The 1% Rule and BRRRR

[Randee K.]

I understand the 1% rule (though I know it is tough to follow in many of today's markets) and I understand how BRRRR works, but I can't seem to find a solid answer on how to apply the 1% rule to a BRRRR property. Is it 1% of purchase price + rehab cost? Or is 1% of the ARV that you are using for your refinance? It seems like you would have to use the appraised value for your refinance, since that is the mortgage that you will be holding and trying to cash flow with. But what I have read in some places says otherwise. Can anyone clarify?

[Patti Robertson]

1% of your initial investment. Appraised value is irrelevant, since this analysis is not looking for equity. It is simply a ratio of investment to rental income. If you plan to BRRRR, you also want to add on a criteria for equity, depending on what your lenders criteria is.