How do you calculate BRRRR?

Nikka Sulton

How do you calculate BRRRR?

How do you calculate BRRRR? The BRRRR method, short for Buy, Rehab, Rent, Refinance, Repeat, is a powerful real estate investment strategy that’s gained popularity in recent years. This approach is all about turning distressed properties into consistent income sources without depleting your finances.

While “BRRRR” might sound chilly, in real estate investing, it’s a framework that combines active and passive income streams effectively. By concentrating on distressed properties, investors use the BRRRR method to renovate, rent, refinance, and repeat, creating a sustainable cycle of investment and profit.

What is the BRRRR method?

The BRRRR method, at its core, stands for Buy, Rehab, Rent, Refinance, and Repeat. It offers a structured approach to real estate investment, enabling you to maximize property value, generate passive income, and create a sustainable cycle of investment and growth.

The BRRRR method operates as follows:

Buy: The first step is property acquisition, typically distressed or needing improvements, allowing you to buy below market value. Securing a discounted price is vital for a successful BRRRR strategy, ensuring maximum returns from the start.

Rehab: The acquired property undergoes rehabilitation, which may involve structural changes, safety improvements, and aesthetic upgrades. This transforms the distressed property into an appealing rental unit, significantly increasing its value and rental potential.

Rent: Once the property is ready, it’s rented out at a competitive rate, providing a steady rental income and building equity in the property.

Refinance: When enough equity accumulates in the property through rental income, it’s time to refinance. Cash-out refinance allows you to convert built-up equity into cash, which can be used for further investments.

Repeat: The cash from refinancing is used to start the cycle again by investing in another distressed property, facilitating continuous growth of your real estate portfolio.

It’s essential to note that while the BRRRR method offers potential rewards, it’s a complex strategy requiring experience and strategic execution. For those who master it, BRRRR can be a powerful tool for wealth creation and long-term growth in real estate investing.

The BRRRR method is multifaceted, and we’ll now delve deeper to understand each step in detail and appreciate the intricacies and benefits of this approach.

“Buy” In The BRRRR Strategy

The “Buy” stage is the foundation of the BRRRR method, significantly impacting the viability and success of your investment property.

It’s crucial to focus on distressed or undervalued properties, those in need of renovation but with the potential for wise investments. These properties often offer the best chance for substantial returns and are the core of the BRRRR method. However, it’s essential to thoroughly understand the property’s renovation needs and create a realistic timeline for completion.

The key principle in this part of the BRRRR strategy is that you “make your money when you buy.” In practice, this means purchasing properties below market value, often involving distressed properties or those poorly managed. In some cases, it may include exploring real estate-owned (REO) properties, wholesale real estate deals, or even “hoarder houses.”

The BRRRR Formula & How To Use It

How do you calculate BRRRR? Real estate investors should target an all-in cost, which covers the purchase price, repair costs, closing costs, and carrying costs, equal to or less than 75% of the After Repair Value (ARV) of the property. To simplify this analysis, you can use the BRRRR formula:

Maximum Purchase Price = (ARV x 75%) – Repair Cost

For example, if the projected ARV of a property is $100,000, your total investment should stay within $75,000.

It’s crucial for your deal to meet this criterion. Subsequently, you must assess it as a rental property. Using the projected ARV as the new purchase price, crunch the numbers to ensure the expected rental income can cover all your projected expenses, ensuring the property’s long-term sustainability.

When purchasing a distressed property, it’s essential to accurately calculate the ARV, which estimates the property’s value after renovations. To determine a reliable ARV, compare the property to recently sold similar ones in the area, considering factors like size, age, condition, and room count. This prevents overinvestment.

What Is The 70% Rule For BRRRR?

A commonly-used guideline in real estate is the 70% rule, suggesting you should not invest more than 70% of the property’s ARV. For instance, if a home’s ARV is $300,000, you should aim not to pay more than $210,000.

The “Buy” phase demands careful financial planning and an objective approach. It’s crucial to view this property as an investment and base decisions on solid financial reasoning rather than emotional attachments. With these considerations, you’ll be better prepared to pursue profitable real estate investing.

In the following sections, we will delve into the subsequent stages of the BRRRR method, starting with “Rehab,” to provide an in-depth understanding of how each step contributes to this potent investment strategy.

The Types Of BRRRR Properties In Real Estate

The BRRRR method’s strength lies in its versatility. It’s applicable to various property types, such as:

Single-family homes
Townhouses
Condominiums
Apartment units
Duplexes, triplexes, and fourplexes

“Rehab” In The BRRRR Strategy

The “Rehab” phase, as the first “R” in BRRRR, involves renovating the purchased property to enhance its value and appeal, making it suitable for top-dollar rents. This stage can seem challenging, as it often deals with issues most buyers and property owners would prefer to avoid. However, this challenge presents opportunities for real estate investors to negotiate deals below market value.

The objective is to prepare the property for the highest possible rent. The extent of the renovation required depends on the property’s initial condition, your budget, and the local rental market standards. You can choose to perform the work yourself or hire a general contractor.

The key in this phase is finding the right balance in terms of renovation. You want the property to compete with other rentals in your market and command desirable rents, but you also want to avoid excessive upgrades that won’t be covered by future rental income.

In terms of prioritizing rehab improvements, consider this order: safety, functionality, and aesthetics.

Safety: Address non-negotiable repairs that ensure the residents’ safety and protect the property. This includes fixing mechanical issues like electrical hazards, plumbing leaks, and heating problems, as well as addressing concerns like mold, termites, and pests. Installing security features such as floodlights and deadbolts also falls into this category.

Functionality: Enhance the property’s habitability and operational efficiency. Repairs that improve functionality contribute to a positive living experience. This might involve fixing a faulty toilet, unclogging drains, replacing broken fixtures, or installing new appliances.

Aesthetics: Enhance the property’s visual appeal and cleanliness. While a property may be livable, improving its appearance adds value. This can include installing new flooring, upgrading countertops, repainting, or updating cabinet hardware. These enhancements not only make the property more attractive but also justify higher rent and quicker leasing.

What Rehab Projects Are Worth It?

Given the financial importance of the rehab phase, a thorough cost-benefit analysis is essential for every improvement project you undertake. The objective is to choose projects with a high return on investment. Here are some rehab projects known for their high ROI:

Roof Repairs: Investing in a new roof can significantly boost property value, often yielding a return on investment equal to the repair cost.

Updated Kitchen: Renovating an outdated kitchen, even with usable features, can substantially improve ROI. Houses with demolished kitchens can be attractive opportunities for cash buyers as they are often ineligible for financing.

Drywall Repair: Fixing damaged drywall, while making a house financing-eligible, is a relatively low-cost improvement, providing an opportunity for investors to increase property value.

Landscaping: Simple tasks like clearing overgrown vegetation can significantly enhance curb appeal and offer a high return on investment. These projects can often be completed without professional assistance.

Updating Bathrooms: Bathroom renovations are typically cost-effective, as these spaces are generally small. Modern, appealing bathrooms can help your property compete with higher-end homes in the area.

Additional Bedrooms: Homes with ample square footage but few bedrooms can benefit from adding extra rooms, significantly increasing property value. A three- or four-bedroom house is typically more competitive in the market.

Next, we’ll explore the “Rent” phase, a crucial element of the BRRRR method. We’ll delve into the significance of finding the right tenants and how it contributes to the overall success of your real estate investment.

BRRRR Method Example

Understanding the BRRRR real estate strategy becomes more accessible with a practical example. Let’s illustrate each step: Buy, Rehab, Rent, Refinance, and Repeat.

Meet Susan SmartInvestor in Orlando, FL, a city with a thriving rental market. She spots a promising distressed property listed at $150,000. Susan has $30,000 saved for a down payment, securing a $120,000 mortgage. After consulting with a trusted contractor, she allocates $20,000 for property rehab.

Here’s the breakdown:

Property Price: $150,000
Down Payment: $30,000
Mortgage: $120,000
Rehab Costs: $20,000

After the successful rehab, the property’s value increases to $210,000. Susan rents it out for $2,100 monthly. A year later, she decides to refinance, obtaining a loan for 75% of the new appraised value, totaling $157,500.

This refinance amount pays off her initial $120,000 mortgage, leaving her with $37,500, in addition to ongoing rental income. Susan can now use this money to acquire and rehab another property, steadily expanding her investment portfolio.

While this example employs simplified figures for clarity, it serves as a practical template to grasp the BRRRR process within real-life scenarios.