BRRR - the math doesn't work??

Question

Hey everyone, I am intrigued with the BRRR strategy!!!!Background info: It is my understanding here in Vancouver BC Canada that lenders need a min 20% down (without using insurance) to buy a property. If you know of any other way then chime in with ideas!This being the case when I do the math on a condo rehab (which we have done a few, but always sold them), it seems the renovation needs to increase the property value by enough that it would cover my 20% deposit + the renovation cost + closing costs for me to be able to refinance and doing it all again without dipping back into my pocket for the next property.... Is my math correct.High level apartment / Condo e.g.:Purchase Price: $130KClosing costs: $3500 (out of pocket)20% deposit: $29K (out of pocket) Renovation cost: $15K________________________________Loan amount: $130K (purchase price) + $15K (reno cost) = $145KARV = $160KWho's good at math?Seems that even if I refinance after a year, and 9months of that was tenanted at $900/mnth, $200 HOA/mnth (presume no repair costs) (50% of $474 loan payment is a principal payment of the loan = $2133 total principal paid by tenant) and presuming no increase in condo value. This condo wouldnt BRRR so i could get all my equity back to reuse and repeat?? How would you make this a BRRR? Check images below for images of loan calcs, interest paid and repayments.

Mike D'Arrigo · Answer

Pawan J. A very simple way to look at is that you need an ARV of 75% of your total all in cost, Bottom line is you need to be able to add 25% in value.

William Hochstedler · Answer

Pawan J.Despite being in a tough market, you may be looking at the wrong asset class. Paint and carpet doesn't significantly affect value in the way a garage or additional bedrooms might.In our market at least, condo's tend to hold to very consistent valuations because there are readily available comparables. They are valued almost exactly the same give or take the cost of the cosmetic repairs. In this scenario, there is no room to force substantial equity which is the core of the BRRR strategy.Our most successful applications of this strategy are when substantial improvements are required that radically change the desirability of the property.The other reason that light rehabs tend not to substantially force equity is because LTV's are a percentage game. If your rehab is less than 20% of the value it's very hard to create a 20% equity position. The exception to this is finding properties where the defects are scary to retail buyers and therefore heavily discounted (sewers, termites, mold, foundations, etc). Or by cheaply adding additional living space or density. You won't usually find these problems/opportunities in condo's.Think of it this way: if the average retail buyer can easily get a sense of what it would take to make a property nice, it will sell for market value minus that cost.The BRRR strategy should work in any market in varying degrees, but you need to be looking at properties with more hidden potential or deeper discounts because of the defects.

Alex Franks · Answer

Never try to make the numbers work. That's the first mistake here . I always done things a bit out side the box. I would focus on 4 properties at a time. I would uses Hard Money, private money rehab , rent , sell 3 as turn key. Keeping the other almost free and clear. Even today, I do this with larger projects. I was a turnkey guy, using the capital to invest in Apartments. Just another way to look at things I know this is not the BRRR way they teach but in todays markets it not really realistic for most as the numbers don't add up. Reguardless if you are in Canada or USA .Alex

Justin R. · Answer

Pawan Johar I'm mostly a buy-and-hold guy and am in a very expensive market as well. I've never come close to getting all my capital out at refi, but I've gotten some of it. Conceptually, I'd still say that's BRRR... Except I have to keep putting in capital with each successive property. Maybe it's more accurate to talk about a "100% BRRR property" or a "50% BRRR property" or - heck - even a 120% BRRR property on the edge case.

Justin R. · Answer

Pawan Johar The BRRR thing practically works when you're able to buy at a big discount to market value AND are able to increase market value by more than your rehab costs AND can throw off free cash flow once it's rented. Not easy. Very, very hard to force enough appreciation solely through rehab to make it work unless you're talking about very low priced areas.

Roy N. · Answer

Pawan J.In Canada, unless you are purchasing an owner occupied property, conventional lenders will require a minimum downpayment of 20%. If there is enough meat on a deal - which there isn't in your example - a private lender may accept a higher LTV, perhaps in exchange for a piece of the profit in addition to the rental of her/his money.You are in a market where prices are crazy, but fortunately for the short term, so are rents. However, when you couple a frothy market with HOA fees, you are unlikely going to find a condominium that makes sense for a rehab and hold.

Pawan J. · Answer

@Mike D'Arrigo & @Austin Youmans perfect summaries as this is what my numbers were showing me. A little more difficult in an inflated market but on the bright side worst case I can pull 1/2 of that back out as refinance it still helps for the next one's deposit. In a higher priced market everything helps.@Scott Schultz if only there was such a thing as $30K houses even within 100km from here but I like your system and seems like it's working great.@William Hochstedler yes adding value is important. Updating cabinets, carpet, paint vanity etc, could add value (not like a house addition of course) and from what I see now if this reno also mixed with finding a deal to buy well below market value this will help to some extent.

Scott Schultz · Answer

Im doing the BRRR on a few right now, the Key is to buy WAY below AVR, for example, one i purchased for $26K with an AVR of 65K my total rehab cost will be about $2,500 so i will have $28,500 in it, with loan costs lets call it $30K my banker is doing a loan for 60% of BPO Value, (my request, they wanted to give men 80%, I dont need the money) so i will get $39K back out. th purchase and fixup was floated on a LOC, so there was no purchase mortgage. Another one i did was for a Line of Credit, I purchased for $32,200 with Cash, had to pay some back taxes and water bills,, the borrower stayed, and now rents from me, the BPO was $80K, my banker gave me a Line at $75% so $60K for me to procure with cash. its a fantastic system. Good Luck Out There!!!!

Austin Youmans · Answer

Not a good enough deal to BRRRR.Your maximum offer, assuming all expenses and holding costs were accounted for, would be 80%ARV - Rehab Costs. So (160k * 80%) - 15k = 113 k for a max offer.Although I am not sure I would do a condo unless there was more of an up side. Better check with the HOA to see if you could even rent it out.

Samuel Sedore · Answer

You are going to have a difficult time making those type of deals work in BC to begin with. Although I would also reccomend not using a phone app to analyze deals, spreadsheets are a little better. When looking for this type of deal you need a realtor who also invest, be ready to make offer sight unseen with minimal conditions. You're market is very very HOT right now@Alex Franks, good advice. Never try to force a deal, you will skip the important details and end up with a loss in most cases.