How to spot a deal when it comes to the BRRRR method, or just general investing?

[Faiz Kanash]

Hello!

I'm sorry if this isn't the correct place to ask this, its been hard to find videos to kinda go into the basic details of how to spot a deal since most information I get is just explaining the BRRRR method. From my rough understanding, the idea is to buy a distressed property, fix it up, rent it out, and then refinance it to pull your money out and move onto the next one. However, i'm primarily looking in the chicago land area(suburbs such as cook and dupage county), and very rarely does a distressed multifamily come onto the market. Most of the properties I see usually have tenants that are paying far below market averages for rent with updating needed in their units (usually just a kitchen and bathroom update). The asking price is usually high too, which makes me question if I'd even be able to refinance after raising rents and get my money out to re-use onto the next one.

I've heard something about rules to follow, like a 1% rule? Im unsure as to how that works. Or, if someone could explain how the appraising process might work in the case that there aren't much relatable comps in the area?

 I can give a real world example of a property im looking at.. Its asking price is $650,000 for a 6 unit that has a cap rate of 7%. Tenants are month to month, fully occupied, each unit being 2 bed 1 bath and would require updating in the units. I've only been able to find 1 comparable 6 unit comp which was in a different nearby city for $895k, nothing within the past 5 years for the city i'm looking in. How would I go about figuring out if this is a good deal, something im able to pull money out after refinance and use it on the next one?

Thank you! 

[John Warren]

@Faiz Kanash I think we need to start moving away from the clever BRRRR and start focusing on added value and forced appreciation. The number one question you should be asking when looking at a deal is how much equity are you able to buy/create with this deal based on the current market conditions. A 650k six unit is unlikely to have much/any equity you can add in the near future, so this would be a buy and hold deal.

When you actually do a BRRR deal in real life, you don't always know without a shadow of a doubt if you will get every penny back. Sometimes on the refinance you need to leave 50% of your money in the deal. Sometimes you get it all out. Sometimes this process takes two years, and sometimes you can do it in six months.

BRRRR is a riskier strategy than traditional buy and hold, and it also entails a LOT of work that is glossed over. You have to reposition the building, which is rarely just a construction play. You have to raise rents or force existing tenants out while you are rehabbing, and the complexity of the rehab goes up on a partially occupied building.

Lastly, no one (I mean seriously no one) has talked about how impossible it is to cash out refinance the hypothetical six unit you just described in six months... or even three years. You will have equity trapped in that deal for a while.