FIRST REHAB PROJECT!! Looking for a bit of Guidance with BRRR!

3 Replies

Hi Everyone!! 

I apologize for the long post, but might as well share the details:) This is a very exciting time for us as this is our FIRST REHAB PROJECT! 

We are not completely new to the game, as in my business partner and I own 2 turn-key multi-family duplex properties that have required minimal repairs.

However with this new venture, we are trying to scope out our first deal to BRRR and see how things turn out. To give you a quick outline, the property is a Foreclosure that is listed for $54,900. In this area, that is high for an 1,147 Sqft, 2 bed, 2 bath that will need a PREMIUM facelift, as in the structure is still good but most everything will be replaced but the studs due to everything being outdated. That all being said, we are starting our offers low around $30k and looking for the bank that owns it to come down quite a bit and settle somewhere advantageous to both parties. Hoping that we can refinance and/or sell the house for ~$110-130k. (House next door is listed for $124k with 1,165 Sqft, 3 bed, 2 bath)

What we are looking for is a bit of detail on how to underwrite contracting fees and materials fees and if anybody had any quick formulas to run through this? 

Lastly, if anybody has a good idea on how to predict reappraisal and refinance expectations, please let me know about your experiences!

If you made it this far, we appreciate your time & interest and PLEASE leave a comment to help us out! (even if its just some motivation:])

We look forward to hearing from BP Forums and everybody involved in this community!! Let's get after it!!

@Kyle Sanders

Hi Kyle,

The BRRRR strategy is my favorite strategy right now and definitely one of the best out there. Regarding your first question are you asking the best way to estimate labor and material costs for the project?

As far as predicting the ARV (After Repair Value) you can actually have the home appraised beforehand and provide the bid from your contractor to your appraiser. This is referred to by some as "As to be completed" appraisal it may be called something else where you are located. For example, the appraiser will tell you the home is worth 45k currently and if you complete all of these renovations in the bid it will be 100k or 120k etc. It costs more up front because the home will have to be appraised again later but this is the most accurate way to know the ARV in my opinion. Also, you said the house next door is listed at 124k but that won't be a comparable property until it is sold. If I was in your situation I wouldn't even consider that a comp until then. What are the sold prices of other comparable homes in the area around the property?

In terms of what to expect during the refinance process, this is all dependent on your lender and personal situation. Are you completing this project in an LLC or your personal name? If it's in an LLC you may have to wait for a certain amount of time before you can refinance the home (some banks have "Seasoning Periods"). If it's in your personal name then your personal financial standing may have to be cleaned up before you can refinance the home. Luckily, you can get just about all of this information upfront from by having a conversation with your lender.

Another side note, you mentioned that you may keep it and refinance the home or sell it after the renovations. Make sure you do all of the calculations for both scenarios before you make a decision. Generally, If you sell the home you will pay capital gains tax but if you keep the property you will receive tax breaks such as depreciation. I'm biased towards holding properties but that's based on my personal goals so make your strategy aligns with your immediate and long term goals.

@Marshall White I want to begin by saying thank you for such a quick reply! We sincerely appreciate it.

To tackle the response in a respective order, let me begin with:

1) You're correct on the first question, we are looking for labor and material estimates for the project... is the only way to obtain these, and I suppose present them, through a contractor?

2) In accordance to the ARV and the "As to be completed", do you personally do the before and after appraisal? Do you find that it is worth the additional cost upfront? (This is something I have not considered, so I appreciate the creativity). Based on a quick Zestimate overlook, houses for this size typically are 86-114k and that is a wide spread and mostly dated furnishings.

3) As for how the property would be represented, we are speaking with a bank and have the ability to do both private or through an LLC. All of that will depend on the packages that we are presented with. However I do agree the buy and hold is much more advantageous long-term, especially if the refinance looks good.The concerns you raised with the all of the taxable variables both positive and negative are things that can be easily overlooked and we appreciate you bringing it to our attention!

I look forward to hearing more! 

Thank You:)

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@Kyle Sanders It's no problem at all! I'm glad you are doing research to avoid mistakes.

1) That's not the only way to obtain estimates but for someone new to real estate that is the best way. I recommend that you get three different bids for every project you do. I have heard and read about different methods investors use to estimate renovation costs based on square footage before their contractor gets involved but I haven't really utilized this so I can't answer your original question. However, I do recommend that you continue researching this. Side note: Since this is your first investment project make your repair contingency amount as large as possible for any unseen circumstances during renovations.

2) The after appraisal I was speaking of will be required by the bank so this will happen regardless. The before appraisal is definitely something I would use if I felt unsure about a properties ARV. I haven't used it before a project yet but that's mostly because I didn't think of this as an option. This will cost you at least $500 but it may save you from buying a property and being surprised after you have already completed the repairs so I personally think it's worth it and I would pay that many times over to avoid a bad project. I personally don't like the Zestimate numbers from Zillow. In my city it is not very accurate and for some properties it fluctuates randomly month to month for no reason. I'll share what I like to do when researching comps on a property, (this is what I do before getting a realtor from the area involved) when you have time go to Redfin.com type in the zipcode for the property, under "Listing Status" it says For Sale, hit the slider so it changes to off and Sold populates. Once that's done change the drop down bar to the right of sold to "Last 6 months" (I would not look at any sold properties beyond 6 months unless there aren't any in the last 6 months) and zoom in where your property is located. Now you can get a more accurate ARV and tailor your renovation to either match or surpass those around it based on the type of rental unit you would like to put on the market.

Lastly, I highly recommend that you read the book called "BRRRR" written by David Greene if you haven't read it already. He actually purchases and renovates his properties with all cash before refinancing with a bank. I don't do it that way but the methods that he lists out and the objective will be the same for most BRRRR investors.

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