7 Tips for a Successful BRRRR
We all know the BRRRR strategy (Buy-Renovate-Rent-Refinance-Repeat). Here are 7 steps that will help you ensure a successful kick-off for your next BRRRR:
1.) Line up commercial lender and handle refinance up front. A Temporary-to-Permanent Loan combines long-term financing and construction loan. Important to note, a construction loan from a bank is paid to you as reimbursement installment when construction benchmarks are achieved. This means that you will need to have cash in hand to get started on the construction. Once the construction period is complete the construction or temporary part of the loan is converted into a tradition long-term loan.
2.) Establish an LLC. Separate LLC for each property. To start go to SEC’s website. Then go to IRS website to establish a specific Tax ID. This reduces liability and risk on your other investments and business partners.
3.) Create Operating Agreement. Working with a lawyer – you need to establish who is the managing member? Limited partners? Equity partners? Who are the lenders? The complexity of this agreement varies based on how many people are involved. The most important part of this agreement is establishing the roles and responsibilities of each person involved.
4.) Establish Insurance. Insurance agent will usually use a Vacant dwelling policy while flipping the property, the property is a little bit higher risk when its under construction and/or vacant.
5.) Bank. Open operating account. Whether its hard money, private lenders, etc. Private lenders will put their money in that operating account. The first expenses will usually be the deposits associated with the purchase of the property. Primary lender (the bank) will put the construction draws into that account as well once construction is under way. Your bank will do multiple appraisals – what is it worth on the closing day and the after repair value (ARV).
6.) Start permitting process early. Submit all paperwork once property is closed then pay fees and we are ready to go. Permitting process is often a long and grueling process. Starting as soon as possible is always advisable and will allow you to start construction immediately.
7.) Gather funds. Ensure you have enough cash for down payment, closing costs, LLC creation, and the start of construction.