How conservative to go when analyzing BRRRRs?

Question

How conservative should I be when analyzing a BRRRR deal? I only recently started analyzing deals for potential BRRRR properties and for the projected rent I have been putting in the 25th percentile rent for the area's zip code. I have also been putting in the lowest comp price in for the ARV. Is this something I should be doing to make sure the deal is a homerun or put in numbers more pretanabel the property I'm analyzing?

Brian Tome · Answer

@Thomas Jerome - Gary and John's advice is solid.  You might just want to run three separate alternatives: worst case, best case, and average.  Make sure it works in the worst case, but aim for the best case in everything you do.

Also, John is spot on when he says everyone underestimates holding and renovation costs, and overestimates ARV.  I do it every time.  I know that I have a tendency to do it, and I still do it.  So, keep a healthy reserve and wait for a good deal.  One mistake on a tight budget can put you out of the game for a while.

Good luck!

John Teachout · Answer

I'd put in numbers that are as realistic as you can come up with. If you're not sure, then erring on the low side for income and high side for repairs is wise. Repairs and holding costs are often underestimated. ARV is often overestimated. You don't need a home run but don't want to strike out either.

Colin Simon · Answer

Brian is on the money here. Scenario analysis is also what I'd recommend.

A few expenses, like taxes and insurance, tend to go up slowly and might not have been assessed lately, so it can be a good cushion to just add 3-5% to their current rates.

Gary Parilis · Answer

@Thomas Jerome, another spin on what @John Teachout says is: Be as accurate as you can, but also do alternative calcs based on the most pessimistic estimates. If the pessimistic view is acceptable, then move forward.

FWIW, I generally assume the rent is somewhere between the 25th percentile and the median. But make sure to look at the individual comps. Sometimes there is a lot of variance -- and some may be more similar to your property than others.

Thomas Jerome · Answer

Alright, thank you!

How conservative to go when analyzing BRRRRs?

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