Is It Really a Successful BRRRR If the Major Systems Are Still Old?

Question

A property can appraise well, rent quickly, and return most or all of your cash after the refinance.

But what if the roof, HVAC, or water heater only has a few years left?

Technically, the BRRRR worked. But part of the money you pulled out may already belong to the next round of repairs.

Do you replace aging systems during the original rehab, leave them alone until they fail, or subtract that future CapEx before deciding how successful the deal actually was?

James Jones · Answer

Sharp question, and your instinct is right. A BRRRR that pulls all your cash out but leaves a roof with three years on it didn't return your capital, it borrowed it from the repair you haven't made yet.

How I actually handle it:

Replace during the rehab when I'm already in there and the system's close to done. You've got the property empty, contractors on site, and financing in place. Doing the roof now is cheaper and less disruptive than doing it in two years around a tenant, plus it adds to the appraised value you're refinancing against. If it's got a few years left and I'm already spending, I just do it.

Subtract it from the deal either way. Whether I replace now or not, I underwrite the true number with a real capex reserve for the big three. A deal that only looks like a home run because I ignored a dying HVAC isn't a home run, it's a timing trick on myself. Aging systems get counted before I call the deal a win, not after they fail.

The one exception is a system with real life left, say a 10-year roof. Then I leave it, fund the reserve, and let it ride. No sense replacing something with a decade in it just to feel clean.

So to your framing: it's not "did the BRRRR work," it's "what's my return after honestly reserving for what's coming." Count the future capex up front and the deal tells you the truth. Most people skip that line and wonder why year three eats their cash flow.

Andrew Postell · Answer

@Ali Kalaei Putting a water heater in the budget is completely different than putting a roof.  Sometimes these things are important...and sometimes they do need to be addressed.  The main piece of this, is there room in the purchase to fit it in.  So, if the roof costs $15k...can you purchase the property for $15k less?  Now, this means that I have to negotiate harder...or maybe even not do the deal...but sometimes I can defer that replacement later...and sometimes I don't feel like deferring. Lean on your experts, mentors, fellow investors, and TRUST YOUR INSTINCTS!

Greg Kasmer · Answer

@Ali Kalaei - If I complete a BRRRs knowing that a few major systems are likely to go in the next 3-5 years I set aside larger reserves from the cash out refinance. I agree with Jimmy in that sometimes it makes sense to replace while the house is under construction. For example, if you're replumbing the entire house (as an example) an already have a 10-12 year old hot water heater you might as well replace the HW heater with your current plumber on the job as it just makes sense to do it while under construction.

Lipa F. · Answer

I'd still call it a successful BRRRR. Future CapEx is part of every rental. As long as the property has strong cash flow and you budget for reserves, those expenses should be covered over time by rents and equity growth.