How keep operating account strong on a BRRR

Question

Does anyone have any tips or tricks to increase rehab budget on BRRR's from the bank?  One of the most annoying things is blowing budget and then having to come up with extra capital at the end of a project. We all love to use the banks money..

Here's where I'm at with making sure draws cover construction:

- Add 10% or so to rehab budget

- Front load Rough demo, MEP's and roof. This way grows operating account off the bat.

- I've heard of people charging development fees to their construction business. Has anyone had experience with this seems like a good idea if you can get bank behind it.

Any other tips would be great! And yes I know spend less on rehab..

Nicole Heasley Beitenman · Answer

Have you tried opening business lines of credit?

Amit Chawla · Answer

You can try getting 2 quotes for the rehab.  I  had a situation where I ended up getting 3 quotes to rehab my building.  2 came in around the same price while the 3rd came in almost 50% higher.  I used the higher quote and then told the bank after that I had a disagreement with the contractor and switched to another.  The lender did not have any issue as they are still making their money.  Every draw that I do now adds some cushion to my operating account, enough to cover carrying costs if needed.

FYI I was very upfront with my lender regarding the multiple quotes and why I had chosen to originally work with the higher priced option.  I ended up changing contractors prior to any work being started and the lender was very aware of everything I was doing.  Nothing fraudulent happening.

Allan Smith · Answer

You could try charging a project management fee or gc fee , but each time I've tried that my bank has said they don't draw on GC fees until the end of the project if it's an owner Builder.

but as for fluffing the budget, yes absolutely. My banker even told me to fluff the numbers a little because he figured we would go over budget either way. The bank doesn't care because they are limited by the appraisal how much they can loan, so as long as your fluffed budget is still at their LTV or LTC target, they get paid more interest and everybody is happy.

the easiest thing is to add a large contingency line item. 10 or 12% might be typical, but you could put 25 or 30% on there. If you try to increase other line items, you run into the possibility that they don't draw on that until the end of the project. For example if you budget 5K in plumbing but only spend 3k, they may only let you draw 3k. That's why the contingency or miscellaneous line item is beneficial. And like you said, you can try to front load it by inflating the numbers at the beginning of the project but that seems a little trickier to me.