The Big 5 BRRRR Profitability Killers3 min read
As you get into the BRRRR biz, rehab is going to be both your greatest challenge and your highest expense. Four systems in the house and your hard money loan are going to dictate your profitability or your financial level of failure in a worst-case scenario. The potential issue areas to find and address early in every deal include:
- HARD MONEY
All rehabs are unique. But on any given project, you could encounter some, all or none of these complications that hold a devastating potential. If the house is going to be a flip to a buyer using any type of conventional financing, then these mechanical systems need to be modern and functional. VA and FHA loans are the strictest, the traditional 20% down loans are not quite as challenging, and as you would think, and pretty much anything goes on a full cash deal.
If you are planning to retain the property, there are two very common camps to choose from. The first is to fix only what is broken. The second option is more proactive and includes repairing or replacing everything that is broken or worn to decrease maintenance issues in the future. This plan is also wise if you are looking for a long term tenant as it is challenging to complete updates and projects when the property is inhabited. Count on your investment increasing your ARV.
Most insurance companies are going to require that the roof have at least a 5-year life expectancy. The most common material is a 20 or 25-year shingle. Other materials like metal are less common because of the increased expense, but they have a longer life expectancy. You will need to speak to your tax advisor on the best approach for depreciation or tax deduction options for a more expensive roof.
Electrical updates can be costly if you need to replace the panel or rewire the house. In most cases, the panel requires replacement if it is outdated, damaged, or is on a prohibited list. Newer panels significantly reduce the potential for electrical fires as a result of a short. The best resource is a trusted electrical contractor or a review of the local building code. Prohibited units include Zinsco, Federal Pacific, Sylvania Home Electrical Panels, Edison Electrical Panels, and Pushman Home Electrical Panels. More information on these brands and other standard electrical panels is readily available on the Internet.
It is essential to understand that there are actually two components to every property’s plumbing system. There is the supply side of the piping that carries water into the building. Then there is the drain system that takes all of the wastewater and sewage off the property. The supply side is pressurized, while the drain side is a gravity system. In addition, the drain side of the system includes some vents or roof stacks that allow air into the drains to prevent the creation of a vacuum. Obviously, every home needs to have a functioning drain and water supply to be considered inhabitable.
HVAC means different things in different parts of the country. Some people say that if it is running, then leave it alone. But it is essential to know that 15-20 years is a full life expectancy. And after that point, it is borrowed time, and you will face some issues. Also, consider what is a necessity in your region. In some areas, air conditioning is regarded as a luxury while in southern locations, it is a necessity and vice versa for heating systems colder climates.
Hard money can be costly, but it is a solution that is often a necessity to fund a project. Long-term financing is always going to be more affordable. But not every project property will qualify for traditional lending, nor do you want to go to the trouble of getting it for a fast flip. Know the complete terms of your deal before signing and know exactly what your responsibilities are to avoid any expensive issues during the life of a hard money deal.
As you evaluate properties, be on the lookout for any of these 5 issues. Any one of them could be the tipping point from a profitable deal to one that turns into a complete financial failure.