What is too much for a beginner in the BRRRR strategy?

Question

I am a beginner in real estate and have a good amount of cash ready to BRRRR. I am currently looking at a property in Detroit Michigan for $7k because it obviously needs repair, the seller says it should be about $25-30k in repairs and if that were the case I would still have a solid amount in reserves in case of emergency.

I have a rule that if it has foundational issues it’s not worth it. Assuming there is no foundational issues would you advise a beginner to stay away from a repair of this size, or go for it?

Any feedback would be greatly appreciated!

Theresa Harris · Answer

First do not trust the seller to tell you how much it would cost in repairs. A property selling for $7K is going to need a lot of work and will probably be in a not so great area. A lot of the cheap houses may cash flow on paper, but in reality you will have higher turnover and more damage. Also if you want to do the refinance part of the BRRR, most banks will not lend you money on houses under $100K.

Paul S. · Answer

Jake, you are going to learn 100 times more info by DOING instead of ASKING. Let's be honest - this is Detroit and you are only talking about risking around 30k.... if you were to take an L it's no money really. If you think the property is in a decent area with other rehabs going on around it do it. All these guys out here gathering info for years on end before they buy something could have learned a ton if they just quit being soft and pull a trigger.

Jonathan Maio · Answer

Hey Jake! DEFINITELY make sure you do your own due diligence here and do not just trust the sellers word about the level of renovation required. In terms of your overall question - my first BRRRR was a full gut rehab SFH (more expensive than this one) and I don't think it is too much for a first timer if thats what you need here. I would just make sure you get together a great team to help you and plan every detail! Don't be afraid to pay for a quality contractor to help you along the way - I made the mistake of going with my cheapest option (a handyman) and taking on a ton of that work myself and definitely regretted that. Either way you'll learn a ton so good luck and have fun!

David Kelly · Answer

@Jake Parsons

No its not a set number. This is typically what a lender will voluntarily set a limit because of costs/profits. I have done some as low as 70k.

David Kelly · Answer

You will need to wait 6 months to refinance this property if you want to cash out based on the ARV. This would be conventional financing. There is an option to do it earlier called delayed financing, but that will only get you purchase price plus closing costs.

Alicia Marks · Answer

This is true on the lending side. If there are people looking to finance in Detroit, I have a reference for a local bank brach that will do them.

Drew Sygit · Answer

@Jake Parsons we're not of anywhere in the city of Detroit where you can get a deal like that on a solid Class C or higher property.

You're probably looking at a Class D property which will be very challenging to manage and make money on.

The critical question to ask the seller is how much is it going to cost to rehab it so it passes City inspections.

Recommend you search BiggerPockets for our Deep Dive series on Metro Detroit Ring Cities and city of Detroit neighborhoods.

Craig Anderson · Answer

I would be very wary of a house for $7K needing only $25K in repairs. Make sure the numbers, rehab, foundation and other aspects of the house are accurate.

Alicia Marks · Answer

I do BRRR in Detroit and I would say generally that a house listed that low is going to need 2-3X that budget as a minimum. I did a large duplex and had to put in about $75k to get it up to a nice rental option.

Alex Uman · Answer

I would verify with a contractor whether or not that rehab number is accurate before buying anything. There's likely a reason they are willing to sell for that low.

What is too much for a beginner in the BRRRR strategy?

What is too much for a beginner in the BRRRR strategy?

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