The BRRRR method — buy, rehab, rent, refinance, repeat — is an excellent way for real estate investors to develop a profitable portfolio of properties that generate a combination of income through rentals and equity.
Still, like any investment, several variables and market factors can determine the profitability of a BRRRR property.
To make the most of your investment, a few essential methods exist to calculate a BRRRR property’s profit potential.
What makes a BRRRR property profitable?
Like with a typical fix and flip transaction, the first step in the BRRRR strategy is to acquire a distressed property to refurbish. The property is then rented, which has the advantage of generating passive rental income and equity.
After the property is refurbished, a cash-out refinance (one type of hard money real estate loan) allows you to use the property’s equity to refinance and use the capital towards starting the BRRRR process again.
So, will your BRRRR property yield a satisfactory overall return on investment (ROI)? Will it consistently generate positive cash flow through rental payments?
To calculate your profit potential of a BRRRR property, you’ll want to consider:
Property acquisition costs
Acquiring distressed properties means you can buy more square footage at a reduced price. Still, it’s essential to factor in the related costs, including closing fees, real estate agent fees where applicable, taxes, attorney fees, and any expenses involved in acquiring the property.
Refurbish and renovation expenses
The price tag for the rehab stage of a BRRRR property can vary significantly from property to property.
Locking in a solid figure at the beginning of the renovation stage can take time due to unforeseen circumstances. Anything from higher labor and material costs to scope creep can significantly skew your budget.
While you may be unable to predict every setback or unexpected expense that inevitably pops up during a property refurbish, accounting for the significant expenses ahead of time can help you establish a more realistic budget. You’ll always want to include material and labor costs, permits and administrative fees, and existing debt and loan payments.
After repair value (ARV)
Your ARV is the property’s estimated value once you’ve completed the refurbish or renovation stage.
To determine your property’s potential ARV, start with the property’s value before renovating. A good barometer of a property’s current value is how much similar properties in the surrounding area are worth.
Once the property has been renovated, researching what similar properties have sold for in the same market will help you to determine an accurate sale price, or in the case of a BRRRR property, the market price for a rental in your area. Your ARV will also contain an estimate of what it’ll cost to refurbish the property.
After you’ve conducted market research to determine the average value of comparable homes in the area — and nailed down a reasonable estimate of your refurbishment and renovation costs — the combination of the property’s current value plus the renovation costs will give you your ARV.
ARV is important because it can help you determine your potential ROI. Lenders will also look at ARV to determine real estate loan amounts and terms.
Rental income and associated expenses
BRRRR properties are attractive to real estate investors because they generate recurring income through monthly rental payments in addition to equity.
However, calculating the costs associated with managing and maintaining a rental property is key. These costs include everything from listing and advertising the rental unit(s) to repairs, ongoing maintenance, salaries for management staff, and any fees associated with owning and operating a rental property.
Rental income is also subject to occupancy rates, which fluctuate depending on several variables. Your location, price, amenities, employment rates, and other market factors that determine expenses may be out of your control.
Refinancing a BRRRR property
The refinancing stage of the BRRRR process provides the capital to purchase and rehab a new property. Using a cash-out refinance, you take the equity from the first property to essentially “cash out” in the form of a new real estate loan based on the property’s ARV and LTV (loan-to-value ratio). LTV is calculated by dividing the new loan amount by the property’s appraisal value.
Tips for Successful BRRRR Calculations
Between revelations during the buying stage or surprises during reconstruction, every project is different and will require adjustments along the way.
Here are the basic steps to help you calculate your potential BRRRR-related costs and profits:
- Conduct exhaustive market research
- Make a detailed and comprehensive budget
- Calculate ARV
- Keep your estimates on the conservative side (overestimate costs, underestimate rent projections)
- Have a financial contingency plan (10%-15% of projected expenses when possible)
- Study the rental market
- Don’t forget to include financing and management fees
- Create a detailed exit strategy
- Consult with a pro
- Regularly monitor cash flow
- Adjust as needed
A successful BRRRR project has many moving parts. Still, the key to making the most of your investment and scaling your real estate portfolio is to find the right balance between performing market research and financial projections with the right combination of flexibility, patience, and a little creativity.
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