How to Negate the Risks of BRRRR Strategy

BRRRR Strategy

The BRRRR strategy (buy-rehab-rent-refinance-repeat) can be an amazing strategy for helping you reach your dreams of successful real estate investment. The basic strategy is straightforward. You buy a property that is discounted or perhaps distressed, and then spend the time, money and effort rehabilitating it and getting it back into shape. Once it is ready, you can then rent it out and start making money. You then turn around and refinance the property and then do it all over again with another property. The goal is, after the refinance, to repeat the process using the same money you started with that a bank has now lent back to you in the form of a refinance loan.

While this might seem easy enough to do, there are always some problems that could arise. These risks will often crop up for those who are new to BRRRR and who are not aware of the potential pitfalls, but they can be just as problematic to investors who have been at the strategy for years. Therefore, it is essential to know and understand the most significant risks associated with BRRRR. When you know the risks, you can do your best to avoid them and profit from this powerful strategy.

Buying a Property in the Wrong Location

Poor location choice is a risk that does not often get talked about when discussing the BRRRR strategy. People who are buying properties that they plan to live in naturally want to have a good neighborhood, but they will often forget to look as closely into the location when they are going to be renting out a property. Often, they will see properties that are selling for low prices and will want to snatch them up quickly without understanding that the location is the reason the price is so low. It often is because people do not want to live there for one reason or another.

Even when the property’s rehab is complete, it will have problems when it comes to being rented. You will likely have a more difficult time finding tenants, especially tenants that are willing to pay the amount of rent that you will want to charge if there are problems with the location. The “good deal” that you thought you were able to get could end up backfiring on you.

While finding properties priced low is undoubtedly essential, never forget just how important the location of that property will be to your overall success. Even trying to sell a property in the wrong spot, if you want to get out of the investment, is going to be difficult. After all, there is a reason people say that real estate is all about location, location, location.

However, there is a caveat to this rule. For example, if others have been gentrifying the area and trying to breathe new life into it, or if new businesses are opening up in the area, it could be worth looking into the property. Still, you will need to do your due diligence to make sure that the location will turn around, and we never recommend being the first to invest in an area that “may” gentrify in the future.

Going Over-budget on the Home Purchase

One of the other potential risks that many who are using the BRRRR strategy face is spending more than they should on the purchase of the home even before they start rehabbing. They have a budget for buying a property, but they find a home or unit that they like and believe could be an excellent investment. However, it is beyond their current budget, and they try to justify the purchase. They might be too inexperienced to know that going over-budget is always a bad idea, or they might be impatient. Remember, you make your money when you buy. Expecting cash flow or appreciation to make up for an over-priced investment property is going to be risky. Think about it this way – if you are making $2,000 a year in cash flow but you overpaid by $10,000 you will be in the same net position five years from now than you would be now if you had bought the property right. Our Deal Analyzer tool can help you hit your numbers accurately and confidently.

Another danger is finding a property that someone else is interested in and getting into a bidding war. Even a small bidding war has the potential to inflate the price of the property to a level where turning a profit can be difficult. If you have a competitive side, avoid bidding wars at all costs if you want to make money from your investment.

Do not think about your investment properties as your dream home, or you will end up spending more than you should. Know your budget and know the value of the home for the current condition. Do not pay more than you should and do not “over-rehab” your investment properties. There are other properties out there if the first one, or several, that you find are overpriced. Keep in mind that there is no harm in offering less for a home than the asking price – it is all a numbers game.

The Time It Takes for Renovation

With the BRRRR strategy, you will buy properties that need to be rehabilitated so that they can ultimately be rented out. The rehabbing process can take a lot of time and work, and you will not likely be able to handle it all on your own. While you might have some DIY skills, you want to make sure that you are getting the property in the best shape possible so that people will want to rent the space. Aiming for this typically means you will need to hire contractors that can take care of the repairs and improvements needed on the property. Check out our Interviews tool to find a reliable contractor for your projects.

Many people using the BRRRR strategy, particularly those who are new to the field, do not allow for enough time for the rehab. The contractors and workers that you are using should be able to provide you with a rough estimate about just how long it will take to get the property back in shape. However, many factors come into play that would cause delays. For example, let’s say you need to replace the roof or you need to redo the driveway or walkways. If it is the middle of winter or the weather is wet and rainy, you have to push the repairs back, which means it will take longer before you can get the place appraised and get people into the property. Always be conservative when you run your numbers!

In addition to Mother Nature making the rehab more complicated, there is also the problem of bad contractors. Most contractors will have your best interests in mind, but that is certainly not the case with all of them. Some show up late or never show up at all. Some do a little bit of work and then take what money you’ve paid them and vanish. It means you will have lost money, lost time, and need to find a new contractor. While this does not happen all of the time, it does happen enough that you will want to be aware of these types of contractors. Although you can’t do anything about the weather, you can be careful when you are choosing a contractor to take care of the work for you.

The Total Cost of the Renovation

Determining the actual cost of the renovation will be difficult because there may be additional issues revealed when you are partway through the repairs. Ideally, you will have been able to find all of the significant problems when you had the property inspected before you bought it, and hopefully, nothing was missed or hidden. Still, there may come times when the contractor approaches you and says that they have found a new problem. Maybe they encounter a problem with the plumbing or the electricity or even the structure of the property. All of these issues will need addressing, and that can add to the cost of the repairs.

There are other costs to consider, as well. When a rehab takes longer to complete than you had anticipated, you will not be able to get people into the property. You will be paying the full mortgage, which adds to your overall cost.

The best thing you can do to help negate this risk is to anticipate the problems before they begin. Have a particular section of your budget for the “unexpected” whether that means new issues that need to be fixed or accounting for not having a tenant right away. This extra money is a cushion. You will not need to use it on every rehab, but it should be available to you from your budget. Whatever you do not have to use should be rolled over into your next rehab project. By preparing for this problem and having that safety net, you will have more peace of mind from start to finish of the project. Our Deal Analyzer tool can help you account for this cushion as you run the numbers on your deals.

Appraisal Problems

Many consider the property appraisal to be the most significant risk when using the BRRRR strategy. You are putting your time, effort, and money into the rehab all to make sure you can take cash out after you have the property appraised. This cash is what you will be using to buy the next property in most cases, so it is crucial to get a high appraisal and, of course, that you can find a lender to refinance the property within a reasonable time after purchase so that you can quickly move onto your next purchase.

Some issues that can happen with the appraisal are out of your control. For example, there might be a downturn in the market. It can be challenging to pull the cash out of the property if this happens, and that makes further investing difficult.

To negate this problem, it is vital that you are disciplined regarding the properties that you are buying and rehabbing. Make sure that at a minimum that you have a good understanding of rehab costs and expected after rehab value (ARV) before jumping into the project. Our Deal Analyzer tool can help you nail those calculations.

One of the most important aspects of success when it comes to BRRRR is talking with lenders early to get a better sense of their capabilities and limitations. By forming partnerships with reliable lenders who have the capability and willingness to refinance properties soon after the initial purchase, it can help to speed up your investing. We recommend using our Interviews Tool to meet and assess various lenders to understand their requirements early in the investment process to avoid surprises down the road. Waiting, as often happens with newer investors who have not vetted their lenders, can slow the process down substantially.

Setting the Right Rent Amount

Determining the amount of rent that you can get for the property should be done before you buy a property. After all, you want to be sure that the home you are buying will generate cash flow. You have to consider the amount that other comparable properties in the area are charging for rent to get an idea of how much you will be able to charge. There will be a temptation to charge a bit more for rent.

However, you will find that people are usually unwilling to pay more than what other locations of similar quality are charging. If you ask too much, you will not be able to get renters who want to live in the home. We always suggest renting the property for an amount that is going to generate cash flow for you but also get a tenant in quickly. It is a difficult balance, but it does not make sense to try and push rent say $100 more a month on a property and have it vacant for an extra month where, let’s say, you lose out on one month at what could have been $1500 in rent because you wanted $1600. It will take a long time to make up that lost rental income. Get a tenant in first and include step-up in rent clauses in your lease agreement so that future rents catch up to market rates. The lease agreement template in our Contracting solution contains that provision so that you are always optimizing your rental income.

Filling Those Vacancies with the Right Tenants

As mentioned briefly earlier, there is also the matter of getting people into the property as tenants. Ensuring that you have renters is dependent on several factors. Not only will you need to make sure that you have a property that is priced right and in a good area, but you will need to market the place to find renters.

All of this can be a lot of work for you to do on your own, so you might want to have a property management company who can take care of it for you. They can do all of the hard work, but that does mean they will expect a fee. You will need to consider how much they will charge for their services when you are creating your overall budget. Even though it might be an added cost, many feel that working with property managers who can take away the hassle of finding a quality tenant, and who can deal with bad tenants for you, well worth it. Our Interviews tool will also be a great resource for you in forming relationships with property managers that your trust.

These are some of the most significant risks that are associated with the BRRRR strategy. By understanding what these risks are and how they might affect you throughout the BRRRR process, it becomes much easier for you to deal with them before they become an actual problem for you.

Is BRRRR Worth the Risks?

As you can see, BRRRR does have some risks associated with it. However, we believe it is still an extremely powerful tool when it comes to real estate investment, and we use it ourselves (obviously!). Rather than being afraid of the challenges that come with this strategy, manage them. Investors will be able to learn how to mitigate those potential problems and make the most of one of the best investment strategies around. It is time that you started to invest with this winning strategy!

Excited about BRRRR Investing? Sign-up for our All-in-One Solution for the BRRRR investor to make sure you are analyzing deals accurately and engaging your contractors, property managers and tenants on terms that are favorable to you with our attorney-prepared, buyer-friendly contracting solution.  

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