The BRRRR Strategy is simple, yet with such convoluted acronym, who can remember its order? Today we are delving in to the first “R”: Rehab. As you may remember from our last BRRRR Strategy post, the first step of this entire purchase is the B: buying a property at a discount. The first R-Rehab, tends to be the step of this process that unnerves investors the most.
So how can you enter confidently into this step of the process? Today our loan officer Dustin has the answer!
Rehab with the 3 C’s
So as we know, the full BRRRR strategy is: buy a property at a discount, rehab that property, rent that property, refi that property and then repeat over and over and over again. The second step is the rehab portion, which scares a lot of people. I can understand that, especially if you’re not a handy person or you’ve never rehabbed a property before. We want to remember the three C’s when we’re in the rehab portion.
What are the 3 C’s?
The 3 C’s come in handy when you are in the rehab stage of the BRRRR method. They are:
- and Contingencies.
First of all, let’s talk about comps. We know that to establish what our max allowable offer on the property will be, our formula of 75 percent of ARV minus repairs is what we need to figure. In order to plug numbers into this equation and gauge if we are on target with the budget, we have to know what the comparables are out there to make sure that we’re going to hit the value we want to hit on that property. Looking at comps is critical to make sure that we are rehabbing our property to the specificity of the comps out there.
For example: if all the other companies in the neighborhood have granite counter tops in their kitchen, we should probably put granite counter tops in our kitchen, because again, we want that appraisal to come back as high as it possibly can. So we have to make sure what the comps are to see what our value is going to be. Knowing the comps for the neighborhood will help you strategize your rehab so that the ARV lands in a competitive range.
The next C to keep in mind when preparing for the rehab is contractors. Contractors can make or break a project, in terms of the quality of repair, reliability of communication, incurring unexpected costs, staying on schedule…just to name a few. When you’re searching for these contractors, ask for referrals from other real estate investors. We talked about going to real estate investment associations and clubs before, and finding contractors is another great reason why. A lot of contractors will be there! Talk to them and be sure to ask if they are used to working with investors, or if they are more used to the resale side of things.
The contractors that are used to working on investment properties versus the resale properties are probably a little different, because investor friendly contractors on volume. This comes to bear on the budget. The prices might be a little lower because they can do so much. Vet your contractors well before hiring them to make sure it will be a good fit. I would also want you to go to Menard’s, Home Depot, and other such stores to vet your contractors. They often even have contractor or pro desks, where you can walk up and say, “Hey, who’s the contractor that I can talk to, because I need this done?” Also a great time to meet contractors? Between six and seven in the morning at those hardware stores, because they are loading up for the neighborhood and about to go start work. A lot of times they have their name on their truck and you can get their info that way, or you could even find them in person in the store or lot and ask for business cards.
Now that you have your comps and your contractors, there is one last C to get under your belt before breaking ground on the rehab. And that’s contingency. Stuff happens, right? The question is not going to be IF stuff happens, but WHEN, when you’re rehabbing a property. In order to not let the unexpected de-rail you, make sure you have a contingency budget. I recommend having 10 percent of the budget reserved for contingencies to make sure when those things happen–and unforeseen things do happen—you are protected and your overall numbers still work.
So, to recap: make sure that your property is comped correctly and make sure that you’re rehabbing to comps specifics. Make sure you’re vetting your contractors and make sure you’re talking to a lot of them. And make sure you have money in your contingency plan. Guys, this is the second part of the BRRRR process. We’ll see you next time. when it gets to the rent part. We’ll talk to you soon!