Common Mistakes in a BRRRR

[Thomas McPherson]

Hi all, I want to start the conversation about common mistakes when doing a BRRRR. Here is my short list:

Overestimating the After-Repair Value (ARV):

Investors sometimes overestimate the future value of a property after renovation. This leads to issues with refinancing and could leave you with less equity or higher debt than anticipated. Accurate market analysis and conservative estimates are key.

Underestimating Rehab Costs:

Rehab costs can quickly add up. Failing to budget correctly for repairs or not accounting for unexpected expenses can cause you to go over budget. Always leave a buffer in your rehab estimates and work with experienced contractors.

Choosing the Wrong Property:

Not every property is suitable for BRRRR. Picking a house with major, costly structural issues or in a location with poor rental demand can hurt both the rental and refinance phases. Focus on properties that will have a strong rental market and a clear path to increase in value.

Overleveraging:

Some investors refinance and pull out too much equity, leaving them with little to no cash flow. This can be risky, especially if vacancies or unexpected expenses arise. It’s important to balance cash-out refinance with maintaining healthy cash flow from rent.

Mismanaging the Rehab Process:

Delays in the rehab phase can eat into your profits. Poor management of contractors, permit delays, or running out of funds can extend the rehab timeline, costing you money. Having a detailed rehab plan and experienced team is critical.

Not Screening Tenants Properly:

The rental phase is crucial, and bad tenants can cause property damage or miss rent payments, disrupting your cash flow. Thorough tenant screening and ensuring the property is well-managed can prevent these issues.

Misjudging Refinance Timing:

Timing the refinance is tricky. If the property hasn't appreciated or you haven't completed necessary renovations, you might not get the refinancing terms you expected. Waiting too long to refinance can also leave you with less favorable market conditions.

Neglecting to Build Relationships with Lenders:

Many investors assume refinancing will be easy, but without building good relationships with lenders or shopping around for the best terms, you could end up with a deal that doesn’t work for your investment goals.

Ignoring Cash Flow:

Some investors get caught up in the equity gains and forget about cash flow. A property may look good on paper in terms of appreciation but might not generate enough cash flow to cover expenses and build long-term wealth.

Not Having a Backup Plan:

If something goes wrong in any phase, such as a longer vacancy period or higher renovation costs, it can disrupt the whole strategy. Having contingency plans and sufficient cash reserves is crucial for navigating unforeseen challenges.

Please let me know if I am missing any.  I look forward to hearing your thoughts.
Best,

Thomas

[Max Emory]

Great list, @Thomas McPherson! The top ones we see in our bookkeeping firm and that I've experienced personally doing BRRRR's are overleveraging and romanticizing the cash flow.

Overleveraging by paying too much for the property mixed with mixing hard money with private money for a 100%+ LTV at the beginning of the deal. There's just too many factors that can go wrong with these types of deals if you're overleveraged from the jump.

And, sometimes we want these deals to work so badly that we fudge some of the numbers during our underwriting process to show some "cash flow" just so we can get into the deal. But, those of us who have been in the rental game for more than a couple of years know that cash flow is a myth with most rental properties no matter what the initial analysis shows.