BRRRR Strategy TIPS Episode #2

BRRRR Strategy TIPS

Episode 2

Today we’re going to focus on one of several components to the R1 (REHAB) phase in the BRRRR Strategy.

REHAB:

Questions to ask a Contractor during the interview process!

All components of a BRRRR are important, but making sure your Rehab component is completed properly is essential to long term success. Many investors take short cuts on this step or even worse skip it all together. This will lead to unnecessary deferred maintenance. You don’t want to become a slum lord. I will never push renovating a home halfway. Execute a detailed and concise Rehab. Remember this strategy is most likely going to be a long-term hold so you want to make sure there is little to no deferred maintenance. The lower your expenses are the more money you’re going to make in the long run.

Your contractor is going to be in charge of getting the work done so when you’re first starting out you will need to work with someone that you haven’t done business with. Here are some questions to ask to help you understand where your money is going and to get a feel for the person. You don’t want to work with people you don’t like if you can avoid it!

Questions for General Contractor

How do you charge and do you add a fee or percentage on top of materials

Many contractors will add a 5% to 10% fee on top of buying materials. This doesn’t include their fee whether it’s per Sq Ft or a flat fee. I see this a lot, but I would strongly recommend negotiating with the contractor if this is the case. If you’re going to make a business out of this, you need to create strong business relationships. Asking a contractor to lower his/her material fee by 5% or all together in exchange for knowing that you’re going to be doing 1 to 3 BRRRR’s per year or whatever your number is might be worth it to that contractor.

Are you ok working with a lender that will most likely require you to front costs and get paid when a phase is completed?

Lenders that offer rehab loans will require you to come up with a detailed budget which is completed by the contractor. They will also need the contractor to fill out a W9, provide proof of insurance and show 2 months of bank statements to show that they have enough money to fund the project.

When executing an FHA 203(K) loan this an much more are required. The contractor will be reimbursed after each phase, but they will have to fund the phase with their own cash initially.

How extensive of a rehab are you willing to work on?

Let’s face it, some people don’t want to work on a 3 plus month fixer and I can respect that. However, I need to know this before I hire you! This question will save you a lot of time if you have a heavy fixer. You can also look at this the other way. Some contractors only want to work on large projects and if your fixer is just flooring and paint then it won’t be worth his/her time. Again, this question will save you a lot of time.

What type of work do you do vs outsourcing to other specialized contractors?

If you have a kitchen, a bathroom, and flooring to complete these are tasked that can be completed quite easily. But if you have major wiring, plumbing and a roof to replace most likely you’ll need an Electrical contractor, Plumbing contractor and roofing contractor. If your GC (General Contract) can’t or won’t do any of these then he/she will have to contract the work out and that’s a whole other episode!

How many rehabs have you completed in the last 12 months?

This is a simple and straight forward question. I would also add something like “ Do you have before and after pictures or a website that I can look at,” obviously looking at previous work and or talking to you former clients will help in the decision making process. Lastly, having a contractor who is actively working is always a plus because they’re more likely to have their insurance and always licensing up to date.

Do you work on residential or commercial?

If you’re working on a residential property, you’re going to want to work with a contractor that works on residential properties. Commercial properties have so many different guidelines to adhere to. Many contractors can do both, but you’re most likely going to want to deal with the specialist in this case.

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Take care and have a good one.