How to maximize the BRRRR method?

Question

We are currently closing on a townhouse in Northwest Indiana, and we are trying to figure out where to invest most of our money to be able to get the highest rate of return when refinancing. Do we start with the kitchen? Roof? bathrooms? and how far do we take the remodel? The townhouse itself is in livable condition, but we are trying to maximize our return, and are wondering how far we should take our remodels? Do we completely gut the kitchen, and the bathrooms? or do we focus more on aesthetics of the townhouse?

Kevin Sobilo · Answer

@Djordje Janjus, Most BRRRR rehabs probably start with a distressed property, not one in decent condition. So, the scope of work is probably more obvious than your case.

If I was you, I might work backwards! Start with the ARV that you want. One where you can refinance out 75% of the value and still get the cashflow you want after accounting for vacancy, cap ex, etc.

Then, take the amount you could refi out based on that ARV and subtract your purchase costs. That leaves you with the amount you can spend on the rehab. Then see if you can stay within that budget to create that ARV. Look at comparable sales to see what kinds of features and finishes are common for properties in that price range.

Whitney Hutten · Answer

@Djordje Janjus Great Q's.  Soo... not to beat you up on this... why ask now when you are closing?  This is a Q that should have been asked early in the due diligence phase so you can have a scope of work drafted, that meets or beats your competition and know that your numbers will work.  So it tells me that you may not know your competition and that your numbers are not run properly.

OK... off my soapbox :)

In my experience, the kitchen and bathroom yield the highest returns.  You want to upgrade to meet (or slightly beat) the market.  Therefore, look at 50 properties for sale right around your home.  Look at 25 recent closes and 25 listings (if you can't get to 50, don't get discouraged, look at closes first in the price range you are targeting).  Write down what each home has.  This will be your new standard for this condo.

Now create your budget to meet that new standard.  That will inform if you have to gut the kitchen, or if you can leave the cabinets, or even maybe just repaint.  That will also inform what finishes you have to have in place, and items you need to upgrade to be competitive in the market.  It will also tell you if you have to replace carpet and paint.

Hope this helps!

Paul Wachtler · Answer

Hi Djordje,

This blog post that Anum Yoon wrote on BP a couple of days ago provides a quick list of some renovations that can improve the property's value:https://www.biggerpockets.com/blog/5-home-improvements-improve-resale

Best,

Paul

Gil Segev · Answer

One thing I've noticed recently is that granite and quartz cost pretty much the same. In fact, I spoke with someone who runs multiple flips (in AZ) who told me buyers actually prefer white quartz to granite these days - just FYI.

Djordje Janjus · Answer

Whitney, thank you so much for the response. We invest very conservatively, and assume we have to gut the bathrooms and kitchen. So we assume for the worst case scenario. How this question came about was walking the unit with a contractor. He was suggesting just to paint, and change the flooring. The unit is in good shape, but painting and changing the flooring "I personally don't think will get us to the numbers where we want to be. I will take your recommendation, and compare our property to others around to see what makes sense. I thank you for your help.

Kenneth Garrett · Answer

@Djordje Janjus

In general kitchens and baths provide the best return.  Look at the competition in the area to see how they are finished.  Don’t over improve because you won’t get it back.  Do little inexpensive improvements that tenants will like.  It’s the same concept as to what improvement a flipper would implement.

Kenneth Garrett · Answer

@Djordje Janjus

The BRRRR concept is contingent on refinancing the property to get your money out.  You need to put in the improvements that will enhance your ARV.  If you go cheap it will cost you on the appraisal.  If granite improvements are to costly look at B- and C+ areas to avoid it and other costly improvements.

Good Luck.

Krunal Patel · Answer

Rehab also depends on the area. You can ask around what is more important for appraisal in your area. Is it square feet? More modern kitchen?

For example, if it is square feet then is there a way to add one more bedroom on property? This kind of approach would help a lot.

Also in bathroom you can get top of the line materials for high end feeling because the surface area will be smaller.

Djordje Janjus · Answer

Thank you for the response. I did not think about working backwards on this deal, but looking at it from a different perspective definitely made this deal more appealing. Thank you once again.

Djordje Janjus · Answer

Krunal, I have reached out to a few real estate agents to get their opinion on what adds most value to a rehab. Thank you for the comment.

How to maximize the BRRRR method?

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