BRRRR 1% rule for purchase price? or ARV?

Question

Hi BP!

I have seen one thread about this topic and am still wondering how you determine a property to BRRRR. Do you apply 1% rule for an original purchase price? or purchase price plus rehab cost? or ARV?  I know how the strategy works and that 1% rule is just a rule of thumb and it will all depend on your interest rate, closing cost, property tax and amortization period etc. However, if you want cash flow to be positive after refi or even break even, it would be better to look for a property that has potential to raise a rent to meet 1% rule for ARV, right?

What's your criteria on this?? Please share your insight if you don't mind!!

Thank you!!

Account Closed · Answer

@Yuji Miyamoto

As you mentioned, all of the numbers you read about, 1% rule, 50% rule, minimum cash flow dollars, etc., etc. are more so guidlines. You need to look at the deal holistically. Just because rent is 1% doesn't mean it's a good deal and will cash flow. With the BRRRR's I've done, I looked at Cash on Cash return and trying to get as much of my investment back through the refi. So for example, after running the numbers, if the property cash flowed $200+ and I had most, if not all of my money back, I didn't even pay attention to the 1% rule. As Grant Cardone says, "if it doesn't cash flow say no."

Everyone's strategy is different, I'm just sharing mine.

Yuji Miyamoto · Answer

Thank you Charlie! When I run a number, it seems like a rent that is 1% of the original purchase price won't bring much cash flow so I should be looking for something more like you stated!!

Account Closed · Answer

I use Purchase + Rehab + Holding. So if purchase is $50k and rehab & holding is $25k then I'd look for rents to be around $750+

Yuji Miyamoto · Answer

Thank you CJ for sharing your insight!

Yeah the whole idea of BRRRR is to get your capital back after the refi! Since I can't allow myself to have a monthly negative cash flow after the refi, I seeked some insight from you guys! And also it will help me narrow down my search if you have your criteria in place. I can avoid those areas where median rent barely makes 1% of your purchase price which will not likely to cash flow after the refi for me so.

Again, thanks for sharing!!