BRRR Have WE GONE TOO FAST? A Financial Diary

28 Replies

We started last year and bought our first 2 side by side  Duplexes.  We did not have enough money at that time to renovate them but they were occupied and they cash flowed about $20,000 a year.  We bought the 2 of Them for $334.000 and they needed about $35,000 worth of renovations.   We have had to put back all of the cash flow into renovations and will have to continue to do that for an additional 9 months before we see the cash flow as we still have approx $16,000 more in renovations and then we will first start seeing our positive cash flow.  We like the town and feel there is appreciation on this property but we still have to wait 9 months to finish this and see any money here although the renovations are being paid for with the positive cash flow.

The problem is we have continued to buy.  We now have another Duplex under contract that we intend to BUY Renovate Rent and Refinance. We are paying cash for the duplex and  cash for the renovations.   This town is not as good and has lots of renters and it might take us 2 months to renovate and rent the 2 apartments and then we are going to go to a bank that has told us we can refinance.  We hope this will work as the Bank indicated it would be something that they would do.

We also have under contract another 2 duplexes (4 apartments) that we have a conventional mortgage on.  These 2 duplexes are rather new and in perfect condition and will cash flow.  They are occupied but one person has a lease for only $950 when the rent should be $1,100 and his lease runs for one more year.  The problem is we are getting a little nervous that we have expanded too fast.  We self manage.  

So in a little over one year we own the 2 duplexes that still need more renovation and we have 3 other duplexes under contract.

Have we bitten off too much.  What is the worse that can happen?  Perhaps the single duplex that we have to renovate and then refinance will be a problem?  Should we have gone slower?  But we are all in now.  What do the experienced BRRR think? 

My Philosophy is buy them first, then try to fix them, if it's a good deal the money will come later.... I found myself with 9 property's which mostly all needed renovating but I somehow managed to get it done and you can always seek hard money or leverage credit cards to renovate, what I usually do anyway... maybe I operate too fast also though...feeling overwhelmed in this business is pretty common, it's how you manage that stress that really counts..

"Too fast" is relative.  Too fast for some?  Probably.  However, it is what it is right now. While it's not quite too late to back out of some of this, I think you'll likely incur some costs in doing so.

So you're feeling a bit overwhelmed and unsure.  That's completely understandable, but it doesn't mean you've done anything wrong.

First things first -  get yourself organized if you aren't already.  Start making lists and notes about what needs to be done at each address.

Take the one that requires the least amount of effort, work through that list, get it rented and move on to the next one.  You'll be cash flowing all over the place before you know it.  As Mike NA said, you may need to use some credit cards or other financing in order to move forward, but it sounds like that would be a relatively short term problem.

Well done on taking the bold moves and making things happen.  There are many here that think you are in a VERY enviable position.

Barring something catastrophic (fire with no insurance, construction worker dies on your job site, etc.), the worst that can happen is that you simultaneously go over-budget on your renovations, lose tenants and fail to refinance.

If you have significant cash reserves, you will be fine. If you don't have significant reserves, it may be wise to open a line of credit to have extra liquidity available. Some people will probably disagree with me on this, but as long as you have liquid capital, the sky won't fall. In real estate, everybody makes money long-term; the trick is keeping your head above water in the mean time.

Originally posted by Mike NA:

My Philosophy is buy them first, then try to fix them, if it's a good deal the money will come later.... I found myself with 9 property's which mostly all needed renovating but I somehow managed to get it done and you can always seek hard money or leverage credit cards to renovate, what I usually do anyway... maybe I operate too fast also though...feeling overwhelmed in this business is pretty common, it's how you manage that stress that really counts..

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Well we bought our first 2 Duplexes and figured we could fix them later as they  were all rented. One person moved 2 months after we took over.  There were other repairs and  we are into that one for $20,000 worth of needed renovation all coming out of the cash flow.  That's exhausting.

Now the 2 Duplexes that we have gone to contract on is demanding Paper work and Paper work that should cover buying the Empire State Building and that is driving us crazy and they are still demanding more, they even want to know the ages of the children, and where every cent we are putting down comes from and On and On.  These 2 duplexes have tenants in place so if we can get through this Bank torture the Duplexes should be easy to  manage as they are in excellent condition and need no renovation or repair and are only 11 and 13 years.  Its only the existing tenants we have to worry about.  It should cash flow

None of this is fun.

The other  Duplex that we have  contract on, is the duplex  that we are going to renovate and pay cash for.   It is hopefully going to be a BUY Renovate, Rent and Refinance.   The Bank that we are hoping to deal with, can not possibly be more difficult then this so called conventional mortgage Bank.  We hve to worry about tenants and renovation and financing on this one

Originally posted by @Jon Kepler : the worst that can happen is that you simultaneously go over-budget on your renovations, lose tenants and fail to refinance.

If you have significant cash reserves, you will be fine. If you don't have significant reserves, it may be wise to open a line of credit to have extra liquidity available. Some people will probably disagree with me on this, but as long as you have liquid capital, the sky won't fall. In real estate, everybody makes money long-term; the trick is keeping your head above water in the mean time.

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We will not go over budget on renovations.  Estimating the cost of renovations is our strong point.   We also self manage.  This is a our 5th property.  The banks  count our primary residence as a property.  This bank that we have spoken yo said they finance up to 10  and we are counting on them to refnance once we Renovate and Rent.    Should we keep  looking around for a 2nd bank in case for some reason this bank denies us? 

Does everybody in Real Estate really make money in the Long Term??  That sounds like a good thing.  What do you base that statement on?

@Barbara G. , I don't think it could hurt to search for a second bank, just in case. Banks expect more loyalty from their customers than they give in return. That said, you might have nothing to worry about.

Generally speaking, yes, everyone who sticks it out long term makes money. This is true in the stock market as well (though our mortgages have amortization schedules that improve over time and stocks purchased with cash do not yield the same benefit). Admittedly, inflation is partially responsible for this, but as the decades go by, everything does trend upward. The real risk is that an investor can mess up (bankruptcy, etc.) and lose their opportunity to participate with the rest of us.

Having done the BRRR strategy 4 times now you have to be prepared for if things do not go as planned for us this boils down to one question.

If the rehab is done, the place is rented, and you can't get a refinance, can you sell the property and make a profit you will be happy with?

If the answer to that question is no, we pass on the deal.  We have been fortunate where our refinances have all been executed as planned, but having that backup plan is crucial and I think puts ones mind at ease.

@Barbara G. - if the bank you are dealing with will do up to 10, you likely have an investor-friendly bank. Are you buying and financing with an entity or your own name?  This will make a big difference in options available to you. 

Originally posted by @Doug McLeod :

@Barbara Goodman - if the bank you are dealing with will do up to 10, you likely have an investor-friendly bank. Are you buying and financing with an entity or your own name?  This will make a big difference in options available to you. 

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Hi Doug

Yes the bank sounded friendly and they did say they do up to 10 mortgages. We have spoken to the Loan officer on the phone and she sounded very positive. She said they refinance at 70% of the appraised value. This Duplex cost us $72,000 and the max on renovation will be, we believe, $25,000 so if the duplex appraises for $120,000 after renovation we should get 84,000 while we would have laid out $97,000 so the down payment would come to $13,000 plus costs. That sounds good to us. Can we do the LLC after we get the mortgage?

At this point we are not sure about the rents and we think it will be berween $850 to $950 a month on each side.

Originally posted by @Michael Noto :

Having done the BRRR strategy 4 times now you have to be prepared for if things do not go as planned for us this boils down to one question.

If the rehab is done, the place is rented, and you can't get a refinance, can you sell the property and make a profit you will be happy with?

If the answer to that question is no, we pass on the deal.  We have been fortunate where our refinances have all been executed as planned, but having that backup plan is crucial and I think puts ones mind at ease.

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HI Michael

No we have NOT done this BRRRR 4 times. This is the 1st time. Our other 2 investment Duplexes were conventional 30 year mortgages where we did not renovate before hand and are still renovating them out of our positive cash flow. If we don't get these refinanced we will still keep them BUT we will not have the capital to Repeat the BRRRR on our next property. Our plan is to buy 10 Investment properties using BRRRR. If we can do this what can we do for the 11th investment property?

I remember reading that you bought a 5 or 6 multiplex one bedroom building that you had a BRRRR plan for But you did not say what happenned on the refinancing end? I am interested in knowing how you handled that?

Ask what the lender is really offering. If they are doing portfolio loans, they can lend to an entity (but does not mean they will). You will get better rates and 30 yr amortization on conforming loans (Fannie Mae), but these must be in your name. Moving them later to a LLC can trigger the due on sale clause. Lender has the option (rarely exercised) to call note due.

One common strategy is to do first 10 properties in own name with Fannie Mae loans, then use an entity and portfolio loans after that. Any financed property will count against your 10 Fannie Mae limit under current rules as I understand them. 

So you can continue BRRRR after 10 but you need better deals and more cash to make it worthwhile at higher rates and shorter amortization on the loans.

Originally posted by @Doug McLeod :

@Barbara Goodman - if the bank you are dealing with will do up to 10, you likely have an investor-friendly bank. Are you buying and financing with an entity or your own name?  This will make a big difference in options available to you. 

Hi Doug

I believe we made a mistake with out first 2 duplexes in the way we financed them. Instead of doing a BRRRR we just got conventional Mortgages with 25% down and then although they positively cash flowed we had to put all the positive cash flow back into renovating the 2 duplexes piece meal. Now we have owned them 14 months and done $20,000 + in renovation and still need $16,000 more in renovation. Big mistake!!! We have not been able to take any money out. Do you think we should take the cash flow from another property that we are closing on that will be cash flowing, and accelerate the rest of the renovation of these original 2 duplexes. Then, af\fter they are fully renovated, we could try get a Refinance mortgage for a larger appraisal (probably at 3/4 or 1 point less in interest) Would that be a good move? Would the fees to refinance it be high??

The original 2 duplexes  appraised at $332,00 (14 months ago when we closed)  and we think they  would appraise at $450,000 or $475,000 now with the renovations.   Would the original bank do this or would this portfolio  bank do it?  Could we only get 70% of the appraisal?  The new Mortgage would be for $365,000 or $382.000?  Would that make sense?

Your advise and input would be appreciated.

You couldn't buy fast enough in 2011, 2012, 2013.  Now it's much more difficult.

If you're keeping a decent amount in cash reserves, and keeping your financials very well organized and starting to set up systems for scaling (online rent payments, etc.) then you're well on your way. It sounds like you're doing a great job

About the duplex that we last bought and had to renovate in Waterbury ct:

I see in a past post that I said our budget was $25,000 for renovations and that I said estimating was our strong point and that we would NOT go over budget.

Well I guess it was not our strong point because so far we have gone over Budget and if the final renovation number is $40,000 instead of the projected $25,000 we will be lucky.  Afraid to look at all the numbers right now,

We went over budget because we of "extra's."  We decieded we should cut trees down and that was at least $2,500.  We decieded that we needed to give the future tenants a backyard so we had to pay an excavator to dig out the yard and build a railroad ties retaining wall and pull off the 2 decks and replace them with cement patios and put a fence there to give each tenant a private patio area and that cost at least an extra $4,500?.  

The plumbing work was Extensive.  Every pipe in the house had burst including the water meter.  Fortunatly we were able to do the plumbing ourselves because that cost would have totally buried us and I think it would have cost $6,000.

Several ceiling had to be replaced.  The place was painted expensively because of all the pre painting prep work.  

we are advertising it for $1,000 for each apartment which is top rent in Waterbury ct and it looks like we might be able to get that (hopefully)

The next thing is getting it rented.  After  that we  are going to refinance it.  Zillow says it should appraise at $150,000 and if it does we will be OK

@Barbara G. A duplex in Waterbury, CT appraising for 150k? Where in Waterbury is it?

Did you get those comp numbers from a realtor?

No Michael I just saw that Zillow said $150,000 and I have no idea what the comps are.   I suspect they are lower then the $150,000 but the $150,000 would make me very happy.  We have poured too much into this property but it could still work well.  We really would love for the mortgage to pay for the bulk of the investment  but we have to take what we get.

@Brandon Turner

Have you realized how more and more people are using your BRRR acronym in everyday language on here now? Perhaps you can get it added into the dictionary soon haha

@Barbara G. I think I understand how you feel, I've been there with a property before I even started investing. And it was a terribel time, but I got through it and I really learned a lot during the process. Calm sea does not make for a good sailer, right...?

OK, but let me tell you this: from reading the story here I get the feeling that planning is not your strong side. You have the guts to pull the trigger and the confidence that you somehow will figure it out (which is awesome), but either you dont have much of a plan or you dont stick to it (deck added, trees removed..) I looks to me like you are a poor planner, at little bit chaotic maybe and not very organised? Sorry I really dont mean to insult you, but I'd rather want you to be honest with yourself so you can do something about it. My guess is that your bank is sensing that too, thats why they have so many questions and keep torturing you.  So if this is true ( again, I dont know you, I am out on a limb here) you need to get an acountability partner. Someone you can show your plan and have it criticised and hacked into pieces. Then you can adjust the plan and try to stick to it. Your acountability partner can also help with that. One of my favorite american sayings is: Plan your work and work your plan. Most of the time I screw up and look back I usually failed at one of the two. Hope that helps ;-) 

Originally posted by @Marcus Auerbach :

@Barbara Goodman I think I understand how you feel, I've been there 

OK, but let me tell you this: from reading the story here I get the feeling that planning is not your strong side. 

Well I would just say we planned but we changed our plans

You have the guts to pull the trigger and the confidence that you somehow will figure it out (which is awesome), but either you dont have much of a plan or you dont stick to 

answer: We call it being flexible

w\it (deck added, trees removed..) 

Answer:  Removing  thee trees was my partners idea but it did help us give a backyard area for our tenants which I think we will realize is a plus in the end, we hope.

We have't gone to the bank yet. It was our last bank that gave us a long drawn out difficult time on a conventional 25% down mortgage on our last 2 duplexes (which were pretty much perfect properties). This is a BRRRR which is a different kind of mortgage and we are looking for a bank that will Refinance it for us

Sometimes it's the properties that make the decision.

Well it' not over until the "Fat Lady Sings" and we will see if its a winner or a loser.

@Barbara G.

I have to agree with @Marcus A. here. Moreover, it sounds like you're looking to make the perfect place for a family to live - unfortunately, we need to get you thinking more like a slumlord! I'm kidding ... sort of. Improving a property is great, but you need to be able to balance renovations with cost. Most tenants aren't going to treat a rental property super well, so keeping in budget, using appropriate fixtures, and finishing on time are key to making a profit. I think you would benefit from having a bean counter on your team to ensure the properties are working for you, not you for the properties. 

Additionally, you desperately need a qualified real estate agent on your team that can provide accurate comps (sale and rental) for your properties to ensure you don't overpay when you buy or sell yourself short when you exit. Zillow is fine for a ballpark estimate, but it is not an accurate way to value your property. Your agent can also help you figure in Capex, Repair Cost, Vacancy, Taxes, and other fees to ensure you have sufficient cash flow. I don't know the area you're in at all, but these purchases seem like the cash flow may be light, when all expenses are taken into account. One of the biggest problems new landlords can face is over-leveraging and then being pounded with unexpected costs.

 

Good luck to you with all the new properties!

-Christopher

Hi Chris Thanks for your input but if we pay $117,000 for the property Cost 72,000 + renovation $45,000 = $117,000)  and the rent is $2,000 that is more then 1% and close to 2%.   It's also OK on the 50% rule.

You say "Your agent can also help you figure in Capex, Repair Cost,"

Everything is new so how much can Capex or maintanence cost?

"Vacancy, Taxes, and other fees"  

Well we can figure that out!!

"to ensure you have sufficient cash flow."

"I don't know the area you're in at all, but these purchases seem like the cash flow may be light, when all expenses are taken into account. One of the biggest problems new landlords can face is over-leveraging and then being pounded with unexpected costs."

The cash flow of almost 2% sound OK to me or what am I missing here?

great posts here. Thanks to all!

@Barbara G. , you wrote: "Now we have owned them 14 months and done $20,000 + in renovation and still need $16,000 more in renovation. Big mistake!!! We have not been able to take any money out. Do you think we should take the cash flow from another property that we are closing on that will be cash flowing, and accelerate the rest of the renovation of these original 2 duplexes. Then, after they are fully renovated, we could try get a Refinance mortgage for a larger appraisal (probably at 3/4 or 1 point less in interest) Would that be a good move? Would the fees to refinance it be high??"

That made it sound like you really want to move even FASTER!

(I didn't see having to pour your cash flow back into the property as a mistake at all - after all, you always intended to reinvest all the cash flow anyway, right? Otherwise your BRRRR strategy WILL be slowed, if not put into reverse)!

Banks have a way of putting your brakes on for you, don't you agree?

The MAIN issue you might have is: becoming emotionally attached to the idea of the deal, rather than relying purely on the business numbers. 

Please keep us updated with this diary. All the best...

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