BRRRR method and a first time Investor

BRRRR method and a first time Investor

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

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

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Crystal SmithPro Member
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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. 

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  • Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
    6y

    @John Warren I will plan on getting out there to look at some properties then, thanks!

  • Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
    6y

    @Jake Fugman great info, thanks a lot! I'm going to be entering a partnership so an all cash purchase may be possible, especially in the market we are going to be entering. I think I've finally come to terms with taking the harm money approach off the table. I think the stress of making sure to get somebody else's money back in time, nailing my rehab costs, and getting the correct appraisal would be too much for my first investment. Now if that's logical thinking or just fear talking, that remains to be seen. The one thing is, I don't want to clear out all reserves I have covering my down payment portion and rehabs. Now obviously it all depends on the price of the property, but does it hurt too much to just go lower on the down payment percentage if the PMI fees still make sense in the analysis??

  • Jake FugmanBusiness Member
    Real Estate Broker · Chicago, IL · Member since 2016 · 256 posts · 250 votes
    6y

    @Tim Sipowicz if you are planning on refinancing you wont have to worry about getting your reserves stuck in equity for long since 75% of your ARV appraisal will ideally be high enough to cover the down payment + rehab + closing costs + holding costs. That's the beauty of BRRRR model if used effectively.

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  • Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
    6y

    Very true @Jake Fugman, thank you. 

  • Investor · IL · Member since 2019 · 151 posts · 135 votes
    6y

    I can tell you not all BRRRs go according to plan. My first one I went 40% over budget, and 4 weeks longer than expected because of hidden problems, and failure to account for wintertime holding costs. This despite the fact I have been in construction and building maintenance my entire life. The good in this story is I bought the house right which allowed the deal to still cash flow although not as much as I would have liked. 

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

    @Tim Sipowicz happy hunting! What neighborhoods are you looking in?

    Whatever you do, just make sure you have multiple exits. Right now lending is a LOT tighter than it was a few years ago. I just was able to complete a cash out refinance with Fannie Mae on one of my buildings in Berwyn but my local bank is taking a long, long time to complete a cash out refinance on a six unit I picked up in Cicero. Also, the LTV is a lot lower in today's world than it was last year on your cash out refinance.

    For upcoming deals, I will most likely look at loans that I can stretch out for at least two years if I use bridge/hard money again. This gives you the time to flex if things go sideways with your financing on the back end. 

  • Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
    6y

    @John Warren thanks, can’t wait to get out there at start looking. Right now I’m actually leaning towards investing in Indiana, more so the Hammond area. I have a friend at work who invests and is well established in that market and has been doing well. I don’t see myself getting to crazy or trying to get to creative with the way I finance this first one, especially in today’s time with how lending is going. If I can accurately acquire a property and have it just cashflow, that will be a Win for me. I’ll take that and all that I learn from it and just plan for the next one. How’s the Berwyn/Riverside market? I have a good friend (who i May actually partner with) who grew up over there and still has family there.

  • Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
    6y

    @Gail W. Thank you for your input. With the feedback I’m getting and especially it being my first investment, I don’t see myself getting to crazy with how to finance or approach it. Like I told John on this forum, if I can negotiate, get a good deal, and get the property to cashflow. I’ll take that as a win and learn all that I can from it for the second property. By then HOPEFULLY this virus situation dies down and the lending will get back to somewhat normal

  • Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
    6y

    @John Warren when you say exit strategies, are you just referring to different ways to get equity out of the house need be? Can you explain what some of those would be? Maybe flip it instead of buy and hold? 

  • Investor · Member since 2020 · 7 posts · 0 votes
    6y

    Hey @Tim Sipowicz. What are you exactly looking to do in Hammond Indiana? I see you mentioned a friend of yours is doing very well in that market. Does or has he flipped or BRRRR the properties?

  • Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
    6y

    @David Szaflarski not sure if it'll be exactly Hammond since I'm still researching the Indiana market but my plan is buy and hold. My friend does the same, I don't believe he has flipped any properties or used the BRRRR strategy.

  • Whitney HuttenPro Member
    Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
    6y

    @Tim Sipowicz I like having multiple exit strategies on properties just in case my "plan A" doesn't work.  Not all exits, mean repositioning equity, but sometimes just how to protect it.  If you are doing a flip, you might also want to underwrite it as a long-term rental, short-term rental, corporate rental.  Or maybe do a lease option to purchase with another tenant who needs to repair their credit to purchase.  Rule #1 of investing: Don't lose money.

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

    @Tim Sipowicz when I buy a piece of real estate I want to make sure that it works as a buy and hold, but in addition I like to know that I can refinance it to pull equity out or sell it if I don't like the investment for some reason. Since I typically buy value add properties, there is normally plenty of equity position left which allows me to sell if I need to. Having said this, I haven't sold yet. 

    In your shoes, if you are using a low using a low down payment loan then there probably won't be enough equity left to sell or refinance so your only option is to hold. If you put cash/conventional financing into a deal you may have enough equity left to do some of your other exit options. 

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

    @Tim Sipowicz the Berwyn area has been hot for a few years now. There are still good deals here, although a lot of my clients cast a broader net and look at multiple neighborhoods. You will definitely get higher rents in most B class areas in Chicago than you will in NWI. 

  • Rental Property Investor · Medellin, Colombia · Member since 2017 · 83 posts · 33 votes
    6y

    @Tim Sipowicz What are you going to propose in terms of how your partnership will look? One other note on BRRRR too, along with the exit strategy discussion above, is to also have flexibility in timelines. Make sure that the project works for you even if the refinance takes longer than the usual six-month period. Make sure you are not locked in to selling the property in a set time period on the back end in case there are changes in the market. Happy to chat more about all this.

  • Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
    6y

    @Whitney Hutten first thing on my mind is definitely don’t lose money! Thanks for your input tho and I’ll definitely start thinking of didn’t ways of approaching a property. I’m sure once I start looking at properties, I’ll be able to better distinguish all the investing potential it may or may not have

  • Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
    6y

    @John Warren Thanks for your continued advice on this thread, I really appreciate it. When it comes to financing, i think I’m just going to go conventional and “Play it safe” for my first property. Depending on the property I find, I’ll work the down payment to try and ensure I have some equity in the property. I’m kind of stuck tho, how do you research multiple neighborhoods and find out which are the better ones to invest in? I’m willing to put the work in to find deals, I’m just having a hard time figuring out what direction to go. I obviously know my surrounding areas but how do I cast that broader net like you said. 

  • Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
    6y

    Thanks for your input @Adam Jason. In terms of the partnership, we plan on sitting down and really hatching that out and getting a set document in place that we both agree on. As for the BRRRR approach, that is what worries me about it for my first property and why I probably won't go that route, being locked into a set timeline before even knowing a lot more ins and outs of the business

  • Rental Property Investor · Medellin, Colombia · Member since 2017 · 83 posts · 33 votes
    6y

    @Tim Sipowicz we have some good free template docs you can use over on our site for demonstrating the terms for the partnership and the financials and plans for the project.  Help yourself. I can also chat more about my experience with these kinds of things and the terms I would expect to see if you would like.

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

    @Tim Sipowicz Chicago is definitely a big market, so I think it takes some time to figure out where you want to invest. There are certain areas that are very transactional where you can find inventory. Those of us in the business figure out these areas quickly because it allows us to do a lot of transactions! As an investor, it normally makes sense to look in the areas where there are transactions as well because you can be selective. 

    The other thing to do is to look for the type of deal you want in the right areas based on building stock. If you want a three or four unit you probably will want to look in the city or suburbs that were built in the 1900-1960 range. You won't want to look in the newer suburbs like a Schuamburg or Naperville type of area as there aren't many 2-4 units in those areas. 

  • Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
    6y

    @John Warren thanks. I appreciate all the feedback, very helpful 

  • Rental Property Investor · Chicago, IL · Member since 2020 · 49 posts · 23 votes
    6y

    This is a great thread. I'm also new-ish to the real estate investing game. I have a SFR in Homewood, Illinois that was rehabbed and now with a tenant. My appraisal value came back lower than expected even before the pandemic and it is likely to be even lower through other various lenders in the current pandemic. Anyone have any successful or near successful refinancing during this time?

  • Rental Property Investor · Medellin, Colombia · Member since 2017 · 83 posts · 33 votes
    6y

    Hey @Jay B. I would recommend chatting with @Alex Bekeza about lending during these times. He specializes in lending to BRRRR investors and may have some strong insight for you.

  • Rental Property Investor · Chicago, IL · Member since 2020 · 49 posts · 23 votes
    6y

    @Adam Jason Thank you so much!!

  • Rental Property Investor · Lockport, IL · Member since 2019 · 169 posts · 37 votes
    6y

    @Jay B. the SFR in Homewood, is that your only rental property you own or are you in other areas? I'm not to familiar with Homewood in general, I'm still researching and narrowing down neighborhoods to invest in

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