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
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. 

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

    @Tim Sipowicz I have two other properties in Southside, Chicago. The values and therefore rents are better in Homewood in my opinion. 

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

    @Jay B. understood. Thank you!! 

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

    @Tim Sipowicz No problem!

  • Brookfield, WI · Member since 2016 · 191 posts · 108 votes
    6y

    I think there are a couple things. As I have read, the biggest brrrr "fails" have been over-estimating the ARV (or just getting a bad appraisal) resulting in not being able to pull out all you put in. Or over-improving with things you "like" vs. best ROI. Still, many of those are "soft" fails. They still make money, it's still a good investment, it's just not the perfect BRRRR where you reuse the same initial capital 100% of the way from first to last property.

  • Downers Grove, IL · Member since 2019 · 15 posts · 3 votes
    6y

    @Tim Sipowicz welcome to the forums! 

    The numbers game will always be a critical one! I didn't run the numbers all that well on my first BRRRR, but I'm fortunate it wasn't a "fail" but that sorta depends on who you ask... I'll let you decide.

    Purchase Price of Condo (Naperville): $160,000
    Down payment: $8,500
    Renovations: $11,000
    New home value: $175,000

    If I where to sell, I'd technically loose money or break even as I lived in it for a year and a half. That being said, I should be able to rent it for around $1600-$1700 per month, with a monthly payment of $1200-$1250, meaning on a conservative estimate Ill make $400 a month. Therefor it will take me 4.2 years to get my down payment and renovations back, realistically 5 years for an ROI. In my opinion for a first time deal, not knowing anything, that's not terrible.... but could be better.
    Things I learned;
    - I over payed for my condo
    - I didn't research the HOA enough, and this is huge because they increased 5% the first year of ownership and 17% the second year.
    - I went a little overboard with renovations, but I wanted to get good materials that would last

    Nevertheless good luck! Welcome again! I hope my experience can give you some insight into people in a similar situation. 
    Side note: Look into 203k loans, those mortgages pay the cost of the house plus money for renovations... its a lot of paperwork on the loan side, but not a bad route. Thats going to be my next route is an FHA203k loan. (They will be hard to get for the next few months due to COVID, banks are afraid of loaning money for those at the moment). 

  • Matthew PorcaroBusiness Member
    Lender · Long Island, NY · Member since 2016 · 456 posts · 336 votes
    6y
    Originally posted by @Austin Tondreau:

    @Tim Sipowicz welcome to the forums! 

    The numbers game will always be a critical one! I didn't run the numbers all that well on my first BRRRR, but I'm fortunate it wasn't a "fail" but that sorta depends on who you ask... I'll let you decide.

    Purchase Price of Condo (Naperville): $160,000
    Down payment: $8,500
    Renovations: $11,000
    New home value: $175,000

    If I where to sell, I'd technically loose money or break even as I lived in it for a year and a half. That being said, I should be able to rent it for around $1600-$1700 per month, with a monthly payment of $1200-$1250, meaning on a conservative estimate Ill make $400 a month. Therefor it will take me 4.2 years to get my down payment and renovations back, realistically 5 years for an ROI. In my opinion for a first time deal, not knowing anything, that's not terrible.... but could be better.
    Things I learned;
    - I over payed for my condo
    - I didn't research the HOA enough, and this is huge because they increased 5% the first year of ownership and 17% the second year.
    - I went a little overboard with renovations, but I wanted to get good materials that would last

    Nevertheless good luck! Welcome again! I hope my experience can give you some insight into people in a similar situation. 
    Side note: Look into 203k loans, those mortgages pay the cost of the house plus money for renovations... its a lot of paperwork on the loan side, but not a bad route. Thats going to be my next route is an FHA203k loan. (They will be hard to get for the next few months due to COVID, banks are afraid of loaning money for those at the moment). 

    The 203k really is an awesome vehicle if you find the experienced guys that do these day in day out. Truth is, every market has a few renovation loan kingpins that do a majority of the loans in the region. As long as you find these guys from the beginning, they'll lead you down the process and the paperwork really isn't that bad. They'll also usually connect you with the right consultants, and may be able to make recommendations on contractors, or give you a clear checklist on what the contractor needs to be approved by the bank. 

    Right now due to COVID the banks that don't typically do 203k loans took them off their books for obvious reasons. For the guys that don't do them often, they're a pain in the but because they don't understand them. 

    But, from what I know about the renovation lending industry, the top reno lenders are still doing them. This is their bread and butter. 

    The 203k Way
  • Investor · Chicago, IL · Member since 2019 · 62 posts · 27 votes
    6y

    I'm starting a BRRRR type investment on the south side in the next couple of weeks. Going to be my first investment and rehab, although I have seasoned investors and contractors on my team. Any advice on permit laws in Chicago? What is and isn't allowed without one, also any experience people have regarding permits would be helpful

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

    @Joseph Walsh it may just be the fear talking but the reasons you stated, are exactly why I'm going to shy away from a BRRRR investment my first go. Still something I'm definitely interested in the future but for my first one, it may be a tough go. Thanks for your input

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

    @Zak Marinko first off, good luck with the investment! I’m not much help in the area you’re asking but I’m just curious where on the Southside is the property? I’m in the south suburbs 

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

    @Austin Tondreau way to make a move on your first BRRRR! I appreciate all the insight, definitely helpful. I love the idea of a 203k loan or an FHA but right now, they just don't work for me since I won't be able to live in the property.

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

    @Matthew Porcaro I’ve been reading a ton, watching webinars, and listening to podcasts but I think it’s time to start reaching out to people in various fields, including lenders. Just to get an idea of what they’re offering, especially in these times and what I have to do to prepare. Thanks for all the info, I appreciate it. I’ve read into HOMESTYLE and CHOICErenovations loans and they wrap up the rehab costs with the purchase. May be an option but I have to see what stipulations come with them 

  • Jonathan KlemmBusiness Member
    Moderator
    Contractor · Chicago, IL · Member since 2016 · 4k+ posts · 2k+ votes
    6y

    @Zak Marinko - If you have a solid team who has done work in Chicago you should be in good hands.  Just know that everything in Chicago and probably most cities takes longer than expected, especially now with COVID.

    If you need any specific advice around zoning, permits, or the city PM me.  Happy to help any way I can.

  • Investor · Chicago, IL · Member since 2019 · 62 posts · 27 votes
    6y

    @Tim Sipowicz Thanks! It's going to be in Beverly

    @Jonathan Klemm Most of my team has more experience than me, so as of now I'm partially relying on them to handle it. Definitely expecting it to take some time, but hopefully connections can help make that quicker. I'm getting together with my team over the weekend so if anyone brings up questions that are unanswered I'll shoot them over. Thanks!

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

    @Zak Marinko love the Beverly neighborhood. Good luck with everything 

  • Architect · Chicago, IL · Member since 2020 · 214 posts · 236 votes
    6y
    Originally posted by @Zak Marinko:

    I'm starting a BRRRR type investment on the south side in the next couple of weeks. Going to be my first investment and rehab, although I have seasoned investors and contractors on my team. Any advice on permit laws in Chicago? What is and isn't allowed without one, also any experience people have regarding permits would be helpful

    I assume you are talking about Building Permits? Feel free to send me more info regarding your property and what you are looking to do and I can help lay out your options... Depending on your scope you may not need a permit; however, the City also has a streamlined "Easy Permit" process for pull & replace projects, in addition to the standard permit process which would be needed for additions or significant interior remodels where you are completely re-configuring rooms or adding bathrooms, etc.

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