Before You Rush Into Your Next BRRRR Read This

[Stuart Udis]

I recently came across two posts that couldn’t have been more different. Investor #1 was a seasoned investor who spent two years waiting for the right opportunity to secure land in a high-barrier market. A reminder that real estate investing requires patience and capital discipline. Investor #2 had two BRRRRs under their belt, was actively renovating a third, and expected to be ready for a fourth by May. They were now trying to raise new capital or find a creative strategy to accelerate the timeline and close their fourth by February.

Using Investor #2's own numbers, their cost basis was $260,000 and the property is expected to appraise around $320,000. Using aggressive timeframes to bolster investor #2's side of the argument let's assume they are completing two BRRRR's a year. This equates to roughly $10,000 in equity creation per month (after factoring in refinance and transaction costs). This means $30,000 in additional forced equity a year by accelerating the pace purchasing in February vs. May. That level of forced equity will not materially alter the trajectory of their investment career. Meanwhile, the risk of over-leveraging is one of the fastest ways to end a career before it ever begins. Here's a few tips:

-Moving too fast and over-leveraging makes your entire portfolio vulnerable. One bad deal can drag down everything else you own.

 -Today’s market is far less forgiving on leverage. I’m not even talking about interest rates—lenders already account for current rates when sizing debt. The real issues arise from everything else investors underestimate: increased cap-ex budgets, rising insurance, higher turnover costs & higher vendor pricing. With these realities, a 70% loan-to-value ratio is the new 75% in many markets, and in lower-cost markets with thinner margins, 65% may be the real stress-tested number.

-Execution risk multiplies with every added open project. Renovation delays, refinance delays, unexpected turnovers, or surprise cap-ex items compound when multiple projects are open and capital is constrained.

 -Protect your balance sheet. Credit issues are almost always caused by liquidity issues. Hits to your credit take years to repair, and preserving borrowing capacity is far more valuable than the limited upside created by pushing too aggressively.

By the time I had a chance to respond to Investor #2’s post, at least five people had already offered ways to secure additional capital or creatively acquire property #4 by February. I can’t guarantee following my advice will turn you into Investor #1, but it will protect your downside and dramatically increase your chances of ending up on that path.

[Chris Seveney]

One of the biggest mistakes I see people make is they rush into multiple deals without finishing a deal. So they truly do not know the full cycle of real estate. Even if you do one deal and it does really well that is not an indicator or a future success. The first construction project after college that I managed went really well, and there I am thinking wow this is easy and the next three were extremely complex and made me realize “oh wow this is not as easy as I thought it was”.