5 Killers of BRRRR profitability

If you are going to successfully BRRRR, the second letter 'R' (rehab) is going the be the most expensive and challenging component. The four systems plus hard money will drive most of the rehab dollar and profitability.  If they can be assessed early in the project and managed, a successful BRRRR will follow.  

The 5 killers:

• 1.  Roof
• 2.  Electric
• 3.  Plumbing
• 4.  HVAC
• 5.  Hard Money 

Trying to provide meaningful pricing would be impossible to cover; every market is different. I am not going to focus on the cosmetic, paint, floor, kitchen cabinets countertop. The optics are important for the ARV and rent. However, they are generally cheaper and easier to manage. No permits or inspections are required which creates a more competitive environment and drives the costs down. Further, it is not out of reach for most do-it-yourselfers.

In any given rehab, you may have all or none of the killers.  There are many strategies about how to handle various areas. If the house is going to be a flip and the buyer will be using any type of conventional financing, then all systems will need to modern. VA and FHA are the strictest, while conventional (20% down) loans are more liberal and of course cash is anything goes.

If you are going to hold the property, there are 2 schools of thought. Fix only what is broken or update everything to significantly reduce maintenance issues for years to come. It is more costly and difficult to make upgrades while a tenant is living in the house. Updating all the systems will drive ARV. It is a balance as to how much to spend on the systems vs driving ARV. 

Roof- Should have at least 5 years of life for most insurance companies.  20 or 25-year shingles are the most common. There are other materials like barrel roofing and metal, while less common, they last longer. I would stick with the 20-25 year. If you go to the 30 you will have to depreciate the roof it as part of the house. If the life is less than 27.5 years for the entire house, then you may take a tax deduction for the entire amount as bonus depreciation in year one. Check with your tax advisor for full details.

Electric - updates can be a significant cost if you need to replace the panel box and rewire. Replacing the panel box is generally a function of the age or if it is on the prohibited list. Modern panel breaker boxes leverage Arc Faults. This prevents fires in the event of a short. If you want to geek out, Google it, it is very cool. It may be a national building code, but I know for Jacksonville, it is a requirement. Some panels can be retrofitted with a single Arc Fault. 

Electric panels considered unsafe by insurance:

• NicestAlan via Foter.com.
• Zinsco or Zinsco.
• Sylvania Home Electrical Panel.
• **Federal Pacific – this was really common in the 60s and 70s
• Edison “type” Electric Panel Boxes.
• Pushmatic Home Electrical Panels.

Plumbing – It is not common knowledge but there are actually 2 plumbing systems in your house. The supply and the drain or sewer and are not directly connected. The supply is just that, turn on the faucet and water comes out, it is under pressure from the water utility or a pump onsite. The drain is a gravity-fed system and relies on gravity for “IT” to roll downhill, as the saying goes.

Fun fact:

This is a roof stack or vent. The main purpose is to introduce air into the drain line, otherwise, it would create a vacuum, and nothing would flow. Think of a straw if you put your finger over it. Its other less important purpose is to release gases, which is what most people believe.

HVAC- Some say if it runs leave it alone. If you wait for it to die, it will inevitably happen on the 4th of July weekend during a heatwave. If your machine is between 15-20 years, it is not a question of if, but when. In Jacksonville, we generally do not have furnaces or boilers like many other cities. The A/C is reverse cycle and provides heat. The machine is a little more expensive but compared to a separate heating and a separate A/C system, it is lower in cost.

Hard Money- It can be a bitter pill to swallow. However, there is no easy way to scale without more money. This would be entirely separate from the long-term financing which provides better rates and terms.

Example:

30k purchase

40k reno

70k borrow – unlikely the entire amount can be borrowed, but for the example it works.

100k ARV

Costs:

700 -1400 1-2% origination

4200 interest 12% (1% a month) 6 months

1500-4000 Fees – appraisal, doc stamp, application

6400 – 9600 In this scenario, it would be how much money was left in the house.

As you evaluate and plan your BRRRR the difference in cost between 2 houses may be offset by one of the 5 BRRRR killers not being a requirement. It is easy to overlook any system if functions. Houses that go through BRRRR were generally built long before most of us were born, they could have been updated once and still be beyond their useful life.  It is important to balance the ARV vs dollars out of pocket.