BRRRR method and a first time Investor

OP

Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes

6y

@Abel Curiel thanks so much for your response and input! Either a SFH or small multi with light rehab is something I'm definitely aiming for in the first property. With an FHA loan, I would have to live in the property for 12 months, correct? That isn't going to line up to well with what I have now so that may not be an option but I do think a low down payment conventional loan may be the route so thanks for bringing that up. I'll just have to consider the PMI into my analysis then, right? Thank you for the referral to an agent as well, it will definitely be helpful in obtaining those solid comps. I'm still learning how to get reliable info in that field along with what actual rentals go for in the areas I'm looking. I've used rentometer but it seems like a real ballpark figure, it does help tho in practicing with analysis of properties.

OP

Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes

6y

@Abel Curiel would the BRRRR strategy still be able to work with a conventional loan? If I'm able to gain some equity in the house for the first year, can I maybe do a cash out refi and take a small portion out for a down payment on another property? If my numbers after doing so still make sense of course. Then I won't have to stress too much about taking a hard money loan out, making sure I refinance to get the full amount back and get those rehab and appraisal numbers nailed. I want to eventually get the BRRRR strategy down and rolling but starting to think it may be to big of an undertaking for my first property.

Patrice Boenzi

Real Estate Agent · Geneva, IL · Member since 2015 · 403 posts · 172 votes

6y

@Abel Curiel thanks for the shout out!

@Tim Sipowicz I love educating new investors. The advice @Abel Curiel gave you is solid and wise! We call that house hacking and we helped our son do this when he got started right out of college. Investing is all about the numbers!

OP

Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes

6y

@Patrice Boenzi thanks for the input! I would love to house hack and think it would be a great way to get involved in REI. I own a small SFH now for my primary residence and have a young family so house hacking just isn't a fit for my lifestyle at the moment. BUT you can also never count out all possibilities so I'll never fully take it off the table. Small sacrifices now can lead to big changes for the future.

OP

Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes

6y

@Patrice Boenzi also, have you ever helped investors with properties in Indiana?? I have a co worker who has been investing for awhile and that’s the market he’s mainly involved in, due to lower property taxes and overall prices of properties. That may be the route I take so I was just curious.

Patrice Boenzi

Real Estate Agent · Geneva, IL · Member since 2015 · 403 posts · 172 votes

6y

@Tim Sipowicz very true! We lived in our first two flips 😂! It’s all about reaching our goals and I love that, usually, there are several ways to get there!

OP

Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes

6y

@Patrice Boenzi that’s awesome! You are not lying about the multiple ways of getting there! I’m just trying to navigate them all right now and nail down the best one.

Francis Rusnak

Flipper/Rehabber · Chicago, IL · Member since 2016 · 123 posts · 38 votes

6y

You can do the BRRRR with a conventional loan, but it's not likely to have as much equity when you buy it.

You'll be competing with home owners who are able to pay closer to retail. Best deals are going to be the ones that a bank won't lend on for whatever reason.

And no, it's not a home run every time like you read about on these message boards and hear on the podcasts. I lost over 50k on my first deal. People tend to be a little more tight-lipped on their losses.

Luckily we've done over 30 deals since and things have gone a little better : )

2 Reply

OP

Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes

6y

@Francis Rusnak thanks for your response. So it's even more important to get a great deal if I want to successfully do a BRRRR with a conventional loan. I don't plan on getting the prettiest house on the block but also don't want a complete rehab so going to be looking for that middle tier. I appreciate your insight

Crystal SmithPro Member

Moderator

Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes

6y

Originally posted by @Tim Sipowicz:

I've taken the deep dive into REI about a month and have been consumed with information ever since. I'm looking to purchase my first property within the coming months and the BRRRR strategy has really stuck out to me as a great opportunity. Only issue is, every story I've heard has been one of success and it CANNOT be just that easy. I've watched webinars and have learned about different risks but I'm trying to understand all of them and see if it's a good fit for a first time investor like myself. Is it really a matter of nailing your numbers like rehab costs, getting that correct appraisal you're looking for and having an eye for a great deal?? I've been very back and forth with financing as well as it's related to the BRRRR method and stuck whether I should be focusing on a hard money lender, which I know can be expensive depending on interest rates and possibly points, or stick with a conventional loan. I want to start reaching out to lenders but also have a solid foundation on how I would like to approach the deal financially. Any input would be greatly appreciated and I apologize for this winded post, as you all know, there's a ton of info out there to try and digest!! Thanks and I look forward to your responses

Whether your a first time or an investor with a lot of experience I believe one of the most important things missing from your list is "cash reserves". Whether you go conventional or hard money you need cash reserves. it could be your cash or someone else's. A lender will want to know that have and are prepared to put some of your own skin in the game. so be prepared to share your own balance sheet.

312-681-7487

4 Reply

Patrice Boenzi

Real Estate Agent · Geneva, IL · Member since 2015 · 403 posts · 172 votes

6y

@Tim Sipowicz I have not helped anyone in Indiana since I am only licensed in Illinois

OP

Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes

6y

Ok thank you @Patrice Boenzi!

OP

Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes

6y

@Crystal Smith thanks for your input, I appreciate it. I have reserves in the bank definitely, I would like to just hold onto those reserves, at least as much as possible. I’m not opposed to putting a down payment down, whether it’s hard money or conventional, and don’t mind having skin in the game. That makes sense, I just don’t want to drain all reserves I have and put myself in a trick bag for my primary residence, I like to keep an emergency fund. I would like to be able to finance correctly to keep some reserves I have and have momentum going into the next property if that makes sense. Maybe I just need to take a step back and weather the storm of my first property and go from there without worrying so much about my second

OP

Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes

6y

@Crystal Smith I've also thought about doing a HELOC to help with the down payment and or the rehab costs.

Crystal SmithPro Member

Moderator

Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes

6y

Originally posted by @Tim Sipowicz:

@Crystal Smith thanks for your input, I appreciate it. I have reserves in the bank definitely, I would like to just hold onto those reserves, at least as much as possible. I’m not opposed to putting a down payment down, whether it’s hard money or conventional, and don’t mind having skin in the game. That makes sense, I just don’t want to drain all reserves I have and put myself in a trick bag for my primary residence, I like to keep an emergency fund. I would like to be able to finance correctly to keep some reserves I have and have momentum going into the next property if that makes sense. Maybe I just need to take a step back and weather the storm of my first property and go from there without worrying so much about my second

Don't give up so easily. Since you have reserves, the trick is showing it on your balance sheet, then only using it for emergencies or since the topic is BRRRR, using it to fill the gap between what you get from a lender and what you really need to complete a renovation, and then when you refinance getting all or most of your reserve back.

Simple example- Total cost for a project is $100K, lender gives your $90K; you fill the gap with $10K of your own money. When the project is complete and you refinance you get all or a portion of your $10K back. It doesn't always work out this way but that's the objective.

Another example: Lender wants to see you have the $10K on your balance sheet- You show it but don't use it. This is where Real Estate gets fun- Make a deal with someone privately to borrow the $10K to fill the gap. Refinance and pay that person back.

312-681-7487

John Warren

Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes

6y

@Tim Sipowicz the BRRR method is simple and easy to understand. The part most of the blogs forget is all the blood, sweat and tears in the middle! The rehab component is the riskiest part, and if you aren't careful it is possible to over renovate when you are new at this. The other thing a lot of investors miss is that the renovation component doesn't always have to be a complete gut rehab. In fact, experienced investors would often rather not renovate but instead would like to find a property where you get value on the purchase without having to do major renovations.

3 Reply

Henry Lazerow

Real Estate Agent · Chicago, IL · Member since 2017 · 2k+ posts · 2k+ votes

6y

I agree 100% with @john warren. "In fact, experienced investors would often rather not renovate but instead would like to find a property where you get value on the purchase without having to do major renovations."

The rehab is the risky part and it is even more risky if you are new and don't have trustworthy inexpensive contractors lined up.

Most of my first time clients do a simple house hack with a basic cosmetics rehab for their first deal. Often times they will pull out cash with a heloc later on. This strategy works well on Chicago northside where we can pick out high comps to give appraiser.

2 Reply

Adam Jason

Rental Property Investor · Medellin, Colombia · Member since 2017 · 83 posts · 33 votes

6y

hey @Tim Sipowicz yep one challenge is finding a house that you can get for a place that is low enough where you can build some real equity that a traditional bank will want to lend on. They shy away from houses with major repairs that if you were to fix you would build some equity for sure. That has been my experience.

OP

Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes

6y

@John Warren not having to do major renovations will be a big component in finding my first property. Currently reading J Scott’s book on rehab costs, so I’m trying to educate myself as much as possible. Obviously a lot of unknowns going into a property but I’m doing my best to be well prepared. Thanks

OP

Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes

6y

Thanks for your input @Henry Lazerow. I'm going to be looking for an intermediate rehab project in my first property, don't want to tackle anything to crazy right off the bat. I'm about 30-45 minutes for certain areas of Indiana so I may be investing in that market due to lower property taxes and overall housing prices so hopefully I'll be able to gain a little capital back for my repairs. Leaning towards maybe a low down payment conventional loan to start out with and like you said, maybe do a HELOC down the line.

John Warren

Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes

6y

@Tim Sipowicz J Scott's book is good, but the pricing in there is more or less irrelevant at this point so don't spend too much time learning his pricing models. The best thing in that book was the model he sets up that tells you when to do each part of the process (framing, hvac, plumbing, etc).

I have done a lot more rehabbing of apartment buildings than I have of homes, and I think there is really no substitute for learning on the job when it comes to rehabs. I have learned some painful lessons in the last few years, but it helps so much to have lived those experiences when I look at the next deal.

OP

Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes

6y

@John Warren I agree. I can’t wait for that hands on experience, even with the headaches that come along. I’m going to take some points out of his book like how to breakdown each component in the house and set up an itemized scope of work. These current times are rough with not being able to tour properties, otherwise I could do some practice runs with estimating costs.

John Warren

Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes

6y

@Tim Sipowicz as an aside, you can still tour properties! Some realtors have chosen not to show properties, but many of us never stopped. The only properties you can't tour currently under the stay at home order would be tenant occupied properties.