The Cons of BRRRRs (Hint: not for high net-worth investors)

BRRRR is an acronym for buy, rehab, rent, refinance, repeat. If you have done one of these deals before good job you probably made a bunch of equity and likely got into a deal for no money. For my outsiders’ prospective its successful most times (~70%) but it always takes Time. As higher net worth investors, for some of us at least time is more important than getting the best deal. When you add in an element of risk it makes the decision closer. Most Accredited investors would not bother with a Turnkey rental and a BRRR because of scalability. The sub-$200,000 bro might get really excited about getting into a cool $60,000 property with no equity after a successful BRRRR however $20,000 of manufactured equity means very little for an Accredited investor. via GIPHY  
Other Considerations
Have you done a partnership deal with this GC before? Is this a small-time GC or a medium/larger sized builder? Either way, I’d be very skeptical of the deal unless he is incentivized to do you a favor in return for future referrals or some type of reciprocation down the road. I would be super careful before getting into bed with a GC on a project..especially if this is the first partnership type deal you are doing right now.
Maybe I’m just cynical but I feel the business proposition puts all the risk on you and he is free-rolling and possibly incentivized to screw you over.
Assuming as-is value is $160k, $40k construction price, ARV of $250k.
  • Off the bat, the renovation could easily go over (as larger renovations typically do) which may translate to 25% overage on the $40k estimate. That’ll put the reno at $50k.
  • Let’s say the builder has other higher-paying renovation jobs/priorities or that he concentrates on other items and the home reno goes until ~March.
  • You are looking at best-case scenario may be a ~$20k profit if everything goes perfectly for shouldering all the risk.
  • There is no backup plan if the house doesn’t sell. The ownership of the property is convoluted and you won’t be able to execute a cashout refinance (unless you pay him off for the renovation costs in full, but then how do you calculate his profit margins since the GC is not going to work for free). Say the appraisal comes back at ~$250k, but the best offer you get is ~$210k? At a sales price of ~84% of appraisal, I’d rather just refinance at ultra-low interest rates, turn the house into a rental (long-term or corporate rental, etc.), ride out the COVID craziness and re-assess in a year or later down the road.
Now, if the builder/GC is shady…and I’ve had awesome GC’s and I’ve also personally had to fire at least 8-10 for a myriad of reasons. But for the sake of example:
  • GC takes there time and overcharges you for the renovation, he makes up a bunch of BS and charges you $80K for the renovation even though the actual cost of the renovation is $40K. The extra $40k he’s charging could be to pump up his overhead rates and fake billing hours, he could supply receipts for materials that he will (or has already used) on another project, mark up other jobs or artificially increase the scope, or have items “stolen” and need to be repurchased, send you pictures of problems that need to be fixed from another house, the GC could have friends/relatives in other trades that markup their rates via a kickback scheme, etc. These are extreme examples but they happen more than you’d think. The all-in break-even point is now over $240k. And if the house sells for only $220k…guess what – the GC is going to be screaming that it’s YOUR fault…yada yada and say he needs the $20k shortfall to pay his people or he’ll put a contractor lien your house, sue you, etc. etc.
  • What if the renovation goes sideways and you need to fire him midway through the job?
To be honest…I would strongly advise against this partnership deal and just go the simple and straight-forward time tested route of getting bids for the renovation from multiple licensed GCs (through a referral from other investors if possible).
  • Set up a standard draw schedule based on project completion milestones
  • A full scope of work and signed construction contract
  • All the other standard stuff that comes along with a renovation… we can help you this in the Incubator
This option you have multiple exit strategies and have the ability to fire the GC for subpar work. Plus you are taking all the risk anyways with the partnership route, so this option is a much better risk/reward proposition in my opinion. It is very easy to get into partnerships….but HARD to get out of them and this small sfh could become a huge pain in the ass if the project goes sideways…believe me from experience. I would 100% prefer to keep the lines very clear between the owner of the property and the contractor doing a fixed scope of work to be delivered by a specified date at a predetermined price.
My two cents anyway 🙂
For those who are able to save more than $30k a year or have substantial liquidity (over 200k), being a landlord and especially flipping is a lot of work. If you like it cool/good for you… but just remember why we got into this… To be free from a JOB. A lot of us (80%) who stumble upon and start drinking Kool-Aide will be financially free in 4-7 years pending taking action. So I always urge people to start with the end in mind and take a more passive approach. Focus on being an Investor not a Landlord. Do the math here… with 300 dollars per property (2 months of work to buy a turnkey rental) you are going to need 20-40 of these to replace your income. I have 10 of these and have systems in place but have 1-2 evictions a year and 3-4 big things that happen. Image if I had 30, just 3 x those numbers. Directly investing in a turnkey rental or small MFH is a good way to start to learn and build up the war chest to go into my scaleable investments such as private placement syndications. If your net worth (income minus expenses) is under $300,000 or barely save $30,000, syndications are not for you. Stick with these Turnkey rentals despite what Gurus (who are trying to sell you their program) tell you for now. They have a little higher gains (a lot more volatility) but a syndicator who is willing to put you in a deal with more than 10-20% of your net worth is asking for trouble.

*PS never like the idea of wholeselling where you basically steal houses from people at 50 cents on the dollar and say you are “helping people solve problems”

My last BRRR ever 😁 No more direct ownership rentals

This is process on my Last 2021 BRRR – its a complete PITA

  • Fixing the back overhang
  • running electrical
  • new plumbing for the master bath
  • powder room
  • laundry room
  • Priming and painting ceilings, walls, etc.
  • Sheet rock new closets upstairs framing master closet and new openings in the hall and kitchen/dining room. 
  • All the doors, door frames, cabinets and various shelves in the house have been sanded and we are going to spray them this week/ weekend. 
  • Main level cabinets are ready for prime and paint, prep plumbing has been done. 
  • Electrical work has started once done sheet rock will be hung, primed and painted. 
  • Tile will begin once the shower backing is installed. 
  • Upstairs 2 new closets
  • Doorway opened to male the bedroom more functional
  • Windows painted and cleaned of excess paint
  • Fans go up this week.  
  • Vanity will be removed new Vanity installed after painting upstairs hall bath. 
  • Then ready for flooring.