BRRR-Do you really need to rehab?

Question

I know this is a popular strategy. But my question is do you really have to “rehab” a house in order to be successful in this strategy? What if a house is in rentable condition? What’s the benefits of rehabbing? Looks to me if a home is rentable and you’re looking to buy & hold, that’s the best option. What’s your thoughts on this?

Jaysen Medhurst · Answer

For the most part, yes. The point of BRRRR is to add value, @Tassany Prasoeuthsy. If a property isn't in distress of some kind, there's no opportunity to add value. If you can't add value, then refi becomes moot.

Straight buy and hold can be great. The advantage of BRRRR is the creation of equity, which then allows a return of capital for future deals.

Rebecca Knox · Answer

In my opinion, you don't always have to rehab but in order to be able to pull out equity, you typically have to get the property at a considerable discount then when you purchase it. For instance, we purchased a property at $42k and it re-fi'd out 1 year later at 130k and the only work done was the basement at the time of purchase which was $7500.

Whitney Hutten · Answer

@Tassany Prasoeuthsy Here is an article on how to find motivated sellers and how to solve their problems.  And not all solutions mean rehabs, though that is a very common form of distress. One thing you could do is look for a landlord who is ready to sell (especially right now) because they don't have a tenant paying.  I've heard of a few landlords that are ready to cash in this summer hoping to lock in prices, deleverage debt, and sit on the sidelines.  That would be a type of value add... reworking the lease to get the tenant caught up.  You make money solving other people's problems they don't want to handle :)

Adam Jason · Answer

Always a math equation....if you can buy low enough and it does not require rehab to get to the 75% of after rehab value that a bank will give you then you can "successfully" BRRRR (get all money back) without the rehab portion.  If you find those kinds of deals I would be pumped for you! @Tassany Prasoeuthsy

John Warren · Answer

@Tassany Prasoeuthsy no you don't always have to do rehab to create value. Sometimes that is the best strategy, but in my opinion it is one of the hardest and most time consuming ways. The best value I have found is in estate sales, short sales and foreclosures. If you can find an element of distress but the property is still inhabitable then you can often times just do minor cosmetic things and get a much higher appraised value. You are in Milwaukee which is a pretty good city to do this in. Chicago is my market, and it has similar opportunities and also has lots of 2-4 unit building stock and my experience should be similar to what yours would be.

Kenneth Garrett · Answer

@Tassany Prasoeuthsy

If you buy a rental at a reduced price then you could refinance down the road.  There is nothing wrong with 20% down with little or no rehab.  As long as it cash flows your good.  If you bought a property for 100K with 20% down and it can cash flow $500 in just over 3 years you have all your money back out.  It’s not the BRRRR strategy, but if it works it works.  You still want to buy at a discount if you can.

Shawn Ackerman · Answer

@Tassany Prasoeuthsy Not at all required for each deal. Typically you can uncover deeper discounts on properties that need more work. However if a seller is motivated they will sell. I buy properties the are either fully or partially occupied at closing. Lately I have been using HML as a temporary bridge to pull all + some of my cash out in a week or two after purchase, reinvest needed capital back into the property then place long term debt in the HML position.  Turn around time on long term lending 60-90 days. Fits perfectly into the rehab timeframe and HM interest obligation.  I won’t do foundation, I will do electrical, no plumbing but I will do roof/siding work. Typical flooring, bathroom, kitchen upgrades are standard. As long as I am all in around 65-70% ARV at completion(acquisition/rehab). Cash flow $150-$175 per door fully levered at 75% ARV is the sweet spot. All the best. Persist and you will WIN

Colby Fryar · Answer

@Tassany Prasoeuthsy Awesome question Tassany.  In my mind the best scenario is a property that requires minimal renovation, has high rents and will allow you to pull most if not all of your money out after refi.  Not only are you maximizing your capital and the cash on cash return but you are able to repeat the process much faster increasing your velocity of money as David Greene likes to say.  The ultimate goal is infinite return on your money!  Just keep in mind that the nicer a property is renovated the more it will appraise for (to a point of course depending on the neighborhood) and the more money you can pull out during refinance.

Rebecca Knox · Answer

@Tassany Prasoeuthsy I don't want to sell you pipe dreams because that situation was not the norm. It was not pre-forecasted or planned....I was quite surprised myself.

Joe Splitrock · Answer

@Tassany Prasoeuthsy I generally buy properties that are rent ready. We usually have one or two rent payments before the first mortgage payment is ever due. I like buying rent-ready because there is no hidden rehab costs, no carrying costs during rehab, I don't have to spend any time managing rehab and I don't have to refinance the property. It takes more capital for down payments, but I have more of that than I do time.

In that situation you just call it a buy and hold rental.

BRRR-Do you really need to rehab?

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