Cons of the BRRR Strategy

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0:24
Today we’re going to talk about the cons of why you should not be doing these burbs. So for those of you guys don’t know what bearse stands for its acronym for by rehab, rent, refinance, repeat. It’s this clever little term created by folks on the internet, where you pick up a property, you rehab it, and you increase the value of it, you rent it out in the meantime. But then the trick comes is when you get a loan on it from a bank, and you get all your original capital back out. And a lot of times, in theory, you can get all your initial capital and be sort of in the deal for nothing. If you’ve done one of these deals before. Well, good job for you. You’ve probably made a bunch of equity this way and likely gotten into the deal for no money, like I said, but from my outsider’s perspective, it’s successful most of the time, like 70%, but it always takes time.

1:19
So as higher net worth investors, like in our group, for some of us, at least time is more important than getting the best deal or in this case, free equity. When you add in the element of the risk, it takes the decision closer, most accredited investors would not bother with a turnkey renter or any type of bur because of the scalability. The sub $200,000 net worth bro might be really excited about getting into a cool $60,000 property with no equity after doing a successful for over $20,000 of manufactured equity means very little for an accredited investor. So if you’re going to do these things, here are some considerations for you to think about. First, have you done a partnership with this general contractor before is this small time general contractors or larger, bigger size builder, a lot of our apartment deals. That’s why I like this commercial world because a lot of our contractors and vendors are big companies with a lot of times 510 million dollars plus of insurance.

2:19
So just on that scale, and they’re much more sophisticated than your run of the mill general contractor that run that drives a little Toyota truck around. So I’d be very skeptical of the deal. Unless you’re incentivizing the person who is your builder or your rehab or your general contractor to do a good job and not cut corners behind your back, especially if you’re a remote investor, like a lot of us are, really there’s no recourse for you to kind of have oversight. But some people will have like an inspector kind of verify this stuff. But to me, it’s just a matter of time before you get screwed over. So maybe I’m just cynical, but I feel like this business proposition puts all the risks on you, the investor, and you basically are giving your GC or rehab or free rein to possibly the screw you over.

3:10
So right now I’m actually doing one of these on one of my properties where I have property as is value of $160,000. in Birmingham. It’s actually I’ve held this property for a number of years and then saying I’m going mostly to syndications of private placements for the scalability. And I feel they’re stronger returns risk adjusted returns. So I’m looking to rehab this property, the rehab estimates around $40,000. And there’s seems to be a bunch of margin the ARV or after repair value is about $250,000. So one of the things that could possibly go wrong here are another renovation could easily go over, as most larger renovations typically do. What many translate to a 25% overrun on the $40,000 estimate is in total, in the realm of possibility. That could be a swing of plus about 100,000 or $10,000. So let’s say the builder has other high paying renovation jobs are priorities that he would rather concentrate on. And your project kind of falls by the wayside. At least the schedule goes back a lot of these markets, if you don’t get the property on the market by September, October, you knew you’re waiting another three to five months to really get it back on the market in March, or the summertime of the next year. And in the best case scenario in this situation. Maybe I make an extra $20,000 of profit here.

4:40
But the question is, is it really worth the time and the headache The other thing to think about is your why and huge sums of money. A lot of times these guys will want to do want all the money up front which I would never recommend you always want to have some kind of a draw schedule and to be able to control the funds Granted, the general contractor needs to purchase supplies, and probably backfill the payments on their past project not associated with you too, because it’s this big, continuous cycle. And that’s, that’s why I don’t really like working with these general contractors, because a lot of these guys, their net worth is under $200,000. And they frankly just are insolvent. And when things get really tough need to pay off, pay their family bills, and put food on the table, they’re going to screw you over the person who’s potentially 1000 miles away, that has really had no recourse.

5:34
So at the very least, make sure you have some kind of draw schedule or control, create project completion milestones. And just like when I was a project engineer, it all comes down to your scope, schedule budget, like we’ve talked about the budget there, but also the scope, what are you guys working on, create a full scope of work and sign construction contract. And then also, no contract is complete without a detailed schedule. So the reason why you get the schedule is because now you can point to certain milestones along the way and hold them accountable for it can’t just be completed by a certain date. And, and needs to be some level of detail in there. because inevitably, things will pop up. And there’s, there’s some of the internal milestones that are in the control of the contractor, you can hold them accountable to them much easier.

6:23
Of course, I’m kind of glazing over the top of a lot of this stuff. And like it’s just from the my perspective, for a lot of working professionals that we work with even a lot of doctors, lawyers, engineers, folks making over 100 200 $300,000 a year to get a 20 to $30,000 equity by doing one of these burrs that take anywhere from three to nine months, it’s just not worth the trouble. Now it’s, it’s fine. If you don’t have that much money, your net worth is under a quarter million or half a million, this is the stuff that you potentially have to do. But the way I grew my net worth from zero to half a million was I just bought that first rental property then I bought the next 134 years later, I didn’t get up to 11 rental properties until I bought my first one in 2009. And I didn’t get that loved one until around 2015 16. So what a lot of people don’t realize it took me almost a decade to get up to that stage. And I just closing things out focus on being an investor, not a landlord. They’ll do the math here, like picking up single family home rental properties, that cash flow 300 bucks a month, you’re going to need 20 or 40 of those things to replace your income.

7:37
Again, I had 10 of these things. And I had an eviction or two every year and three or four big things that happen such as like a trap going out or some kind of plumbing leak. But imagine if he had 30 of those just three x those numbers now you’re talking about an eviction seemingly every other month and some kind of big catastrophe every few weeks. Not directly investing in turnkey rental or small multifamily is a great way to start to build up and learn but to create that war chest to go into more scalable investments should be the progression and that’s personally why I do private placements in syndications today.

8:14
Now if your net worth income minus expenses under $300,000 are you’re barely able to save $30,000 look syndications are not for you. Stick with these turnkey rentals or even do these burrs that were kind of against in this whole video you’re going to have a little more gains that way what you’re doing is you’re essentially trading your sweat equity for that extra equity at the end. If you guys have any other questions please submit it to simplepassivecashflow.com/question and we are also starting a new program to help all newer investors trying to pick up their first few single family home remote rentals. Check out more details of that at simplepassivecashflow.com/incubator.

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