Interested in BRRR

[NA NA]

Hello, I'm new to the group. I'm interested in getting started. I downloaded the BiggerPockets app read books and I think I'm ready to get started. Can anyone give me any advice for getting started with his first property in Kansas City? Thank you.

[Randall Alan]

Quote from @NA NA:

Hello, I'm new to the group. I'm interested in getting started. I downloaded the BiggerPockets app read books and I think I'm ready to get started. Can anyone give me any advice for getting started with his first property in Kansas City? Thank you.

@NA NA

Hi Na Na,

I'm all for you being successful, but I'm going to play devils advocate with you and see if you have the answers to these questions.  It should help you know if you are ready... or at least give you things to think about and research:

0.  (I added this one late... thus the zero... but it is more important than you think)... Right now you THINK you are interested in real estate... but you probably haven't done it 'for real'.  Figure out what attracts you to it.  Is it just the money?  Because the money doesn't always come easy.  It takes some dedication and passion to push through hard situations you will run into.  Often it takes more money than you expected.   On TV it only takes an hour to go from trashed out to beautiful.  In real life that takes months!  And if you are working another full time job and trying to oversee that transformation, it can be tough!  Real estate is typically  a get rich slowly 'sport'.

Being a landlord takes a certain tolerance level.  My wife, for instance, doesn't like the tenant interaction... so that falls to me.  But she loves rehabbing... so she takes more of the lead there.  Just know that it is entirely possible to get into something and then you find out you don't really like it.  Hopefully you can delegate things you don't like... but if not, it's all on you.

1. Do you have the money to BUY the house? Remember - if it is a BRRRR house, it's highly likely it needs repairs and possibly won't qualify for traditional financing. Are you going to use hard money financing? Do you know how that works... like - they still expect you to have a descent percentage of your own money in the deal (20% isn't uncommon). That their interest rate is probably like 10-14% - plus they will usually take 1-2% as a fee up front... and if your rehab drags out that can get really expensive really quick! You also have other holding costs... insurance on the house, utilities, etc.

2.  Do you have the money to REPAIR the house?  After you put down the money to buy the house then you have to have the money to repair it.

3.  Who is going to do that work?  Is it you?  Or are you going to hire contractors?  If you are hiring them, how are you going to find them?  Hint: the ones that run ads on TV and have fancy wrapped trucks and show up with logo'ed shirts are WAY more expensive than the ones that have been doing it for 20 years, but show up in a questionable looking pickup truck!  Point being - there is a wide range of contractors and a lot of your profit can go out the door if you hire the wrong ones.

4.  Do you have experience managing contractors?  They come in all different flavors... from awesome to absolutely terrible and everything in between.  Contractors often taken on more than one job at a time, and keeping them engaged on your job can be a challenge.  For sure, don't pay them all in advance.  

5. Before you buy a BRRRR, you have to know what the house needs to be able to know if your ARV is going to yield a profit (ie. is it worth buying the house, or are you going to be upside down once you fix it up?). I have seen plenty of people overpay for a fixer upper and then end up losing money on the deal... including contractors I have hired doing their own jobs! Who is doing that estimating, and what do you do when you get into it and discover more work is needed that you didn't budget for? Whoever is doing it needs to have done it a number of times before. Don't rely on yourself being a beginner... you will definitely want someone who has been around that block before!

6.  Question 5 begs a conversation about the spread between your purchase price and what you will be able to sell the property for:

Did you, for instance, take into account you have to close twice?  Once to buy it, and once to sell it if you aren't going to hold it.  Or even if you are going to hold it, you still have to Refi it which comes with another closing.  That could easily be $10,000 on a typical smaller house between those two closings.  Did you account for that $10,000+ in your calculations?

Did you take into account mistakes, cost overruns, unexpected work, etc?  How about theft, delays, re-work, etc?  All of those things happen.  We will add in an extra 20% for unexpected stuff into our calculations.  Hopefully it doesn't happen, but a lot of times stuff just comes up.

For us, our goal is to net at least $50,000 on a flip. Which also applies to a BRRRR because you are looking to get your cash back out of it. Since you have to leave 25% of the equity in the property for a BRRRR, you need a SIGNIFICANT margin between your purchase price and the new value.

Did you know you have to wait a year before you can refi the house (if you financed it)?  If you paid cash you are good... but if purchased with a loan, you typically have a 1 year seasoning period where you have to still be holding the house.

Side story: we had one thing go wrong on a flip we were doing and it ended up costing us $50,000 in additional expense.  It had to do with reinstalling 26 windows that weren't up to code.  They had to be removed after already being installed, and then reinstalled.  We had to higher an architect, a general contractor, and a very expensive framer.  It was a total nightmare for us!... but the margin on the flip was $150,000... so we came out ok... but made a lot less than we expected.  So know that what you DON'T KNOW can hurt you!

Probably the most important part of a transaction happens before you ever begin - and that is making sure you are buying a good deal. A $20,000... or even a $40,000 margin on a house that needs work probably isn't a good deal after you close twice, repair it, and pay for those repairs. What are you going to make? $10,000? Was it worth the risk of $100,000 to buy the. house, paying interest on your money, plus $30,000 in repairs to make $10,000? Not in my book. One extra thing that you didn't think about could sink you... like say "Oh, it needs a new septic system, or AC system, or Roof and you didn't think it did." So make sure you find a great deal! As a really quick example... the BRRRR we are working on right now is a lake house that has an ARV of $390,000 and we paid $190,0000 for it. We anticipated it needed $60,000 worth of work. So our margin is $140,000 before closing and such. We are 3/4 of the way though and our numbers are holding. In my book, that is a pretty good deal. Lots of space for not only profit, but also for things to possibly go sideways. You want both... just in case!

So, again, I throw all of this out there to you to let you know the types of things you are in for.  I know nothing of your resources, your skill level, etc.  But I would rather you go into it having thought about these things than to jump in, figure out you bought a bad deal, and then go, "Now What?"

Hope some of it helps!

All the best!

Randy