The BRRRR Simplified

If you have been considering real estate as an investment, you have likely figured out that saving the 20% to 25% required to purchase a non-owner occupied investment property is a pretty high barrier of entry. You have also likely heard about the BRRRR strategy, which is a “work-around” for having to keep saving for a down payment over and over again. Coined by the gurus at Bigger Pockets, the BRRRR stands for Buy, Rehab, Refinance, Rent, and Repeat. If done correctly, this real estate strategy allows investors to continuously recycle the same original pool of funds to more quickly build a portfolio of properties.

For those of you who are just hearing about the BRRRR strategy for the first time, it most likely sounds like a “too good to be true” scam. I used to think so also, until I did it myself and not only cashed out all of my original down payment from my first real estate deal, but actually more than doubled my original down payment when I refinanced the property. That entire deal is described in this blog post here.

This post is meant to give you a simple shortcut to calculating whether or not a property is a potential BRRRR deal. I believe I have found a simple way to look at the numbers that may be helpful to you. Before we dive into the numbers, however, let’s review each letter of the BRRRR so we’re all on the same page:

B = Buy: Find a property that needs work, and acquire it!

R = Rehab: Rehab the property so that it is rent ready. Ideally, you’d aim for rent prices at or near the top of your market, which means better than average improvements.

R = Rent: The easiest part of the process. Rent out your recently rehabbed property.

R = Refinance: The most fun part. Get the property appraised and do a cash out refinance, removing your entire original down payment from the deal.

R = Repeat. Start over and begin accumulating your real estate empire.

So, how do you quickly identify a potential BRRRR property? Easy - you need to save a 20% down payment and then acquire and rehab a property for no more than 80% of the estimated after repair value of that property. Okay, fine, perhaps I am over-simplifying these steps, but the math itself is fairly simple here. Let’s learn this by using an example:

B = Buy 

Let’s say you know that a 3 bed, 2 bath home in a particular city or neighborhood would have an after repair value (ARV) of $300,000. This means that if you wish to pursue the BRRRR strategy, you would need to acquire a property in this neighborhood and conduct any repairs necessary to it and spend no more than $240,000 overall.

How is that possible? Let’s get more specific!

Let’s say you find a 3 bed 2 bath property selling for $195,000. The property needs internal painting throughout, new kitchen appliances, a new roof, bathroom facelift, and a refurbishment of the HVAC system. In total, those improvements cost you $35,000, and closing costs were an additional $10,000. Let’s review those figures:

Acquisition: $195,000

Rehab: $35,000

Total Costs = $230,000

80% Mortgage: $184,000

20% Down Payment: $46,000

Closing Costs: $10,000
Total cash out of pocket = $56,000

In the above scenario, you need 20% down for the acquisition price of $195,000 and the rehab costs of $35,000. That is a total of $230,000, of which 20% is $46,000. With the additional $10,000 in closing costs, the total out of pocket costs for you on this property is $56,000. 

Depending on your interest rate, taxes, and insurance costs, you may expect the monthly costs of the original loan to be about $1,500 (see Redfin assumptions below):

Let’s break all the steps down further.

R= Rehab

Now the most challenging part of the process. Get someone in there ASAP and bring this property to a rentable condition and looking spiffy as quickly as possible. Remember, you will be keeping the property and renting it out. You do not want to take too many shortcuts here. In this scenario, we’re assuming a $35,000 rehab to do the following:

• Painting throughout

• New kitchen appliances

• New roof

• Bathroom facelift

• Refurbishment of the HVAC system

R = Rent:

Now it’s time to get tenants! Some folks make the mistake of looking at the original mortgage costs and monthly payments when figuring out cash flow numbers. You have to be forward-thinking here. The $1,250 costs mentioned above will change once you refinance the property at a higher value. Keep that in mind!

R = Refinance:

Now, the really fun part. This is where the rubber meets the road. Did you successfully work out your numbers or not? If the property in this scenario successfully appraises for $300,000, and you cash out 80%, you will walk away with $60,000 while the new mortgage will be for $240,000. The result for you will look like this:

Appraised Value: $300,000

80% Mortgage: $240,000

Total Cash Out = $60,000

Total Money Out of Pocket on Property: -$4,000

Yes, you read that correctly. This BRRRR deal PAID YOU you $4,000 to have this house. You originally spent $56,000 out of pocket to acquire it, and then you cashed out $60,000. How would the mortgage look afterwards? Let’s take a look: 

As you can see, the monthly payment did go up by $300 compared to the original loan, but don’t forget that you just got this house “for free!” How much money you make monthly now will rely solely on the rental market near you. On my first BRRRR, which had very similar numbers, I originally rented it for $2,200 in 2020 and just rented it again for $2,500 in 2021, so the cash flow is still absolutely great!

R = Repeat

After you get through all of these steps, you get to repeat it again and again! Build your empire by recycling the same funds over and over!

Another R = RECAP

The ultimate goal of this post was to give you a simple and quick way to calculate a potential BRRRR property, and that is this: You need to acquire and rehab a property at 80% of its after repair value (ARV). If you know a market enough, and you look for deals often, I know you will find opportunities in your market! 

Want to know more about the BRRR? Consider these books!