-JonesBusiness Member
      OP
      Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
      4y

      @Matt M. While I certainly think NY is over regulated, just because you don't have to test does not mean you don't have a problem. 

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    • Jay HinrichsBusiness Member
      Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
      4y
      Originally posted by @Matt M.:

      @Matthew Irish-Jones

      We don’t have to test 

      not that way in Oregon..  on remodels  probably more like Pa  but when we do demo we have to do a full test up front then hire the remediation company..  you cant take the crap to the dump with out a cert..  and the fines are heavy..  I know i got one..  jsut for a few floor tiles cost me 40k.

      I just demo'd 2 houses on our new subdivision and remediation went like this..  Test 2500.00  found asbestos 22k to remediate in both structures .. 25k to demo houses.. so the asbestos doubled the price of the job..   Lead paint not so sure how they handle that .. does not seem to be as big of deal as the asbestos but then again i dont have any tenants in Oregon.  and our rentals are all 1990 and newer.

    • Matthew Irish-JonesBusiness Member
      OP
      Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
      4y

      @Jay Hinrichs lead is a similar situation only slightly cheaper.  You need to remediate all of the lead, lead dust etc... If there is a lead violation they will come test the air, the soil if it was outside, and anywhere else.  If they find evidence it was not properly removed they can force you to use a special remediation company that can skyrocket costs. 

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    • Jay HinrichsBusiness Member
      Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
      4y
      Originally posted by @Matthew Irish-Jones:

      @Jay Hinrichs lead is a similar situation only slightly cheaper.  You need to remediate all of the lead, lead dust etc... If there is a lead violation they will come test the air, the soil if it was outside, and anywhere else.  If they find evidence it was not properly removed they can force you to use a special remediation company that can skyrocket costs. 

      Boy that must be tough in the areas of the country were the vast majority of the inventory we know has lead paint.

      I guess its one reason I am liking the new construction these days  :)  

    • Specialist · Easton, PA · Member since 2018 · 1k+ posts · 2k+ votes
      4y

      @Jay Hinrichs

      If that were the case here, there would be tons of vacant houses and not a 1/4 of the amount of investors. 

    • Matthew Irish-JonesBusiness Member
      OP
      Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
      4y

      @Jay Hinrichs its tough but, you can handle it in house.  I am lead certified so I can have our team do the remediation up until a point.  Once we are talking having to tent an entire house we will not touch it but, doing interior work and exterior chipping windows is usually something your local contractor or property manager can handle. 

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    • Jay HinrichsBusiness Member
      Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
      4y
      Originally posted by @Matthew Irish-Jones:

      @Jay Hinrichs its tough but, you can handle it in house.  I am lead certified so I can have our team do the remediation up until a point.  Once we are talking having to tent an entire house we will not touch it but, doing interior work and exterior chipping windows is usually something your local contractor or property manager can handle. 

      Gothca  ,   I can see why the run to new construction for rentals..  is so hot now..  

    • Realtor · Charleston, SC · Member since 2017 · 81 posts · 39 votes
      4y

      @Matthew Irish-Jones hey it’s still cheaper than going to grad school!! And just think of the confidence and character building all these hard-earned lessons provide! For people hoping to shift their careers and lifestyles sometimes there is no way out but through! I’m lucky enough that I would still do real estate even if I didn’t get paid because I simply enjoy it. Some deals win some suck but with proper expectations and TIME…it’s a pretty fun game to be in!

    • CO · Member since 2020 · 63 posts · 40 votes
      4y

      Hahaha...I love these! I do live-in BRRRRs in the Front Range of Colorado. My fiance is an accountant and carpenter/construction. We renovate ourselves. Expensive to purchase small multifamily but the appreciation has been and continues to be phenomenal and the rent appreciation has still allowed cash flow. The cash flow seems to be declining as I see purchase prices rise to the point that rent plus maintenance/cap ex is netting little cash flow, is break even, or in some cases (appreciation speculation) is upside down. 

      I'll add one to the list..... You bought a SFH hoping to turn it into a multifamily property only to find out after closing that the zoning doesn't allow for it, you're in a sea of SFH zoning and the city zoning department doesn't like to spot re-zone.

      From others...

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

      -YES! Something my father taught me early on. Don't buy the cheapest thing on the shelf. If you are buying and holding, spend the money. You'll save yourself headaches and repairs in the future. Use tile, real wood, metal, stone, and the more expensive paint whenever you can. Rarely do you need the highest end product (think Behr Marquee paint) but don't cheap out. I put ikea laminate countertops in my first BRRRR because I was simultaneously renovating 3 kitchens on a shoestring budget. A month in, my tenant was using the counter for wet dishes without a rack or towel under them and water damaged a section of the laminate. I think I'll bite the bullet for either custom-cut laminate or stone in the future.

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

      -Havent had this happen yet but I do look for ominous trees around properties when purchasing. I have a love/hate relationship with leaves. I want trees around my own home but not my rental. They fall on houses and their roots damage pipes and foundations. 

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

      -I drool over xeroscaped yards now.

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

      -Thank god for Colorado. Also....test for and mitigate RADON! Other than smoking, its the top cause of lung cancer.

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

      -Meh. If the tub and toilet look fine no reason to swap. This depends on your market and class though. A full gut is probably needed in A class.

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

      -I'm torn on this one. I swore after renovating old cabinets in 3 1978 kitchens that I would just tear out and go new next time. But the expense of cabinets is crazy and the quality of the older cabinets is better than a lot of the cheaper new cabinets. I've become quite efficient at cleaning, degreasing, sanding, adding shaker framing, priming and painting, and replacing hardware on older cabinets. The prep work is arduous but worth it if you ever want the cabinets to stand up to abuse. Using expensive Valspar cabinet enamel is the key too. I found that oil based primer (kilz) provided a nice even cover and filled in some of the larger oak wood grains to give a smooth finished look to the cabinets. Cost me $900 total per kitchen and looks incredible.

    • Rental Property Investor · Eureka CA · Member since 2020 · 91 posts · 27 votes
      4y

      Bought last Christmas in NorCal, currently at the third R...still have hope. Waiting to be able to refi when I have more equity. The numbers still look right even though I felt this list hard. Why wouldn't I still try for the refinance and repeat? 

       OMG #10 tho yessssss 

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