The dream of any investor is to get maximum returns from minimum effort. As a BRRRR investor, you’re hunting for a unicorn –a property at a steep discount that needs minor renovations and can be rented within a few weeks. Add to that, being able to achieve an ARV that is significantly higher than the purchase price!
However, the reality is often quite different, especially in a strong sellers’ market where great deals are much harder to find. Even though it is both normal and smart to start with projects as close to unicorn status as possible, there might come a time in your BRRRR investing career when you feel ready to take on something bigger.
Deciding You’re Ready for a Major Renovation.
In BRRRR investing, the market determines the price you can purchase a property for and how much you can increase the resale value of that home. Of course, your ability to find highly motivated sellers, your negotiating prowess, and a mortgage consultant or appraiser that wakes up on the right side of the bed, can all add to your success, but “the market” still ultimately sets the parameters for how much you can spend on a renovation while still making a profit.
These five signs could indicate that you are ready for a BRRRR project with a major renovation:
1. You have done a thorough analysis of the house and market conditions. In doing so, you have developed a budget that is realistic and conservative. Conservative means your budget takes setbacks into account, and you have a built-in contingency if any aspect of the renovations ends up costing more than expected.
2. You have a solid team that you have worked with before, and you have developed a level of trust with them. The best kind of business partner is one that will tell you when you’re being taking on too much risk and can give you expert information and advice on which to base your decisions.
3. You are not afraid to think the worst. Not to be overly dramatic, but taking the time to think through everything that can go wrong, and writing down practical measures you can take when you encounter those situations is important. Mental preparation can make the difference so that setbacks, minor or major, do not derail you. You don’t have to dwell on the worst-case scenario, but only thinking about positive outcomes is unrealistic.
4. You have a reserve of money and experience that you can draw on if the worst case does come true. The problem is that you will never know if that reserve is big enough because there is no limit to the challenges you could face. But having something to fall back on, no matter how small, can be just the extra dose of confidence, the buffer, you need.
5. You have accurately calculated the property’s cash flow. Having the prospect of a positive cash flow from the property once it is rented will be important in case you need to increase your renovation budget.
What to Expect?
When taking on a BRRRR project that entails major renovations, the two most obvious things you should expect are surprises, and changes to your budget and timeline. We’ve already gone into that in great detail. Asking Google how much contingency for a home renovation got answers ranging from 5% to 25%. Some useful advice from Trendsideas.com is that you can plan a lower contingency when you have a fixed price building contract, but a higher contingency with a charge-up/cost-reimbursement contract since the contractor might not cost each aspect of the renovation in great detail.
Then there is the relationship between money spent on a renovation and the eventual ARV of your property. It is not a one-to-one relationship. Some renovations have a higher return on investment than others. It is worth researching this when planning your renovation so that you can make smart decisions about spending your renovation budget. Remodeling’s Cost vs Value Report gives useful information on the average costs of different types of renovations and resale value.
Perhaps less obvious is knowing what to expect from yourself. We don’t all respond to stressful situations in the same way. You remove the carpets to lay laminate flooring, only to find out the subfloor needs patching. When patching the subfloor, you uncover floor joists that need to be repaired, and then you discover the cracked foundation! Are you going to flip out and panic? Do you take a deep breath and revisit your budget? The more projects under your belt, the more you discover about yourself. Through knowing yourself, you can prepare and improve your reactions!