At what point does rehab uncertainty kill a BRRRR deal?

Question

I’m looking at BRRRR deals and starting to think the biggest risk isn’t always the ARV or the refinance. It’s the rehab scope being too vague before the deal is locked up.Example: Purchase price: $185k
Estimated ARV: $285k
Expected rehab: $45k–$55k
Rent works on paper.

But then the inspection comes back with possible foundation movement, older electrical, HVAC near the end of life, and plumbing concerns. Now that “$50k rehab” could realistically become $70k–$85k, depending on what gets uncovered.

At that point, the whole BRRRR changes: cash left in the deal changes, refi proceeds change, timeline changes, holding costs change, and the “infinite return” spreadsheet starts looking fake.

When the ARV and rent still work, but the rehab scope has too many unknowns, do you:
Still move forward with a bigger contingency?

Renegotiate hard before closing?
Walk unless the major systems are verified? Or treat it as a heavier rehab from day one?

Mike Klarman · Answer

Add the purchase price and the rehab together and divide by the ARV.  In your case this would be 240k/285k = 85%!

That's called burning money.  You want that number under 75% for sure, definitely closer to 70% and the really good projects are under 70% and the great ones are under 60%.

I recently bought a duplex in Pitt for 25k at auction.  The building needs about 70k to make it rent ready.  So that's a 95k project cost.  Building is worth 180k when done and each side rents for 1300.  That's a 55% project cost.  At the refi table, only take 100k.  You get all the money back plus closing costs for the refi and now a 100k 30yr note is only 900 or so.  DSCR is now 2.88 on this asset.

That's how you win.  Stack the low project cost/high DSCR assets.

Jonathan Klemm · Answer

@Ali Kalaei - In my opinion, it's worth it to pay a general contractor to come and walk the property with you and have them develop a scope of work and rough budget.

Staying out of bad deals is more important than finding good ones!

If there are more unknowns that come up, voice them to the seller and by time to make the unknowns known.  Whether its you or someone else it will help to sort through some of those things.  You can ALWAYS RENEGOTIATE!   Don't be afraid to tell them how it is and give them the number that works, and be confident walking away if they aren't willing to accept it!

Stacy Raskin · Answer

From what I have heard from investors and from my own experience, it may be a better plan to do a lighter, more cosmetic rehab until you have systems, service provider referrals and experience for a heavier rehab. And even then it might be worth thinking twice unless you are very confident in your numbers, people and sytems. I think anything like foundation can quickly add up. If planning to sell, doing a cosmetic rehab can help flip the house, make the cash and move on to your next deal. You still need to be confident in your rehab numbers and contractor and/or subcontractors.

The person who's going to buy the house after the rehab is generally going to have an inspection as well so important to consider as far as the work done and the state of the property. I think sometimes investors take on too big of a project because it sounds good on paper because the purchase price was low due to some major items that need to be fixed. Those costs can quickly spiral out of control and make it less likely to be any profit.

James Jones · Answer

Great question Ali, you're thinking like an operator already.

When the rehab scope has too many unknowns, you renegotiate or walk. Foundation, electrical, HVAC, and plumbing are the four that blow budgets fast. Any one of those with question marks and the original price doesn't hold.

A few rules:

Get a contractor bid during the option period. Real bid beats any spreadsheet estimate.

Underwrite to the worst case. If the range is $45-55k with question marks, run it at $75k. Still works? Move. Doesn't? Walk.

Build 15-20% contingency, not 5%. Older homes always surprise.

Renegotiate with documentation. Most sellers come down when you bring the inspection report and the bid. If they don't and the numbers don't work, walking is the win.

The "infinite return" math only works when the rehab number is real. Anything less is just speculation with your money trapped in the wall.

Russell Brazil · Answer

The actual rehab will almost always be more than you initially estimate. That should be built into your assumptions.

Burton Williford · Answer

Ali — your instinct is right. Rehab scope uncertainty is the silent BRRRR killer, way more than ARV miss or refi rate spike.

The way I model this is to run three scenarios on every deal before I sign anything:

Base case: rehab as estimated (in your example $50K)

Stress case: estimate + 25% contingency ($62.5K)

Disaster case: estimate + 50% contingency ($75K)

For each, I compute capital left in after refi, cash-on-cash return, and monthly cash flow.

Your deal in those three lenses:

Base: $185K + $50K + ~$5K closing = $240K all-in. Refi at 75% of $285K ARV = $213,750. Capital left in: $26,250.

Stress: $185K + $62.5K + $5K = $252,500 all-in. Same refi. Capital left in: $38,750.

Disaster: $185K + $75K + $5K = $265K all-in. Same refi. Capital left in: $51,250.

Now I have a real answer to "is this deal worth doing." If even the disaster case still cash-flows $200+/door and only leaves $50K in, I can live with the uncertainty. If the base case is already tight and the disaster case turns into bleeding $300 a month, walk.

The mental shift is to underwrite the deal as a band, not a point. Then ask: does the worst-case end of the band still meet my minimums? If yes, go. If no, walk — regardless of how good the base case looks.

For your specific scenario (foundation, electrical, HVAC, plumbing concerns), I'd pay $400-600 for a pre-offer inspection from a contractor who does this kind of work — not just a general home inspector. That tightens the range from $45K-$85K down to maybe $55K-$70K, and that smaller band might be enough to make the call confidently.

The "infinite return" math is the most overrated number in BRRRR. Capital-left-in at the disaster case is what actually matters.

Frankie Vozzi · Answer

For me, it's usually when I can't get comfortable with the downside.

A foundation issue by itself might not kill a deal. Same with HVAC or electrical. But when multiple major systems are question marks at the same time, I start underwriting the project as if the worst-case scenario is going to happen.

I've seen investors get into trouble when they keep the original rehab budget and just add a small contingency. If the numbers only work with a $50k rehab but fall apart at $80k, that's probably something I'd want to know before closing.

Curious what market you're seeing these in. Are contractors generally backing up the $45k-$55k range, or is that your initial estimate?

Bruce Woodruff · Answer

The solution is to be able to ascertain an accurate Rehab Budget before locking yourself into the deal. There will ALWAYS be surprises in any project, but the fewer the better, You need a GOOD General Contractor to walk the project with you before you make the offer...

Kenneth Garrett · Answer

@Ali Kalaei

BRRRR deals are a math problem, but it takes execution of each phase.  I would say no matter how experienced you are there are always surprises same as with flip projects.  During your due diligence period is when the work takes place.  You have to be realistic about your rehab assumptions as well as the comps and rents.

If a major issue is encountered during due diligence you need to negotiate with the seller.  If the seller won’t budge, walk away.  The numbers only work when they are realistic.  Either the math works or it doesn’t.

In today’s real estate environment you will most likely have some money stuck in.  That’s when your cash on cash return is important.  How quickly can I get my money back and do it again.

At what point does rehab uncertainty kill a BRRRR deal?

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