Do you ever walk away from a BRRRR?

Question

Hey BP!

I have a question I'm noodling over, and wanted to see what you think.

Do you ever walk away from a deal that you believe you can BRRRR? I'm looking at an REO in Indianapolis, in a solid C-area, that would likely rent quickly for $800 (potentially more with section 8).

I was originally planning to restrict myself to homes that would rent above $1000 at a minimum, to try to minimize turnover costs. My goal is to build a portfolio of 50 SFH rentals so that I can retire early. I have enough cash available to do up to about 5 BRRRR B-class deals at a time, based on the terms I've found with a local HML.

My question is this: If I can own a C-class home with no equity invested, and I'll have reserves for the portfolio, do I really care about the property class being C or C- instead of a B+?  Would you pursue that deal, or walk away to stick with your strategy?

If being a C- class property wouldn't cause you to walk, then what aspects of a potential BRRRR deal would cause you to walk away?

Mihir Bhimaraju · Answer

@Sean McCluskey I'd say it depends on the area where you're looking at. $800 would still be risky in certain areas. If you have a team in place, touch base with them to get a feel for the area. Personally, I've bought deals in C-. As long as the tenant screening is strong, your turnovers would be minimal (not factoring in life altering event).  The few deals I walked away from were based on the location (even though a BRRR would've worked) and the condition of surrounding homes in the nearest block. If they're boarded up or not taken care of, I stay away from that street.

Andrew Syrios · Answer

The biggest thing that would cause me to walk is if the property won't meet my ARV requirements (75%) or I don't believe it will have positive cash flow. In the ladder case, it's usually because the property is too expensive, in which case it might make for a good flip. If it's too low end, it maybe worth considering wholesaling the property. That being said, we have a mix of C and B rentals (and a few D to be honest). I don't think it's the end of the world to have a few lower end properties. And if you have good equity, you can always sell it later if it's too much of a hassle.

Kyle McCorkel · Answer

@Sean McCluskey

That's such a great question.  I've asked myself the same.  I have certain school districts that I don't buy in because I think re-sale will be a major problem, and I don't buy in D class areas.  Generally I try for B and A.  But, like you said, if a deal came up that I can BRRRR and leave minimal capital in the deal....and it was a C class area, I'd probably take it.

So there's your answer, and another question for you to consider: what will re-sale look like in that area? If it's truly a C class area you will probably need to sell to another investor so your chances are slim to sell for more than you paid for it.  Which might be OK, if you make great cash flow on it and have paid down your debt principle significantly before selling (not to mention the initial equity that you created through the initial rehab).

Andrew Syrios · Answer

I haven't used 2 year leases and wouldn't see them as a huge advantage since if someone can't pay, it doesn't matter how long their lease is. The main thing I would focus on is screening. Screen early and screen often and you should be alright, even in a rougher neighborhood.

Sean McCluskey · Answer

@Andrew Syrios you’re definitely right, it’s a higher deposit than that level of tenant would normally have to put down. It for sure would slow down the lease up on a unit, at least a bit, if the others aren’t asking for it.

I would be ok with rent $50-75 below market if I could get a 2x deposit and a 2 year lease, though.

Have you ever focused on 2 year leases instead of 1? Jason Hartmann is a big fan...

Sean McCluskey · Answer

@Mihir Bhimaraju It’s a small world after all, huh?

What would you say if I said the house would have an ARV of $65k? It’s closer to Shadeland and 46th than the high school. Does anyone else have feedback on that area of Indianapolis?

Andrew Syrios · Answer

If your PM can get that kind of security deposit, then I fully recommend they do. That being said, I haven't seen that much in low areas I've worked in and around. Generally people in those areas have a tough time putting a substantial amount of money together to cover move in costs, so I'd be interested to know if they have problems getting tenants to bite on those requirements.

Mihir Bhimaraju · Answer

@Sean McCluskey You must be comp'ing one of my properties! It rents for 900. That area has a few rough pockets but if it's in the residential area with 90k+ homes, you should be okay. You'd need a good PM in areas like these. Your properties will only be as good as your PM and their operations no matter what rent they collect. I have a unit that brings in 600 a month and it is the least hassle so far vs another one that brings in 900 ( in a good area).

Sean McCluskey · Answer

Hey @Mihir Bhimaraju , thanks for jumping in.

The area is actually just to the east of Devington, between Arlington Community High School, E 46th and Shadeland. What do you think about that area? There are a number of rentals currently on the market asking $850-900 and a few asking over $1000, but I'm trying to be conservative on my rent # in my model.

Sean McCluskey · Answer

@Andrew Syrios Thanks so much for your reply. It's great to hear that I'm thinking about this the same way.

I was talking with my PM this morning and he even mentioned that they will often require a 1.5-2 month security deposit on the lower priced rentals (based on tenant credit and financial background). So the deposits on the C-class rental can actually be equal to the deposit on a home renting for twice as much.

The lower priced rental will also be a smaller floorplan with tile and laminate flooring instead of carpet, which saves on carpet cleaning and new carpets, and repainting on a pure sf basis.

Do you ever walk away from a BRRRR?

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