BRRRR Financing Tips

[José Rivera]

Hello everyone my name is Jose Rivera I am new to Real Estate investing. I very interested in the BRRRR strategy, my concern is in how to mitigate risk in regards to doing the refinance to get my capital back. Any tips regarding this would be appreciated. Thanks Jose Rivera

[James Masotti]

@José Rivera - The risk is in not knowing your numbers in two regards.

1) Not knowing construction costs

2) Not knowing your ARV

This basically applies to all of real estate investing though not just the BRRRR strategy. Specific to BRRRR you need to also know how you plan to refinance (commercial or residential). This will help you determine the amount of time to get your cash back.

Real world example:

I purchased a house for $35k and through it would need $20k worth of work. I thought it was a $95k ARV and I knew I'd be refinancing at 70% of that ( $66,500 for those like myself not wanting to do the math).

Turned out that the $35k I spent on the house actually needed $60k worth of work and when I got the appraisal back it also came in at $60k. Now the repair costs I wasn't necessarily wrong on...everything I budgeted for came in on budget, however...I didn't budget to have to rebuild the back side of the house from the foundation up, or rerun all of the electrical wiring throughout the house. But I did know my market well enough to know that the $60k appraisal I got on the refinance was totally bogus, so I went back to the bank with all my proof that the property was worth more than that including the comps that should be considered and lo and behold my appraisal was changed to $90k. 

So...whether it is BRRRR or flip...make sure you know your numbers as best as you can and that you more more than the usual cushion to absorb them. My example above is an extreme one, so understand the odds of your first deal being like that are small...but if you don't "know enough to be dangerous" and ask the right questions of a seller and/or have a contractor you trust walk thr property with you, then it is possible that you'll walk into that.