Good morning,
This week we’re going to address the first and most critical stage of the BRRRR strategy: Identifying and acquiring the property. This can be a very tricky stage, especially for the first time investor. But, if done right, acing the “buy” will set you up for smooth sailing for the rest of this wonderful strategy.
4 steps to buying the perfect BRRRR
1: Line up a trusted contractor
Unless you have extensive experience rehabbing properties, you will need a contractor who is willing to tour the property with you (or at least review pictures/videos with you) so that you can establish how much the rehab will be on the potential property.
Remember to add a healthy 10%-15% contingency to their rehab quote as things always seem to run a bit high during the construction phase. Having a solid contractor will allow you to move quickly and confidently when you find a property where the numbers might work. Here is how you can line up a good contractor:
– Ask your agent for a recommendation
– Go to investor meet ups in your region and solicit recommendations
– Ask for recommendations in social media groups in your target area
2: Know your purchase & rehab numbers
A BRRRR is nothing but a math problem. Understand your numbers, and you will be well on your way to creating a rental portfolio. Remember that a successful BRRRR is one in which the investor has zero funds from their original investment left on the deal. In order to achieve this, you have to start with the after repair value (ARV) of the property, and work backwards from there.
As a general rule for my own deals, I look for properties that can be acquired and rehabbed for 80% of the ARV.
For example, if the property’s ARV is $300,000, you can only spend $240,000 total to acquire and rehab the property. That means that if the property needs $50,000 worth of repairs, your maximum acquisition price cannot exceed $190,000.
More on this when we discuss refinancing in a couple of weeks!
3:Your initial mortgage is not your final mortgage
Remember that you need to consider what your mortgage will be later in the BRRRR process, when you refinance the property. When you underwrite the deal and look at the cash flow, you need to make sure the rent for the property works when you cash out at the estimated ARV.
In our example, that $300,000 ARV property in my market would look like this if we assume 20% down and a mortgage interest at 5%:
$2,400 Rent
$1,631 PITI (principal, interest, taxes, insurance)
= $769 gross cash flow
If the above numbers would not work for you, then you would not have a strong BRRRR candidate. In my market, these numbers would work great, especially assuming we’d have zero dollars left on the deal.
4: Get Ready to Submit Many Offers
If you think that buying and rehabbing a property at 80% ARV, then cashing out ALL of your invested capital AND having gross cash flow of $769 sounds nice, you’re not alone.
There are many investors out there looking for the exact same deal you are, and many others still that are happy with thinner margins. That means you’re going to have to make many offers and get many “nos” before your land the perfect deal.
But I assure you that, with a little persistence, your first BRRRR buy is just around the corner.
Frugal Mogul 🏡 (@RealFrugalMogul) | Twitter — twitter.com
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