Part of being a strong BRRRR (buy-rehab-rent-refinance-repeat) investor is to make sure that you protect yourself legally with the contracts that you enter into with your contractors, property managers and tenants. It is important to not leave anything to chance. All material terms of your investments should be documented appropriately. Our advice is to assume the worst will happen in any of these relationships. It is crucial to avoid ambiguity.
Here are some contract terms that we recommend that you include in the contracts that you enter into with your property managers, contractors and tenants for your next BRRRR.
Contractors love to give general bills and quotes. For example, something that says “renovate kitchen” or “general repairs”. You should do your best not to accept these provisions. It is important that you and your contractor line-item the work to be done and the cost of such items. This will keep everyone on track and make sure items are not overlooked. This will also prevent arguments from contractors that what you are asking of them is beyond the scope of the initial agreement.
These are simple enough for you to buy with contractor guidance or on your own once you have the experience. Make sure your contracts give you the right. Big savings can result. Also, you can use your credit card to finance the purchase and even get points on your card for these bulk, generally large purchases, resulting in future savings. This will also be a great learning experience for you as you continue to improve your knowledge about rehab and construction costs for your BRRRR projects.
Often, you will buy more materials than are needed for a rehab. Your contract with your contractor should provide that these are your right to keep. You should not be paying for extra materials that a contractor will then go and use for another person´s project.
Contractors notoriously finish projects late. Motivate them to complete your project on time so that you can get your next BRRRR rented as soon as possible. Delays can cost you a lot of money in the form of lost rent. We suggest including a clause that provides a bonus (1-5% of costs) for on-time completion (so make sure your contract sets out an agreed to completion date) and penalties (same 1-5%) for lateness. Our contract tool will be a good resource for you here to use precise language.
You should always include payment milestones in your contracts with your contractors. We recommend never paying more than 50% of total costs upfront or you risk working with a demotivated contractor who has already been paid. Define when you will remit funds and make sure final payment only occurs after you or someone you trust has approved the work done.
Managing tenants helps you maximize rents. Here are some suggestions for your lease agreements with your tenants for your next BRRRR. If you are using a property manager, make sure that their contracts include these clauses. We would be happy to review the contracts your property manager is using and provide feedback to help maximize your cash flows.
Make sure your contracts state that absent a cancellation the contract will renew for an additional period. You do not want to have to worry about signing new lease agreements every time a previous agreement is set to expire.
Ensure that your contracts provide for strict payment in the case of late rent. Remember that you are running a business. Prompt payment is crucial to your success. With tenants, the “give an inch and they take a mile” phrase is often spot on.
Make sure your contracts specify who will pay which utilities. If you fail to do so, you will most likely be the one who ends up paying these. Requiring a tenant to pay utilities versus you taking that money out-of-pocket can make or break your cash flows.
Your contracts should be clear that rents will be increasing with each renewal and by what percentage they will be increasing. We usually use 5%. This is not a conversation that you want to have at the start of each contract renewal.
Here we like to include language in our contracts with our property managers that requires them to seek our approval in the case of any expense over a certain dollar amount (we use $250). This prevents property managers from hiring someone, overpaying and then presenting you with a bill after the work is done and it is too late. As with all of the suggestions in this article, proactiveness is crucial.
We strongly believe that as your portfolio of investment property grows and you give your property manager more properties to manage your fees should be decreasing. Assume your property manager charges you 10% of gross monthly rents. We like to include hurdles in our contracts that provide, for example, that once your property manager is managing three or more of your properties that monthly fee goes from 10% to 9% for all your properties under management. We usually attribute a percentage point to each three properties. So at six properties, you would pay 8% with respect to all your properties. Our contract tool will be a good resource for you here to avoid ambiguity and get this right.
These are just some of the contractual provisions we think any good investor should include when working with their contractors, property managers and tenants.
Excited about BRRRR Investing? If you want access to click-through versions of the contracts we use instead of trying to recreate the legal language to cover the items we discussed, all prepared by professional attorneys who are also BRRRR investors, then signup with us for a risk-free, free trial of our BRRRR deal analysis and legal solution. You can further modify those contracts to suit your needs and as you negotiate them with your providers! Click here to learn more.