Biggest Risks of the BRRR Method
You’ve been reading about this investing tactic all over the place, but have you thought about what the biggest risks of the BRRR method might be and how you can guard against them?
All investments involved risk, if it didn’t then it would most likely not make money, or as much money as it does. Real estate investing is no different. If you are looking for a “no-lose” scenario then real estate investing is not something you should try.
BRRR is simply an acronym the has been applied to an investment strategy employed by some investors for years, whether they’ve thought of it that way or not. The “B’ stands for buy. The first ‘R’ is for rehab or renovate. The next ‘R’ is for rent. And the last ‘R’ is for refinance. You may see additional R’s added on for things like repeat or resale, depending on where you see the acronyn and how the tactics are being discussed.
A Thoughtful Approach Matters
An important thing to understand is that while it is an investment that you approach in steps, all of the actions of the later steps need to be considered when working on the ones before them. Such as looking for a property to buy and rehab as a potential rental property not one that you want to resale after the repairs like with a fix and flip investment. Assessing ARV the way the lender refinancing the property will do so, and things like that.
Crucial to the success of this kind of investing is recognizing the biggest risk factors in each of the steps and to plan as much as you can to counter them and work your way through the process to a profiable outcome.
Risks Present in the Buy Step
Simply looking for a low purchase price on a property can cause other problems later in the process. Not every property will work, and not every real estate market is hospitable to the technique. Similar to house flipping, determining the ARV is key, and when doing so it is important that you use comps from the properties that will be competing with your property in the same way once the renovation is complete. You should never use an outlier property in the area to determine value, no matter what type of investment you are looking to complete. This is true whether you are using your own capital to make the purchase or is you are financing it with a hard money loan.
Be Realistic With Values
Starting with an incorrect or unrealistic expectation of ARV is one of the biggest mistakes that investors of all types make, and presents the most common risk here. Negotiate with the seller to get the property at a price that will allow for profit once the renovations are done, because you are looking to increase the equity in the property so that it will qualify for the more traditional long term funding you want to get in the refinace step of your deal.
Risks Present in the Rehab Step
This step carries two major risks, the rehab taking too long and the rehab going over budget. Both of these scenarios can quickly each up profit and cause delays in other processes. And, they often take place simultaneously.
If you’ve financed the property purchase and rehab with a hard money loan, loan from your retirement or some other personal line of credit, you end up paying more interest if the trhab takes longer than the time period you budgeted for.It will also eat into the time you alloted for looking for the tenants you need in order for the cash flow you want in place whan it comes time to refinance.
Start With A Good Plan
You should have done this before you even bought the house, because a comprehensive scope of work is necessary to determine profitability and is also often part of the funding process. Project management is key. If you do not have experience with this make sure that your contractor does. And all parties should commit to timelines and inspections schedules.
Risks Present in the Rent Step
The biggest risk in this step is that it takes you a long time to get tenants in the property paying rent and giving you the necessary cash flow each month. Before you even purchased the property you should have looked at the vacancy rates and time to rent data in your market. But you need to do it again now.
Often a good property management company can help you here. Learn from them and utilize their expertise. Having one or two great property managers as part of your team in each of your investment markets should be part of your long term strategy.
Risks Present in the Refinance Step
Your biggest risk here would be waiting too long to even begin trying to obtain this financing. Ideally this should be in place before you finalize the initial property purchase and begin the rehab. (in fact, your hard money loan provider, should you choose to fund the first part of the transaction that way, may require it.)
Scrambling to obtain funding at the last minute uses valuable time and can damage the relationships you want to establish as part of your plan to grow your cash flow using the BRRR method.
Obvisously not being able to refinance could cost you the whole deal and you would lose all the time and money invested to this point.
BRRR Investing Is Worth The Risks When Approached Properly
It is worth utilizing this strategy to build up your business and establish the kind of cash flow you want for financial independence. The biggest risk of the BRRR strategy is not doing it when it makes sense. Many of us lose out due to opportunity cost.
While this is not necessarily the best methodology for a brand new investor, anyone with one or two wholesale deals, house flips, or even regular buy and hold investments should consider giving this a try.
We would love to help you get started. We have so many tools to help you find and value properties as well as providing a project managet for your rehab and the BRRR loans you need to get this going. Click on the button below to get started, or call us 801-692-7703!