As a BRRRR investor, you are looking to maximize your returns from each investment property by purchasing properties under market value and adding value to them through repairs and renovations. Firstly, repairs and renovations can increase the value of a property and the equity that you can pull out when refinancing. Secondly, repairs and renovations can make your property attractive to tenants and generate cash flow from a property for you over time.
How much you spend on improvements to a property determines the returns you will achieve. The sweet spot is spending as little as possible while generating the most value. Over-Improving a BRRRR property and spending too much will directly reduce your returns, and under-improving it might result in vacancies or not being able to charge top rents.
These are our three tips for avoiding the over-improvement of your BRRRR properties.
Tip 1 - Question everything.
To come up with a rehab budget on a property, you will use your experience, and the experience of a general contractor, to identify what needs to be repaired or renovated. Once you have a list, you need to go over each item and ask: What if I do nothing?
An obvious example could be a leaky roof – if you do nothing, the roof might deteriorate further, you will have ongoing water damage to the property, and you will have more costly repairs down the road. A less obvious example could be a run-down kitchen. On the one hand, it might have a dysfunctional layout and the cabinets could be damaged beyond repair. On the other hand, the layout might be OK with the cabinets only needing new varnish or paint to give them a new lease on life.
The aim is to identify repairs and renovations necessary to make the property safe, livable, and functional, and appealing to prospective tenants. No more, no less!
Tip 2 - Distinguish between cost and quality.
The cost of repairs and renovations comes down to the cost of materials and labor. Get quotations from contractors to understand how much each item on your list will cost.
Quality is a much more complex concept. You could purchase custom, made-to-measure kitchen cabinets made of expensive materials with fancy hardware, or you could purchase stock cabinets for less. Both can be considered good quality, but quality is in the eye of the user – your future tenants. While prospective tenants might be impressed by the custom cabinets, they might not be prepared to pay more in rent to have them. Also, consider that not all tenants will treat the property with as much care as a homeowner, and it is probably better to use resilient materials that can withstand heavy use.
The aim is to minimize cost while ensuring that repairs and renovations are of acceptable quality and aesthetic in a rental property.
Tip 3 - Know Your Customer.
Deciding which improvements to make to your BRRRR property, and how much you should plan to spend depends on knowing as much as possible about your market and prospective tenants.
To avoid over-improving a property, you need to know what a desirable property in your specific market looks like. What features or finishes are considered customary by prospective tenants?
Perhaps your property is in a higher-end neighborhood where custom cabinetry and hardwood floors are considered standard, or perhaps your property is in a middle- or low-income neighborhood where stock cabinets and good-quality laminate flooring are acceptable. A one-bedroom apartment downtown is likely to attract young professionals, a 3-bedroom house in the suburbs is more likely to attract families with kids – something that could also affect the types of finishes you choose.
The aim is to understand your local rental market and your prospective tenants so that you can hone in on what repairs and renovations you need and how much you should spend.
According to CNBC, overall property owners are only getting a 60% return on their renovation investments. Besides the necessary repairs to your BRRRR properties that you can’t avoid, not all renovations are created equal, some generating better returns than others. Market trends change. Keep up to date with the research and keep your costs down!