How to BRRR as a beginner / beat a fear mindset around renovations

Question

Hi folks!

I'm at the start of my investment journey with the goal of owning property by September of 2024. House hacking drew me to real estate and my ideal situation would be to purchase a duplex in Boston to do so. The reality is I'm likely to purchase a MFH out of state - heavily leaning towards a few neighborhoods in Chicago. I will 100% be flying there to assess any properties, no sight unseen deals for me ;)

I want to open my mind to the BRRR method. I fear the "renovation" piece - having a property that is "cheap" on face value but a disaster to fix (i.e., lighting, plumbing), getting quoted one thing and paying thousands more. Obviously doing your due diligence is critical and the podcast has great points on working with contractors etc. but I'd like any advice I could get to beat my anti-BRRR mindset.

What's your checklist when finding "add value" properties (in my mind that's up and coming area, outdated kitchen/bathroom, not overly in shambles - i.e., needing roof repair). How much should I have in the bank as a security blanket and what should I look for as low barrier to entry add-value properties (I'm thinking unkept yard, old paint etc). And what's the timeline I should reasonably consider (i.e., 6 months of repair before going on the market)?

Finally, is the BRRR method better for "later on?" When you've established yourself and have modest cash flow through house hacking or something similar? I assume there's no one-size-fits all answer and it depends on your area, finances, individual appetite for risk etc. but I'm curious if people have some rules of thumb here.

Thanks all, excited to hear what people think.

Sincerely,

A hungry 24 year old ready to learn and work

John Warren · Answer

@Melissa Loupeda it sounds like you are on an exciting journey, and I think you are thinking all the right thoughts! The main thing to realize is that there are some areas in Chicago that are very cheap because they are bad areas, and there are some areas that are affordable, but they are fine. You really want to focus less on the property and more on the type of tenant you want to attract. If you have a good person as your tenant, then the rest will fall into place. In terms of BRRR, it makes sense to find a property with some upside. That is part of what can propel you forward so much more quickly than other strategies. The trick is not to look for an absolute grand slam, but to understand that sometimes you will leave some equity in some deals. The deals still might be worth doing! I also would encourage you to look for places that need cosmetic rehab as much as possible. Painting, flooring, landscaping, and other minor cosmetics can be done from afar. You won't have major risk with these projects. Doing major renovations is not simple, and in my opinion, should be avoided until you are multiple deals in.

Melissa Loupeda · Answer

I've been tracking the Chicago housing market since 2021 wanting to hop in so perhaps you're right on starting sooner. I appreciate the note on doing either full reno or cosmetic only. I'll likely reach out to you for more Chicago specific notes.

Jonathan Klemm · Answer

Hi there @Melissa Loupeda - My first thought is you should move that date up by 6 months ;-) and get that first property sooner!Chicago is a great place to invest! We have TONS of multi-family properties that need renovations and there are purchase price points at every level.When we are looking at value-added properties we either want FULL gut renovations or strictly ONLY cosmetic renovations...nothing in between. We typically like brick buildings and prefer buildings that already have a forced air system in place if it's cosmetic.The BRRRR method is always for the NOW, just realize that it may not be the "OLD BRRRR" where you get all your cash back...and that's okay. Getting in the game is more important than hitting a grand slam."The key to getting ahead is getting started and the key to getting started is taking your overwhelming task and breaking into incrementally smaller tasks that are far less overwhelming"

Crystal Smith · Answer

Since you are targeting investing out of state, which we have done often, then here's my checklist1. Fly into the town that you want to invest in or get on some zoom calls and establish relationships and build a team. Find an attorney, some contractors, a realtor, some handymen... The notion that you're always going to be able to fly in and see properties before making offers may put you at a severe disadvantage. Once you have established the criteria for what you want with your local team, get comfortable, being uncomfortable and start making offers. Use your local team to review the property. If it's a listed property you will have an opportunity once a property is under contract to use the attorney review & inspection period to book a flight to see the property. If you don't like what you see then cancel. If it's an off-market property then your local team will have to do all the due diligence before making an offer.2. Regarding being quoted one thing and paying thousands more- That's why you establish relationships with investor-friendly local realtors and contractors before you start your search. They either have done many deals or have systems in place that you'll be able to leverage to get a true understanding of the costs. Naturally, nothing is perfect or promised hence why there's a word called contingency budget. 3. My checklist regarding value add when working in the city of Chicago- The first thing I check is the City Website for code violations. The city makes it easy to check. Because of the age of many of the properties in the city if a property hasn't been updated in the last 30 years then we always budget to replace the electric, plumbing, HVAC. The team you build will tell you if you also need to replace the roof. Yes, the Kitchen and bath are value add, but that's at the surface. And this is where people get into trouble regarding costs because they only look at the surface cost. Back to your concern about getting a bid and then it ends up being thousands more. When determining what's required for kitchen and baths we just look at the recently sold comparable pictures to determine where we need to be quality-wise to hit the number we want.4. Days on Market- the other part of our checklist before making an offer is to evaluate the average days on the market for recently sold comparables along with how many pending properties there are. If the average days on market is too long and/or there aren't enough pending properties then I may decide not to pull the trigger on an offer. 5 How much should you have in the bank as a security blanket? If you're going to borrow from a lender they will give you a number. If you're going to pay cash to purchase and renovate then in my opinion you should have at least 15% renovation contingency budget. And enough set aside to pay expenses for one year if working in the city property. If working in the suburbs then 6 months. Why one year in the city- I say one year only because you may have to deal with the city and permits. Yes you may be able to get in and out of a project in 6 months or less but have the money set aside for one year. Better to have it and not need to use it then not have it.The BRRR method applies no matter what phase of investment that you're in. Regarding rules of thumb- You need to establish the minimum Return on Investment for your investments. That's kind of the bottom line.

Steven Wesolowski · Answer

Let me know if you would like to see what off-market inventory I have in Central Texas right now. A lot of great opportunities my team and I can refer you to, so that you can add to your research and practice running your numbers.

Jonathan Klemm · Answer

@Melissa Loupeda - The market is always going to go up and down over time but a good Chicago deal is always a good Chicago deal! There are times to be more conservative and more aggressive but at the end of the day, the numbers don't lie. Happy to take your next step...any idea what that might be?

Melissa Loupeda · Answer

That’s a very good point - thank you

John Warren · Answer

@Melissa Loupeda I wouldn't drive Chicago to get to know the areas. It is a big place! I would rule out the areas you don't want, so you can focus on the areas you do want. Start with the end in mind as they say. Find what you want and work backwards to find the investment areas that fit that. Do you need to be near the airport? Near transit for the loop? North? West?

Bradyn Melser · Answer

I can honestly say, David Greene was right when he wrote in his BRRR book that a bad deal can be a good deal in a few years. I think it's best to approach BRRRing a property with the mindset that you might leave some money in the deal. And if you do, that's ok. You get to start with a completely rehabbed property with less money down. You're not a failure if you left some money in the deal. It's all a learning process, and no one get's it perfect each time.Second, I would suggest starting in an area or with a property that won't crush you. There are many great areas to invest where property prices and the cost to BRRR is much less. So if the appraisal comes in 10% lower on a 120k property versus a 300K property - you could still be in good shape.

Nicholas L. · Answer

@Melissa LoupedaOut of state BRRRR as a first deal is just going to be really, really tough, and I generally don't recommend it. I BRRRR locally and even that's really hard - I can't even picture how I would do it out of state. It involves coordinating contractors, going to the property more times than you think you will need to, going to the property to do something yourself that you paid someone to do who just didn't do that thing even though they said they 100% would, etc. Why not pick a market / city a couple hours away instead?