What’s your biggest challenge when evaluating a BRRRR deal?

Question

I'm curious what other are finding most challenging with BRRRR deals right now. Is it finding properties at the right price, keeping rehab costs under control, getting the refinance numbers to work, or making sure the rental cash flow holds up?

For those who have complete a few BRRRR projects, what do you pay the most attention to before moving forward with a deal?

I'd be interested to hear what's working for everyone

Matthew Morrow · Answer

@Darius Gibson For us it's the refi more than anything. Purchase price and rehab you can control with solid underwriting and a tight scope, but the appraisal and the lender's seasoning rules are where the plan really gets tested. I'd rather underwrite the refi conservatively, with a lower ARV and a higher rate, and if it still works leaving some cash in, it's a deal. Curious what you're seeing on appraisals from the lender side lately?

Darius Gibson · Answer

That's the big picture of everything, the appraisal can change the whole outcome of a deal, especially if you're counting on that equity to refinance. The appraisal is part of our process, but it is important to underwrite conservatively and not build the project around the highest possible value. Great that you leave a cushion! Are you finding that appraisals are generally supporting your projects ARV, or are you seeing a bigger gap? I'd be happy to be a resource

James Jones · Answer

For me the challenge is deal flow first, numbers second. In Memphis I buy single-family under $100K with ARV $180K to $265K, and it has to hit the 1% rule on real rent, not hoped-for rent. For Section 8 that is $1,395 to $1,950 for 3BR+. Before I buy I size the refi backwards: DSCR at 70 to 80% LTV, about 30-year amortization, and I assume I leave some cash in. If it only works at top ARV and top rent, I pass. Rehab is where good deals die, so I price conversions that add a bedroom and bath, not cosmetic upgrades that do not raise rent.

Darius Gibson · Answer

That makes sense, James. Working backward from the refi and being conservative on rent and ARV seems like the right way to protect the deal. Deal flow is interesting, too. Are you mainly finding opportunities through wholesalers and direct-to-seller, or has another channel been working best for you in Memphis?

What’s your biggest challenge when evaluating a BRRRR deal?

4 Replies