How to Fund Your First Renovation (BRRRR) Deal Without Going Broke
Why 40% Is Your Magic Number
Doing major real estate renovations is something many people find really scary. The crux of the problem is that you don’t have enough information at the start to lay a solid plan and by the time you have a solid plan in hand, you are months down the road with many thousands of dollars spent. At the point you finally get a solid plan of what it will cost and how long the construction will take, you are about 1/3 of the way through the process. If you think it’s nuts to embark on a journey without knowing the path to your goal until it’s too late to turn back, this post is for you.
The real estate renovation game is more akin to building profitable works of art than growing and scaling a business. Each property is unique, each municipality has unique rules, each owner has unique tastes, and each has unique opportunities to maximize revenue. The simplest way to think about this challenge is the difficulty of figuring out what things would actually cost. For those who have never done a project of this sort, it works like this: To get a price, you need final plans, to get final plans you need all the engineering work, to get an accurate engineering scope you need to complete the demolition phase. It is precisely because of all of these unknows that most construction projects hold huge contingency reserves.
In reality, most project budgets don’t hold for two simple reasons: a lack of information and a cheapskate approach to evaluating property. A vast majority of real estate renovation horror stories center around owners discovering a property defect they knew nothing about (asbestos, black mold, buried oil tank) or something they were too cheap to have the properly professionally evaluated for, before they bought the property (foundation cracks, radon, settling walls.) All too often I have heard amateur investors whine about spending money on someone else’s property. The professionals understand that ‘insurance’ does not always come from an insurance company. The game is just as much about not losing money as it is about making money.
In most models that investors are taught when learning property investing, the most critical starting point is the budget. This number is treated with the reverence of a demi-god, dictating daily behavior and demanding sacrifice. This is usually the case because many investors seek to maximize returns by maximizing deal size, a strategy that leaves little room for maneuver when plans need to change due to something unexpected. It is safe to say that when you seek deals below your maximum capacity, you dramatically decrease your probability of loss. At the stage of our business, the strategy always caps the deal size to that which can be levered from the existing equity in the portfolio.
A second reason many projects fail are timeline delays. Like the unexpected defect, timeline delays introduce unexpected costs to the project that eat away at the budget and decrease the probability of success. The trifecta of lost rent revenue, mortgage payments, maintenance costs may be part of your budget, but if your project runs months longer than expected, it will most definitely eat a not so tiny piece of your budget. So, even if your project came in withing the anticipated contact costs, a six-month delay in project completion can effectively reduce your working budget by a handful of percentage points.
So, if you want to take on real estate renovation projects, how do you protect yourself? If you purposefully chose a project well within your investing means, your contingency reserve should be a little over 10% of the project budget and 6 months of property operating. Even with this best practice, these levels of contingency reserve are meant for typical projects. If you discover a cracked foundation, buried oil tank, or asbestos, your entire contingency reserve could get blown before you even start putting in new walls and windows. The reality is that a project well within your means that gets unexpectedly expensive will be a little less profitable in the long term, but less profitable is always better than a loss.
From a financial planning perspective, real estate renovation requires disciplined savings and clear benchmarks before you even start looking for properties. As a general rule, you should have saved at least 25-30% of your anticipated total project cost (purchase price and renovation budget) before making your first offer. So, if you're eyeing a $200,000 property with a $100,000 renovation budget, you’ll need $75,000-$90,000 in accessible savings beyond your down payment and closing costs.
Your monthly savings rate should reflect this reality. If you're earning $100,000 annually and want to tackle a $300,000 total project, you'll need roughly $90,000 in reserves, which translates to saving $1,500-$2,000 monthly for 3 to 4 years just for contingencies. While conservative, this cushion isn't just for cost overruns. It's your insurance against timeline delays, unexpected discoveries, and market shifts that could affect your recurring revenue and exit strategy.
The key benchmark is simple: never commit to a renovation project that requires more than 40% of your total savings (liquid net worth). This ensures that even if everything goes wrong, and in renovation, something usually does, you won't face financial ruin. Your renovation budget should feel almost boring in its conservatism. If the numbers make you sweat, you're not ready. Wait, save more, or find a smaller project. The most profitable renovations are often the ones that investors walked away from because they stayed within their means, preserved their capital, and lived to renovate another day.
Real estate success isn't measured by how boldly you can stretch your finances, but by how wisely you can preserve them and survive. The investors who thrive in this space understand that renovation is fundamentally a risk management game disguised as a construction project. By maintaining substantial reserves, choosing projects well within your means, and treating contingencies as certainties rather than possibilities, you transform what could be a financial nightmare into a manageable business venture. The most successful renovators are those who sleep soundly at night, knowing that even if their current project encounters every possible setback, they'll emerge financially intact and ready for the next deal.
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