news

The Most Feared BRRRR Step (and How to Get Over It)

If you’re rehabbing a rental, performing a BRRRR, building an ADU, or even getting into new construction, now is a challenging time for you. With supply chain problems, limited materials, and all-time high housing prices, contractors are in low supply. Even when you do schedule a project, the likelihood of your contractors showing up on time can be slim at best.

David Greene is back with another round of coaching calls to give his take on this current contractor crisis, as well as answer questions on the BRRRR strategy, the turnkey rental method, going over budget, and how to stay focused when investing. If you’ve struggled at all with anything related to calculating rehab budgets, liens on properties, and managing contractors yourself, be sure to write down David’s suggestions.

Have a question about real estate investing you want to ask David? Want to help other investors in your position? Submit your question here! 

David:
This is the BiggerPockets Podcast show 556. And if I can put myself in that state, my emotions will line up with if this is a good idea or not, oftentimes you’re like, “Oh, this is terrible property.” I had rose colored glasses when I was first looking at it. Now this doesn’t look good at all. And you get the habit of doing that over and over and over. And eventually your own reticular activating system will see a property that you used to get excited about and be like, “No, thanks. I don’t want anything to do with that one. I’m going to keep looking for these deals that I’m not going to run into these problems with.” And when you get to that point, then you can ramp it up again.
What’s going on, everybody. Welcome to the BiggerPockets Podcast. I am your host today, David Greene, today is a bit of a different episode than our typical interviewing one investor. We’re actually going to be interviewing three investors who have specific problems that they are trying to overcome in their investing career. And I will do my best to give them advice for how I would overcome it, what I have done in the past, or maybe angles that they weren’t thinking about.
Brandon Turner is doing the same thing. So he is simultaneously talking to three other investors and we’re going to see who does a better job. All right, before we get to our guests, I’ve got a quick tip for you all. You can go to biggerpockets.com/david because my name is David and there you can submit a video question, and we will do our best to answer that on the scene Greene Real Estate’s Podcast, basically quit being shy.
Get out there, let us know what you’re thinking. Get your answers, help everyone else by getting to hear it. And then if you are shy, just go to the forums on the BiggerPockets’ website and ask your questions there, go to the Facebook group and ask your questions there. I promise you, whatever is in your head right now does not make you dumb.
Everybody else is thinking the same things and waiting for somebody else to ask it. So be the person to step forward and do that.

All right. On today’s show, we have some pretty awesome council. I mean, I just tooted my own horn there, I suppose, because I’m giving the council, but I thought it came out really good. We’re going to start off talking to Alex who is stuck in hesitation, switching from a turnkey model to BRRRR model on Midwestern cashflow properties.
And we’re going to kind of work through what some of his concerns and objections are and how he can overcome that. We’re going to talk to Dana who has a very specific problem of a rehab that is almost gone wrong. So Dana was told by her hard money lender, she could get X amount of money and then the switch [inaudible 00:02:26] happened and she was only going to get Y.
So we talked through how she can adjust her plans to make it work with the new, lower amount of money that she’s going to be able to borrow. And then we’re going to wrap up with Susan, who is in quite a bit of pickle where she can’t find a contractor to come remodel the house she’s in. And this is giving her anxiety and concern about switching from a smaller scale, single family residential model into commercial properties because this contractor problem is legit. I think all three of them did a great job on today’s show. I’m excited to bring it to you. And without further ado, let’s bring in Alex. Alex, welcome to the BiggerPockets Podcast. How can I help you today?

Alex:
Thanks, David really appreciate you having me, huge fan really, really appreciate being here with you and you taking just a couple minutes to help me out with where I am. So if I could just start by giving a super quick background on myself, I’ve been investing for just under a year and a half acquired my first property from a distance last May. So we’re looking at, I guess, 14 months roughly now I’m based in Los Angeles, grew up in Southern California, my whole life.
Needless to say a lot of the real estate markets out this way don’t really make sense for your early stage buy and hold investor. So I invest in a couple different markets in the Midwest so far everything’s been relatively turnkey, very minor rehab needed. And at this point I own six doors across three properties and yeah, kind of looking to get to the next level here. So again, very, very thankful to have the opportunity to chat with you.

David:
All right. So you’ve got three properties. The turnkey method works for you but why would you not just keep doing that.

Alex:
Yeah, absolutely. So, really good timing with this actually I picked up your BRRRR book probably about two ago about halfway through it. And I knew kind of when I started out here that I could continue to throw 20, 30, 40K down on these more inexpensive Midwest properties until I die. Right? I have well paying W2 job. There’s nothing at all that’s keeping me from putting 25K down on three different properties, turnkey, buy and hold and continuing to do that for the next 20 years.
But a lot of the points that you make in, in the BRRRR book and that I’ve just kind of absorbed through diving very deep into BiggerPockets over the last couple years, make it so apparent that recycling the same capital that you’re getting from outside people who can provide that capital to you stacking that person up with the sort of person who does what I was describing before, which is just putting one’s own funds, not recycling capital its turnkey deals.
You’re going to have a very different outcome after 20 years using those two strategies. So to answer your question, yes, I I can keep doing what I’m doing. It’s worked well so far, but I don’t think that that’s the best use of my time of the resources that I have. And I’m open to doing something that takes a little bit more thought and a little bit more work to get a much better result here.

David:
So what would you like your portfolio to ultimately look like?

Alex:
Yeah, at this point in time, I would like for my portfolio to look like several dozens of doors, ideally at this point in time, I own a single family home. I own a duplex. I own a TriFlex so single family and small multi-family, I’m not quite to a point where I feel comfortable looking at larger deals just yet. So to answer your question my ideal portfolio in the next couple years is to continue in the one to four door properties, but to utilize the BRRRR strategy, getting instant equity upon refinancing out of those properties, buying properties under market, and ideally, eventually being into each of these properties, whether they’re cash flowing a hundred a month or a thousand a month for $0 all in.

David:
So what do you like about these one to four units in the Midwest?

Alex:
I understand them. They’re at a price point that makes sense for me, they look good on a spreadsheet. I’ve been to each of the markets that I invest in, know a good bit about them. I appreciate the connections that I have in each of these markets. I appreciate the vendors that I utilize them and the teams that I have in each of these markets. But again, going back to the fact that I’m from Southern California, I’ve lived here just about my whole life. The numbers make sense in these markets, in the Midwest, they’re each in growing cities with diversified economies, diversified jobs. And I have good tenants in each of these properties, so it’s not like, I don’t have deep properties deep market. So I feel, again, I feel a certain level of comfort with each of these properties and they, from a ROI standpoint, they’ve done extremely well so far.

David:
And what do you do for work if you don’t mind me asking?

Alex:
Yeah, sure. I run a sales desk for a recruiting firm, so I sell accounting and finance professionals to CFOs who need those individuals.

David:
Do you do a lot of analytics in the job you have, have looking at what resources are being expanded, where they’re going?

Alex:
Not necessarily, but my background is I was a big four CPA for the first five years of my life. So I do come from a very, I guess you could say a very analytical background, although that that is not what most of my job day to day entails currently.

David:
So that makes sense. Can you guess why I was asking that.

Alex:
I have an idea I’ll let you go for it though.

David:
All right. So what I want everyone to understand is when you’re riding a bike, they always tell you, if you see a boulder in the road, don’t look at the boulder, look at the way you want to go around the boulder because our actions tend to line up with whatever we’re looking at. So analytical people in my experience, when they get into real estate investing tends to take two roads. They either get into multifamily, because it’s way heavier on analytics and trying to predict what you can expect in the use of spreadsheets or they do what you’re doing.
They get into Midwest properties, small multifamily. And it’s because in both of those demographic areas, you find that numbers are pretty easy to make work from a cash flow perspective. That is why people invest in the Midwest. And it’s also why they invest in apartments. It’s a cashflow heavy method. And so if that’s what your goal is, that makes sense. That’s why you’re looking into that, but I’m asking you what you want your portfolio to look like, because I’m wondering if you get really good at this and we’re going to talk about how you can switch into the BRRRR-

Alex:
Sure.

David:
… because I know that was your question and you end up with 140 of these Midwest, small multifamily properties. Is that a portfolio that you want to own?

Alex:
At the moment, I wouldn’t say no to that. Assuming that I have the systems and the people in place to keep that a relatively low stress and low involvement operation. Again, I can’t say with a 100% certainty, that is exactly where I want to be. But for the time being that sounds like a good option to me.

David:
Okay, good. So if that’s something that you like, then you have your plan. That’s what you’re looking at. You’re not looking at the boulder. The upside to this is that you can become very efficient if you know the market, if you know these properties, you can get them under market value. You know how to add value to them. And you know that you can cash flow. You can scale relative quick without a whole lot of risk in this. The downside is there’s not a big upside. You’re not going to get as much appreciation. Rents are not going to keep up with what it would be like if you invested in other areas where population is moving there and you’re exposed to more capital expenditure downside. So those properties, cash flow really good until the roof goes out or the air conditioner goes out and then you can get hit pretty hard.
So I’m not saying that there are better or worse areas to invest in. It depends on what your goal is. And Alex, most people start exactly where you’re starting. They worship at the alter of cash flow and that’s because cash flow means more to somebody than in just a number on a spreadsheet. It’s how you get out of your job. It’s how you get some freedom back. It’s how you can start to snowball. A little bit of momentum. It’s kind of like first gear on a bike, but you’ll find that most experienced investors realize that cash flows pales in comparison when you start looking at appreciation, both in the value of the asset and the rent going up. That’s another thing people forget about appreciation. Doesn’t just apply to the value of the home. It applies to how much rent you’re getting and then your cash flow increasing as well as tax benefits and other things.
So my advice to you is that you should be doing exactly what we’re going to talk about, which is getting out of the turnkey model and into the BRRRR model. And here’s why, if you decide that you want to stay in the Midwest, you can buy more houses this way with BRRRR if you decide you want to get out of the Midwest and that’s your first tier and you want go up and tier in the pyramid, you want to get into something different. Maybe you want to get into short term rentals. Maybe you want to buy in coastal markets. Maybe you do want to get into the multifamily game or commercial.
You’ve got capital that you can then use to get into that tier. I can’t stress enough and we don’t talk about it a lot. How important capital is to get moving? If you look at the people that actually start making moves and making progress, when they’re investing, it’s typically the people that have capital to do it.
If you’ve got only $10,000 to your name, it’s very hard to get comfortable jumping into real estate. Whereas if you got a couple 100,000 in the bank, it doesn’t feel nearly as scary. So I look at this pyramid that we’re talking about raising from the base of cashflow and then slowly getting up to the very top where you’re going after creative opportunities as cash flow is the key that unlocks the door at every level.
All right, sorry, not cashflow. Let me say that again. Equity. No, not equity. What am I trying to say here? Capital that’s what we’re going at. Sorry. Capital is the key that unlocks the door at every single level.
So you want to keep as much of it as you can now capital while it can be used to get you into new properties can also serve as a fail, safe in case things go wrong, where you’ve got money in reserves. I’d much rather have money in my bank account in reserves, in case the market crashes than equity in a property, that’s just the market’s going to eat up. So, you’re trying to figure out how do you get out of the turnkey mindset and into the BRRRR mindset? What would you say is stopping you from jumping in with both feet into BRRRR?

Alex:
Yeah, so I thought very introspectively about this and before investing in these relatively turnkey properties to back up here, I had kind of the same mental roadblocks that probably 99% of people have before getting it into real estate in any form, in any manner, which is okay, what if the toilet breaks in the middle of the night? How do I solve for that? What if I buy a property that doesn’t perform well, et cetera, needless to say, given where I am now, I’ve overcame many of those mental hurdles for these turnkey types of properties. Right? I have the systems in place. I have the people in place. I feel very good about that. To answer your question where I think I’m having a little bit of trouble overcoming that, that same mental hurdle for the BRRRR model.
It’s the same idea, but it’s a whole different level of obstacles, right? Instead of okay, what if the toilet breaks, it’s okay what if my GC, I pay him too much at the beginning of the project, he runs off with $20,000 of mine. So it is just a whole different level of these, probably not even really valid mental roadblocks. The GC piece is just one of several. Again, I’m reading your book right now. It’s been extremely helpful. I understand how to go about buying under market property or undervalued property and adding value to that. But again, just so many in each step of the BRRRR method.
So many pieces that just within my head right now, I’m feeling, “Yeah, that could go wrong. That could go wrong. That could go wrong. And this is how the potentially negative outcomes of those pieces going wrong would affect me adversely.

David:
Okay. And that’s what analytical minds do.

Alex:
Yeah.

David:
Is they’re trained to look for what can go wrong and how to mitigate risk. That’s why analytics is actually a concept that people like, is there’s a comfort in it, right? You’re taking a scary and unpredictable world and you’re turning it into something that can be more easily predicted and determined. So there’s nothing wrong with you thinking that way. What we’re trying to do is get your brain to accept that these risks are okay and they’re actually better.
So let’s start by just breaking BRRRR into its five components and talking about what can go wrong with each of those components. The first is buy. You’re telling me that you already know pretty well how to value these properties and how to buy. Right. That’s correct?

Alex:
I’d say so. Yes. Especially utilizing the teams that I have in place in each of the markets, in which I already invest. Yes. I feel comfortable with that.

David:
So there’s the key to BRRRR is to either buy it so far below market value or add value to it that you can get that capital back out when you go to refinance. We’re going to start with the end in mind. Right? So when you’re looking for BRRRR properties, they’re usually fix uppers or it’s just such a great deal that you don’t even need to do a whole lot of fixing up. Okay. But you definitely have to make sure that there’s a plan here. You’re going to add value through the rehab, or you’re going to add value through buying it under market value.
It sounds to me like for the most part, you got that part down. So we don’t have to spend too much time there. The rehab is where you’re going to be scared. Now what I’ve learned dealing with contractors is you have to give them some money to get started, right? Because they’re going to have to go buy some materials. Don’t give them the majority of it. Like maybe 25% of the project.
When they come back and show you, “We’ve done this much work.” The next straw goes out, okay? What you don’t want to do is give them 75% of the money or a 100% of the money based on goodwill. And then even if they intended to do a good job, most contractors I’ve come across are really good at building things.
They’re not really good at managing a business. It’s just two different skill sets, right? So, they pay their guys too early and then those guys don’t come to work or they take them off your job and put them on another one and they fall behind with money that you paid and the other person hasn’t paid.
So that money going in as a draw is crucial that you just pay them for the work that they did. The other thing you can do I talk about in the book is you can buy the materials yourself, have it delivered to the house, and then you just give them enough of a draw to pay for the labor, a very small amount. Okay? That’s the biggest thing that I would say when it comes to the contractor, if you don’t put a ton of money in the pot, you can only lose so much. Now they’re incentivized to want to get the job done so they can get paid so they can pay their guys. Any questions there [crosstalk 00:15:15]?

Alex:
David, sorry to interject, if I could just add to that is again, a lot of this is just in my own head, which is kind of the part of the purpose that we’re talking here, COVID being what it is. And contractors generally being more strapped with business than they ever had at least in my adult life has kind of only added to all of these pieces. Right? So, it’s great. If I can pay a contractor, 25% of the cost up front, give them a draw, pay them the additional 25%, every however many weeks, once they’ve proven that they’ve done that work. But another mental block that I’m having here is to your point, they do have 10 other jobs what’s to keep them from taking that 25% and going to work on these other jobs. And then they get to my job when they feel like it, which maybe that’s three months down the road. So again, not trying to throw more and more blocks.

David:
No. I want that. I want those objections. Right? What’s going to stop them would be a lawsuit.

Alex:
Okay.

David:
If you have a contract with a contractor that work will start on this day and it will be completed by this day, if they don’t hit that, they can be in trouble, right? It’s not like it’s the Wild West like it’s whatever they want, lawsuit may suck for you. We don’t want to go get in one of those. Right? But it sucks for them too. So it’s not like every contractor out there is just going to take your money and run. If they’re licensed, if they’re being supervised by a governing body, that’s not going to happen as easily as if it’s just like some guy with a truck that says contractor on the side and you throw that person your money.

Alex:
Yeah. Gotcha.

David:
Then next piece is going to be the renting it out. Right? It sounds like you already pretty much know how you’re going to find tenants and how you’re going to… Right. So we don’t-

Alex:
That’s probably the piece that I’m least concerned with, out of the five step process. Yep.

David:
The refinance, the easiest way that you just make sure that doesn’t go wrong is you get pre-approved before you go after the property. Now that’s rarely a problem. If you get pre-approved first, the part you got to worry about it is, did it not hit the ARV that I had in mind?

Alex:
Sure.

David:
So there’s two things to go wrong in BRRRR, not hitting your ARV, not managing the contractor well. You smooth those two things out for the most part. They’re all going to go okay. So I would avoid BRRRR in areas with wildly different ARVs. Like that house is worth 800. That house is worth 300 and that’s probably not the case to the Midwest.

Alex:
Yeah. I was going to say, what types of markets do you maybe not anything specific, but what causes a market to have wildly different ARVs that differ? Like you just described.

David:
Something like the Bay Area in California, where I live, where you may have a super conservative city here in a super liberal city there, right? Or a house that’s 4,500 square feet next to a house that’s 1200 square feet has a view. Doesn’t have a view. The higher price points allow for more discrepancy in price. And then if it’s a track home, those different amounts can press and they stay pretty close where I am a lot of the houses like they’re built on a hill or they’re in a neighborhood versus another neighborhood, two blocks down. That’s way more desirable. Probably not the case if you’re in the Midwest, buying small multi-family properties, that’s not as much of a risk. And then the last piece is just repeat. And I think you’ve got that down. So based on everything we’ve gone over, it sounds like the contractors really, the only part you’re having a hard time with. Right/

Alex:
I Have to agree with that. Yes. Especially from a distance. Yeah.

David:
Can you use your property managers to recommend contractors they’ve used before/

Alex:
In the process of going through that activity of getting in touch with each of my property managers and understanding number one, if they do any directly putting in touch with GCs who they’ve used in the past or if they can even manage the GCs for a fee. So yes. I’m working through that.

David:
Yeah. I wouldn’t worry. From my perspective, I’ve always managed the GC myself. You’re going to do just as good as a property manager. They’re going to give you an update on what the person…. yeah. They’re not going to crack the whip on those guys unless you get a super good one. Most of the people I know that hired someone to manage the contractor, that person just gave updates to the person paying them that says they’re falling behind. Right? If they don’t have actually creative solutions to make it happen. Yeah. Then don’t waste your money that.

Alex:
No. For sure. I think though, again, kind of being in my own head here, I’m just thinking about one less person that being the GC that I would have to be in contact with and deal with, whereas I already know the property managers. And I’m in contact with them already multiple times a month. So kind of just one less layer there, but I hear what you’re saying. Absolutely.

David:
If they’re good, then that could work for you. If they take that stuff seriously. It’s just a lot of them don’t. And the last piece I’ll say is if you know, the contractor is the choke point only buy a property that isn’t something really complicated you need a specialist to do. You don’t want to go after something with foundation issues or anything like that. You want to kind of keep it to more or less light remodels that a lot of different, if the contractor’s busy, they can easily find a person to put in laminate flooring or paint.

Alex:
Yeah. David, can I ask you one last piece on the obviously we’re an agreement that the contractor is where I’m kind of mentally stuck at the moment and trying to get past that piece, another one of my fears is getting a bid from, or even a couple bids from a couple different contractors saying, “Okay, this one looks great.”
And that project ends up going 50, 7500% over budget and three months past initial scope of time that we agreed on. Maybe that’s because I’m buying something that there are just some issues that weren’t really found upon the initial inspection or upon the initial walkthrough on which I got a scope of work, but that might not even be a contractor’s fault. And again, being from a distance I’m not going to be any help really in ensuring that doesn’t happen. Have you had that happen to you before? And how did you handle that?

David:
Only times that happened is on deals I knew this could very likely happen because they’re huge projects. We’re going to be replacing the roof. We’re going to be arranging the floor plan or rearranging…. that can happen. If it was just, “Hey, I want you to upgrade the kitchen and the bathrooms and convert the sunroom into us livable space.” It doesn’t happen hardly ever.

Alex:
Okay. No, that’s super helpful. I appreciate it.

David:
All right. Well I got to get you out of here. Thank you very much, Alex. These were some very good questions. Hope we see you around.

Alex:
Thanks very much, David. Appreciate your time.

David:
Dana, welcome to the BiggerPockets Podcast. How are you today?

Dana:
I’m doing well. Thank you David, for having me.

David:
I’m very glad to hear that. So I understand you have run into a bit of a cul-de-sac and you’re trying to figure out your way out of it. Can you share a little bit of the details of your situation?

Dana:
Yes. So I have a duplex under contract and initially the hard money lender said that I could just give him a price to rehab it. And then he would work the numbers later because in the contract they were asking us to be able to close within 14 days. And so when I reached out to my hard money lender, he was like, “Nope, can’t do that.”
So we were going for 21 days. And so when I was on the phone with him, he was like, “Well, just what’s a roundabout estimate of what you think it’s going to cost the rehab.” So I just gave him a number off the fly without actually walking through the property and itemizing everything because it was a duplex and they started renting out the rooms and they tore out the kitchen.
So it’s going to need an extensive amount of work. So when I went to the property and itemize it all out, it’s going to need about $90,000 worth of work. And I only told my hard money lender that I needed 50.

David:
Okay.

Dana:
So I’m in a little bit of a pickle for the difference. So hopefully you can come up with some sort of creative way for me to get the rest of it, to make the deal happen.

David:
All right. First thing, can you just go to the hard money lender and say, “I need more?”

Dana:
Well, he said that I needed to get closer to the 50 because when I sent him the itemized with the 90,000, he was like, “You’re going to need to get this closer to 50,000.”

David:
Okay. And is the hard money lender lending just on the rehab or on the purchase as well?

Dana:
The purchase and the rehab.

David:
Does the seller have any… it sounds like they’re not going to give you a whole lot of slack. As far as the timeline. Have you checked with your agent to see if you could switch to a different lender that would lend you more money and extend your contract?

Dana:
Oh, I didn’t think to do that.

David:
So that might be something, go ahead.

Dana:
I was just going to say so when they pulled the title, then there are now I have found out that there are liens on the property. And so the seller is having to try to clear those out in order for the deal to go forward. So I’m not 100% sure that it’s going to even work if he doesn’t clear off the liens.

David:
So there you go right off the bat. You’ve got yourself some slack. Your agent probably should have proposed this for you. Are you have an agent on the deal or are you buying it directly?

Dana:
Yes. I have an agent.

David:
Okay. So have your agent go back to the seller and say, “Look, our lender needs, these leans to be paid off at close, because they obviously want to be in first position. And I know you guys are working on it. What do you say? We extend the timeline for another three weeks or something like that?” And you keep your contingent agencies in place. Do you have any contingencies, like an inspection contingency that are still active?

Dana:
I don’t have any contingencies.

David:
Okay. So how much money do you have in for the deposit?

Dana:
A thousand.

David:
All right. So it’s not terrible. What you might be able to do though is say, “Hey, these liens were not disclosed to us at the time we wrote our offer based on this new information, we’re going to be able to back out and get our deposit back.” What state is the property in.

Dana:
Kentucky.

David:
And how long ago did you learn about these liens?

Dana:
About two weeks ago.

David:
Okay. So your agent probably should have told you at the time, “Look, we can back out based on this information, even without a contingency.” Because every state has a period of time that regardless of contingencies that are built into a contract, you have a legal right after you receive disclosures to back out.
So a lot of people don’t realize this as they write, we do this on, on The David Greene Team frequently, we’ll write an offer with no contingencies because the seller has not provided disclosures. And then when we get the disclosures in California, I believe at seven days that you have to review those. And you can back out based off of something that you see in the disclosure that you don’t like. Now that is not a contractual thing. That is a state law. So you can’t get rid of it by not having in the contract.
I would check with your agent and find out how long a period of time you have in Kentucky for this. If that’s one way you could back out and recover your deposit, but you might need to because it sounds like what the seller’s trying to do is clear up those leans. So your agent, if they’re new or they don’t know what they’re doing, they need to go talk to their broker and figure out how they can rewrite this contract based on the fact that the seller did not disclose those liens or they only came up in the title search to extend to give you more time.
If you can get that more time, you can go find another lender who going to lend you a higher loan value on the property. And you can fix this up that way. Any questions on that first tier of attack?

Dana:
No, that makes sense.

David:
Okay. Second tier, let’s assume that that doesn’t work. Now what we’re looking to do here is try to figure out where is that 90K going to and how do we break it into two steps or three steps. So instead of having to pay 90K at one time, you get in there for 50K do the bare minimum that you would need to make this thing able to refinance and then do phase two, whatever stuff you wanted to do upgrades, make it pretty, make it nicer. Once, you got a little bit of equity later. So on that 90K can you tell me where the bulk of that money was going?

Dana:
Yeah, so the bulk was to do the HVAC and the kitchen and the bathroom, because like I said, both upstairs and downstairs bathroom needed to be completely redone and then we’re going to have to completely put in a kitchen upstairs as well.

David:
Okay. This is really good news. So in order to rent that thing out, you don’t have to redo the bathrooms in order to do it right, Dana, the way you want to do it, you’re going to do that. That can be phase two or phase three. Phase one is make sure they got a toilet that flushes and a shower that puts out hot water and it’s livable. And you probably don’t have to go as big as what you wanted to do. The kitchen that you plan to put in there. It doesn’t have to be the big, full, gorgeous kitchen that you had in mind. You can actually put in a kitchenette. Do they still have the plumbing run to that area?

Dana:
I didn’t see any plumbing upstairs. There is some plumbing downstairs, but the second level didn’t have any plumbing for the bathroom, but the kitchen was completely not there.

David:
But I believe you said at one point it was a duplex that had a kitchen there and they took it out. Is that right?

Dana:
Yes.

David:
So they probably still have plumbing, electrical run to the area where the kitchen used to be. And that’s the key. Okay? Check with the contractor to make sure that’s the case. If that is the case, you’re going to put a barebones kitchen up there. You’ve already got plumbing and electrical. So you’re going to have a sink. You’re going to have a cabinets and encounters. You’re going to have refrigerator. You’re going to put in a used stove that you’re going to buy from somebody else. Okay? It’s not nearly going to be as expensive as you think.
Now you’re going to have to just delay the gratification on making that thing gorgeous like you really want and giving a family the perfect home. I can see the smile on your face. That’s where your heart’s at, right? I’m not telling you not to do it. I’m just saying you’re going to do it later. It’s not going to be right off the bat. That’s your vision. I’m going to build a beautiful home for these people that they’re going to stay in.
Those changes alone might drop you down to that 50K number that you need to be at. So what you’re looking to do is say, “Look, I need this place to be legal and habitable and safe to rent it out.” Right? Once you’ve got that in place, you’ve got a foothold. Now, you’re in control of when you go put more money in you take more of a loan. You fix up that property or you choose to put into a different property. However, things play out this might actually be a blessing disguise because sometimes people go in with really big plans and they want to make an incredible property.
And they realize that the area or the tenant base doesn’t support the money that they wanted to put in. Or sometimes I’ve found this to be true. They’re is so much demand for rentals in an area that the amount you could raise the rent to is the same. Whether if you rehab it or if you don’t and, and we just assume I have to rehab the property to make it worth more when there’s a demand or a shortage in housing and there’s a high demand, you don’t even have to do that.
So to sum that up, look and see, “What do I have to do here? I don’t have to remodel a bathroom. I don’t have to build an entire kitchen. If I’ve already got plumbing and electrical run to where kitchen used to be, I can put in a very small kitchen. I can get this place for the 50K that I can borrow, able to be rented. I then refinance it. I pay off the hard money lender and I track and see is when is the property going up at value? Did it go up more than I thought?”
At the point that it goes up enough, you can do a cash out refinance, take the 30 or 40 grand you pulled out, fix it up the way you wanted to.

Dana:
That is awesome. David. I love that. That is great. That’s great.

David:
Thank you, Dana. Is there any angles that I might have missed or any information that I should have that would change anything? I said.

Dana:
No, as you were talking through, I was kind of in my thinking about the first floor, I’m like, “Okay, that one won’t need as much, but the second floor, but to make it safe and livable, the first floor is not going to need as much work. And then the second floor will need much more. So yes, that makes complete sense.

David:
You might even be able to find a contractor or the one you have that does a lot of work. That’s doing a job on someone else’s house. That’s fixing it up really nice. They could just take the cabinets out of that house if they were going to throw away and put them into yours, right? It doesn’t have to be the nicest thing ever. There’s probably a lot of ways you could save money in this case because you’re pinched. And then on your next round of the next house that you buy, you’re going in a little bit wiser, a little bit more insightful, a little bit more knowledgeable and you can probably hit a little bit more of the boxes that you wanted to check with this one.

Dana:
Okay.

David:
Great job though. Dana, hang in there, make sure your agent goes and talks to her broker and tries to rework that contract out for you. Okay?

Dana:
Okay. And I have one quick question for you.

David:
Okay.

Dana:
In terms of, I keep building all these different bridges, because there’s so much excitement with real estate. Oh my goodness. So how do I make sure that I don’t keep building these little bridges and that I make it all the way to the destination?

David:
Yeah. That’s the same problem a lot of us have is we see the vision and the fun isn’t taken down the project and then you take it down. It’s kind of like, I look at a fisherman who loves to fish. I’m not super into fishing, but you just see how excited they get when they get a fish on the line and they catch this fish and they reel it in and they take the picture. They show everybody their fish. Well then you got to go through the nasty work of cleaning it and slicing and dicing and keeping it in [inaudible 00:30:38] until you get back home and then freezing it and throwing away all the guts and wash your hands off.
That is real fishing, right? If you’re actually trying to feed people, that’s what you’re doing. Well, we forget with buying rental property that it’s not just taking down the deal. That’s what we talk about on podcasts. That’s what everyone shares the deal they took down. They don’t tell you about the six months of basically like a real estate hemorrhoid that they had to deal with of trying to get that thing to where it could be managed and rented without problems.
So what I do is I force myself and I’m excited to think about how much work is this going to be? And I put myself mentally in that place of managing this construction and renting out to these tenants and tenants fighting with each other. If I didn’t buy in the right area and where are they all going to park their car, right? That type of thing. And I think about what kind of overflow is that going to be?
And if I can put myself in that state, my emotions will line up with, if this is a good idea or not, oftentimes you’re like, “Oh, this is terrible property.” I had rose colored glasses when I was first looking at it. Now this doesn’t look good at all. And you sort of get the habit of doing that over and over and over. And eventually your own reticular activating system, we’ll see a property that you used to get excited about and be like, “No, thanks. I don’t want anything to do with that one. I’m going to keep looking for these deals that I’m not going to run into these problems with.” And when you get to that point, then you can ramp it up again. Awesome.

Dana:
Thank you so much, David. I appreciate your time so much.

David:
Thank you, Dana. It was my pleasure. Susan, welcome to the BiggerPockets Podcast. How are you today?

Susan:
Good. Great, David. Thank you. I’m super excited to be here. Thank you so much for your time.

David:
Well, thank you for that.

Susan:
Yeah. I’m an avid BiggerPockets listener and value your opinion. So I’m a new investor and I just closed on my first single family home in the Seattle, Tacoma market. So thanks to BiggerPocket. I sealed the deal for 110,000 under, asking where most homes are kind of go in the very opposite way in this market.
In my investing business, I’m struggling in two areas, contractors and other skilled workers are really hard to get right now. My method of finding contractors thus far has mostly been getting referrals from friends, family, and local neighborhood, Facebook groups. So recently I had two contractors simply not show up when they were supposed to start their jobs. I had scheduled both projects consecutively around six to eight weeks ahead of time and they both canceled within days of each other.
So I lost that six to eight weeks of lean time to get my jobs done. I don’t want to be the one that has to hang the sheet rock, lay the tile or rehab the yard. I’d really like to give that work to someone else. So my question is twofold. So what am I missing? How do I attract a good quality contractor and skilled labor that’s dependable. And then secondly, I’d really love to scale up and move on to apartment complexes. And I know some of the larger ones might involve commercial lending, but how do I make the leap from single family BRRRR to multifamily BRRRR and especially when help is so hard to get right now.

David:
When we say multifamily, BRRRR we talk about one to four unit or five or more.

Susan:
I’m thinking five or more. I could start at the one to four I’m open for either.

David:
Do you know why I ask about that?

Susan:
Because of the lending process, because it’s a residential or conventional lending versus commercial lending when you get to the five or more, is that correct?

David:
Yes, that’s exactly right.

Susan:
Okay.

David:
So the reason you want to know before you get into it is you have to figure out what lender am I going to go to get approved? And then what metrics do they care about to approve me? So if you’re going through one to four, they’re looking at you personally and your ability to repay, and then there’ll be a component of how much will these places rent for, versus if you’re going for a bigger property, they’re just going to be looking at the property.
And so once you see it through the eyes of a lender, we work backwards from there to find deals that work for their standards, because they’re the ones that are going to be giving the money. So we could probably get into that second, just how you make the transition. As far as your first question, contractors that are flaking on you, that is maddeningly frustrating, especially because that’s like two months of mortgage payments that you just paid and that projects are far behind and they just don’t really care, right?

Susan:
Mm-hmm (affirmative).

David:
It is a problem getting these contractors to do the work when you’re in a hot market and a hot area and you’re in both. Seattle, Tacoma is incredibly popular and you’re competing against not only other investors, but people who just own their house that saw it just went up 200,000 over the last two years. Now they want to remodel it or every listing in markets like ours, the Bay Area, Seattle, if I’m listing your house, I’m probably fixing it up before I put it on the market to get you even more money. So they are spread very thin.
Based on the notes I’m seeing here giving them food and drinks and giving them tips and raises. They didn’t even ask for. I think that’s more an indication of how sweet of a person you are and where your heart’s at. Then it would actually be something that’s going to affect the contractor.
So I love that you did that for them. I think your efforts largely will be wasted using methods like that. Most of these contractors are in a panic mode that they’re trying to hide from you. They don’t know how to manage all the moving pieces. They’ve got jobs going on over here, jobs going on over there. They’re trying to just get guys that will show up to work. This is a huge problem for contractors to get like a steady, dependable source of employment guys are messing up. Other guys are complaining.
They’re arguing with each other. They don’t really know a lot of the time what their profit margin is on a deal. They’re just hoping that it ends up working out. And I don’t mean that as an insult, it’s just prevalent in that industry that they’re not good at managing numbers and they’re not good at managing cash flow.
They know they’re going to make money on a deal. Let say they’re going to make $30,000 on this remodel, but they don’t have money coming in from the other ones to cover the guys that are doing that work. And so it just becomes this big jumbled mess. And you throwing into that, “Let me give you a raise.” Something really nice and sweet is not enough to turn the tide of the just strain and stress and anxiety that they’re under not managing the assets that are under their control.
So as far is your situation, one of the ways we’ve solved it with The David Greene Team is that we have contractors that we give enough business to that they know you don’t do that. You could never get that contractor to actually show up on time because they don’t care if they let you down, but they’re going to care if they let me down because that’s the next 40 people they’re going to get next month of projects that they might be working on.
So without that, you’re just going to have to put extra effort into asking other people, not investors, just other people. What contractors do you know who are looking for work? You may find people that there’s a gentleman that’s really handy and he’s got a contractor’s license, but he’s not using it a ton right now. He’s working in some other field and there’s not a lot of work or their business is slowed down because of COVID.
You’re trying to find that diamond in the rough. And I would do that by asking every person that I know, I need a contractor who remodeled your house, who do you know, do your parents know somebody and sort of working that. If you take a conventional method, which I’m assuming is like Googling and asking other real estate investors, you’re going to come across the same people that everyone else is coming across. And those are the busy ones.

Susan:
Got you.

David:
Anything you want to ask about there?

Susan:
Yeah, I think in my mind it’s a little bit backwards from what you’re saying, David, because up until this point I had been doing, asking my neighbors, my friends, and we have a local, we have a really active North End Tacoma group and got some really good referrals off of there. And even two years ago when I was going to do a complete remodel on my home, which I wish I would’ve got done before the prices went up. But even two years ago I had like seven contractors that I called and scheduled appointments with, four showed up one, came through with a bid.
So I mean, it’s been historically difficult in this market. So now I just switched to doing our real estate investing meetup groups. And I feel like I’ve had a little bit better luck, but maybe their prices… and you are correct because these are the guys that are super, super busy and their prices are higher because they’re with all the different investors.
And you’re right they don’t care about me and my one little project right now. So I guess I’m wondering like how do I scale up if I can’t even get my one little project fixed up that type of thing?

David:
Because the bigger the project is, the more likely they are to do it. So what are you looking to have done on your house?

Susan:
The investment house I just bought, it needs a kitchen. It needs an additional bathroom. It needs a two remodeled bathrooms and the five bedrooms are actually pretty good. I actually went in there the other day and tore the wall out myself just to get something, going to make it look like it’s going. And that was kind of fun.

David:
Here’s an idea. Can you function as the contractor and hire out subs to do some of this work?

Susan:
That’s what I’m trying to do right now because I’ve almost bypassed the whole contractor idea and just the GC idea. Anyway.

David:
Yes. There you go. If you can find licensed people to do that, work on your property and you sort to do the work of finding them and most of the time, that’s kind of how I run my projects. I’m not necessarily act like a general contractor. Who’s getting super deep into it, but I will find one person who doesn’t have a huge business that can manage a timeline and be like, “Hey, can you tell me when this guy’s doing this or this guy’s doing that?”
I don’t know why I have it run into as bigger problems as other people do. I have to figure out why so many people just get like [shiested 00:40:01] by these guys not showing up because that sounds like a decent job. If you’re putting in a kitchen and a new bathroom and remodeling one, I can’t give you legal advice because I’m not sure how it works as far as licensing in each state, but it might be worth looking into if there’s any people in the BiggerPockets community that are contractors that can come from another area, stay in your house and fix it up while they’re there.

Susan:
Oh.

David:
So basically it’s the Seattle Tacoma that’s the problem. All the contractors are in red, hot demand in that area. But if you go somewhere where it’s not blowing up and that’s really good money for them, you may find a very talented person that can figure out how to do this according to whatever the city’s permit rules are that you’re trying to adhere to. And it would be very easy to get them to fly out there for a couple weeks, do this job, make a bunch of money and then go back home.

Susan:
I love that. That’s an amazingly creative idea. Yeah. I can do that. I’m not afraid to post something in the community and I’m a pro member and active on the Real Estate Rookie page.

David:
That’s awesome.

Susan:
And such as that. So yeah. Thank you.

David:
So the reason that we started it off by breaking down, this is a problem and why it’s a problem is because we were able to identify it’s the Seattle Tacoma area that’s making this really hard. You probably don’t have the same problem in like Shreveport, Louisiana, where it isn’t as much rising prices and everybody wanting a contractor. So if you can analyze it and isolate what the problem is, then these kind of solutions will start to pop into people’s brains.
Because I’m sure this won’t be the only problem you have Susan, you’re going to have stuff that’s going to pop up. As long as you’re an investor, it’s always going to be something wrong. And if you can isolate why it’s hard, you can usually find a way around it. Was there anything more you want to talk about that before we get into making the jump from residential to commercial?

Susan:
No, that gives me a lot to think about. Thank you.

David:
Okay. So if, what is stopping you from getting into commercial is that you think, “Well, if I can’t get a contractor to do a small job, how will I get them to do a big job?” It will actually work the opposite. The bigger the job is the bigger their profit margins are and the less risk that they take. Now they can have like, what’s a good way I could describe this. If you’re running a real estate business and you sell three houses a month to have one full-time employee is very risky. Because if next month you only sell one house.
You might lose money that month because of their wages. When you’ve got a business that sells 40 or 50 houses a month, like what we’re doing, I actually have more slack where I can sort of gamble on hiring people and bringing people in to see how they do.
Because if I have a bad month, there’s still plenty leftover that we’re not going to lose money. So getting to that point where you actually have enough meat on the bone to be able to take some risk is a pretty important part of business. Contractors are the same way. If they’re just doing a little remodel, they need like one guy, maybe two, if either of those people don’t show up or if they come across something wrong with your house, that they don’t know how to fix. That’s a big risk for them.
When you take on a really big job and there’s a lot of profit in it for you end a lot of money in for the contractor, you end up finding better people and they want to do those jobs. So the contractors that I talk to, I have a couple in a mastermind that I run and I coach them they’ll come to me and say, “Look, I got 12 people that want me to do their work. I can take on four new projects. How do I decide what to do?”
And we literally look at it and say, “Well, where’s your profit margin going to be highest?” It’s always the bigger jobs. So that’s why they take those four. And then the other eight are the probably the people like you who said, “Hey, I thought you were going to come do my work?” And then they get blown off. Right?
So what you’re trying to do is get out of the smaller situation. You’re trying to get into the bigger deals, the bigger projects, where there’s more sense for everybody and then everything will get easier.

Susan:
Wow. Thank you. That makes a lot of sense.

David:
Brandon talks about this too, with his running of Open Door Capital and how much easier it is to do big deals. It’s just like a law of real estate. Someday, I want to put together a book that just details like the different principles that happen in real estate and bigger is easier is definitely one of them. I’m trying to buy a single family house right now. And the lending process is horrible. It’s torturous, trying to get… And I have the lending company, right? It’s my own people.

Susan:
It is.

David:
And the stuff that they got to collect from me is miserable. And then I could go buy a $15 million triple net property. And it’s like two things that I had to send the lender and the loan was approved. Super easy. I could go deeper into why that is, but just trust me, like the bigger you get, the easier it gets and the better version of you that you’re going to have to be. And I can kind of sense you have a component of you that’s doing this because you like the challenge.
I sense that when we’re talking. So you yourself will also be happier with these bigger deals as well.

Susan:
Okay. Thank you.

David:
If you don’t have a lender already, reach out to us, we can get you… We tell you what we would need to get you proof for commercial lending and help you get your books in order so that you’re ready to go if they have someone you want to use. That’s good too. But just make sure the one thing I’ll tell everybody when it comes to picking your lender is don’t fall prey to just who has the cheapest rate. Lenders get compensated based on like the broker of the loan, the lower the rate is the less money that person is going to be making. So what happens when you go after just the cheapest rate you can possibly find is you end up with worst talent.
It’s like hiring the cheapest contractor out of all of them. And then your project goes terrible because that was the worst person. So look at it holistically, rate’s important closing costs are important, but so is competency of the person you’re working with and maybe even more important, their ability to foresee you what could go wrong and remove some of those hurdles. Because what you don’t want is to be halfway into a deal before you realize a piece was missing.
The lender doesn’t lose any money when that happens, you are going to get hammered. And I see that happen to a lot of investors that go with the cheapest lender or the one that answered their phone the first, because they have no other business. You really want a person that’s done it several times. That’s really smart. They can help you anticipate what could go wrong and save you money.

Susan:
That is awesome. Thank you so much.

David:
Yeah, my pleasure. Thank you very much, Susan.
All right. Well, I hope you all enjoyed this show. Thank you very much, Alex, Susan and Dana for sharing your stories and your concerns. Every investor goes through this. They always think that they’re the only one having this problem. But as people are listening, I can guarantee that you’re all thinking the same things is, “Ooh, that’s really good.” Or, “Oh, I worry about the same thing.”
So the important thing is that you get it out of your head and out into the open, put it in the BiggerPockets forums, put it in the Facebook group, go to biggerpockets.com/david. Submit your question there, get the answers that you need because 30 years from now, you will be very angry at your current self for not getting those answers on buying real estate.
When you could have taken action and overcome these problems that people like me have already overcome and we’ve got answers ready to go. Please do me a favor and share this show with anybody that you think might be interested, let us know in the comments, what you liked, what you didn’t like, what you’d like to see more of what you’d like to see less of.
We are really listening to you guys and we are trying to tighten this up and make BiggerPockets as valuable as it can possibly be for all of you, because I want you to build wealth the same way that I did through real estate, because it’s awesome. This is David, your real estate, Buddy Greene for BiggerPockets Podcast, signing off.

 

Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here. Thanks! We really appreciate it!

Source
The Most Feared BRRRR Step (and How to Get Over It) is written by The BiggerPockets Podcast for www.biggerpockets.com

Related Articles

Leave a Reply

Your email address will not be published.

Back to top button