Good morning,
If you have been reading my column on Resilient REI for the past few months, you have probably realized that the BRRRR method is outright magical. Investing in real estate is powerful enough as is, but creating infinite returns? That’s just crazy!
We often dismiss something great as too good to be true, or maybe as “too advanced for someone like me.” Today I will break out the simple steps to analyze whether or not a property would be a good candidate for a BRRRR by using a real life example with a real property that is currently on the market.
Subject property
Address: 170 College Street, Worcester, MA 01610 (Redfin link: https://www.redfin.com/MA/Worcester/170-College-St-01610/home/16652495)
Asking price: $220,000
Bedrooms: 5
Bathrooms: 2.5
Sqft: 1,898
Step 1: Start at the Finish Line
For a BRRRR, you always start at the finish line. Before you can figure out what you can pay for a property, you must first figure out what it will be worth after repairs, what your mortgage will be after the cash out refinance at the improved valuation, and what the rent rate will be for the property.
After repair value: First, look at comps. To do so, search for properties sold nearby in the last 90 days that are of similar bedroom count, bathroom count, and square footage to your property. This is easily done by using filters on websites like Zillow or Redfin. In this case, we can easily find comps to support an after repair value of $350,000 for this property. At today’s mortgage rates (6.75%) you’d be looking at monthly PITI (principal, interest, taxes, insurance) payments of $2,500.
Rent: Once fixed up this property would demand $2,800 to $3,100 in rents in the City of Worcester, which still leaves some profit on the table depending on how conservative you run your accruals for vacancy, maintenance, etc.
Step 2: Estimate the Rehab Costs
After you figure out what the property will be worth after repairs, you will need to identify what those repairs are and what the cost for those repairs would be. This will be much easier for you once you have a few rehabs under your wings, but be sure to use a professional contractor to give you estimates at the beginning.
Let’s create a summary list of improvements and costs for the sake of this exercise, which assumes a total rehab cost of $78,000 to bring this property up to comparable valuations:
Step 3: Calculate Your Offer Price:
Once you know your rehab budget and your after repair value, you are well equipped to calculate how much you can pay for that property. I have found a lender that allows me to buy properties and perform cash out refinances for single family homes with 20% down payments (in other words: 80% loan to value). This is important because it is a factor into the calculation that follows:
If your goal is to cash out 100% of your original funds, the total rehab cost + your acquisition cost for the property cannot exceed 80% of the after repair value. This can be complicated, so I will say it again: the total that you pay for the property itself, plus the total required to rehab the property, cannot exceed 80% of the property’s projected after repair value.
This may sound complicated, but it is really easy because you just have to find the missing value. It is basic math! Let’s do it together:
After repair value = $350,000 x 80% = $280,000
$280,000 – $78,000 (rehab projection) = $202,000
Now you know your number! In order for this to be a BRRRR that allows you to pull out all of your funds, you cannot pay more than $202,000 for this property.
Step 4: Start Negotiating!
Now that you know your numbers, you can confidently negotiate with the seller. The BRRRR strategy is purely mathematical and not at all emotional. If the sellers don’t accept your offer, you can walk fully understanding why you’re doing so. If you get stuck, know that I have had success showing the seller the list of improvements needed and estimated repair costs. This helps them feel less offended about your offer and allows them to know they’re dealing with a professional investor.
Now that you know how to get to your perfect BRRRR number – Happy Hunting!
Frugal Mogul 🏡 (@RealFrugalMogul) / Twitter — twitter.com
Sharing my journey to financial independence through real estate. Follow for live tweets as I go from 0 to 15+ rental properties (currently at 4).
