Beginners almost always over-improve their first properties. This leaves you with a very nice asset to look at, but it leaves profitability on the table.
I’m going to discuss how to know if you’re over-improving your properties when utilizing the BRRRR strategy. I want to explain it in a holistic manner, so that there is less chance to get caught up in the details of the improvements and lose sight of the overall strategy. I’ll describe how to go through the BRRRR flow so efficiently that the rehab portion becomes extremely simple. Focus on the big problems, and small problems take care of themselves.
Think Backward When BRRRR-ing
Most people think about the process as you move forward through it, but adjust that train of thought. Instead, start at the end and work backward.
The BRRRR method is buy, rehab, rent, refinance, and repeat. That’s how you go through the process in real life, sure. But it shouldn’t be how you design your strategy. In fact, if you plan things from a linear start to finish you, you might get yourself in trouble.
What I recommend instead is for you to reverse engineer the whole process. Before you even purchase the house, ensure you have strategically solved all the obstacles you may run into—like over-improving. Addressing them up front will reduce risks, increase your mental grip on the deal, and boost your confidence moving through it.
Start With the Refi
Plan the exit (refi) portion of your process first. That means making sure you’ve spoken to a lender before you purchase or bid on anything to make 100 percent certain that your refinance strategy is concrete. The number one hurdle people encounter is buying a house with the assumption they can refi, but after the rehab is done and the tenant is placed, they find out something isn’t lining up. Rookie mistake!
Talk to some lenders. Find one you like that can offer the type of product that allows you to complete your project. Then, have them look through your financials and credit to make absolutely sure that you’ll be able to refinance out the cash you put in based on an example house.
The lender will tell you which hurdles you may need to overcome, and they may tell you where your strategy is lacking. Maybe the house size is too small for the loans they offer. Maybe the house is too big to finance because of your debt-to-income ratio. Maybe you wrote too much off on your taxes last year. Don’t assume you know what the lender will do. Ask them at the start of your process so you can be certain!
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