BRRRR - Understanding the Math

[Eric Gamble]

I have seen a number of post where members would like to undrstand why & how the BRRRR Strategy works. Below, I attempt to walk through the logic of How & Why (this is my approach - keep in mind with math you do not have to use the same order to get the same result - BRRRR is about a result, "the REPEAT result."

1) I start with the rent I can get without stretching, let's say it is $1,000 for a SFR.

* SFR Assumptions:

      - Insurance/mo: $50

     - Taxes/mo: $150

     - Property Mgmt/mo @10%: $100 (this is dependent of mgmt company and services provided)

     - Vacancy/mo @ 5%: $50 (this is dependent on the neighborhood and price)

     - Cap Ex/mo @ 10%: $100 (this is dependent on the age and condition of property)

     ## $450.00/mo in owner expense

     - all utilities paid by tenant

     ** $1,000 - $50 - 150 - 100 - 50 - 100 = $550.00/mo (available for desired profit and debt service [paying loan])

2) Now that I know how much I am working with for NOI target and paying a mortgage, I subtract my desired profit per month. So, let's say I want to profit $150.00/mo per unit, I subtract this amount from the amount available for profit and debt service.

   * Amount available for debt service: $550.00/mo

   * Desired monthly profit: $150.00/mo

     ** $550.00 - $150.00 = $400.00/mo ( this $400.00 is what I can afford for a mortgage and cover the loan's monthly principal & interest (P&I)

    !!!! At this point a little deeper understanding is required because we need too understand what the present value of $400/mo, at a given interest, for a certain amount of time will limit our purchase price to !!!!

     >>>> OR you can just use one of the many online mortgage calculator that will tell you how much you can afford <<<<

3) A 30-year mortgage with an interest of 5.25% will allow me to afford a property purchase price of $72,250.00 (P&I monthly payment of approximately $398.13)

   * Use the BP Mortgage Calculator to see various results *

   * This $72,250.00 needs to be your ALL IN Budget (Purchase, Repairs, Fixed and Variable Costs until refi)

   *Remember, the goal of the BRRRR strategy is to refinance the property and repay all initial capital sources (hard money, private money, and/or your money) using a traditional financing source with lower interest rates.

   Now go:

   * BUY a property,

   * REHAB the property,

   * RENT the property, and

   * Keep all money into the project at or below $72,250

4) To be able to refi this property @ $72,250 the following would need to be true:

     - The ALL IN CASH would need to be $72,250 or lower,

     - The property will need to appraise @ $96,333.33 or higher ( $72,250 / 0.75 = $96,333.33 ) this assumes that the refinancing company will refinance 75%.  If they only do cash-out refi @ 70% divide by 0.7, @ 60% divide by 0.6, and so on...

5) So, let's say you are ALL IN with HML and Partner money @ $67,925.00 and you find a cash-out refi @ 75%, it might play out as follows:

     - 75% Cash-out Refi: $72,250 (based on an appraisal of $96,333.33)

- HML payoff: $57,800 <-- This is your property purchase amount

     - PM Partner: $10,125 <-- This is the money you and/or your partner brought to the deal

     **  ALL IN COST - Refi Amount = Money Left In the Deal ( you want this number to be zero (0) or less than zero ( a negative number )

     ** $67,925.00 - $72,250.00 = -$4,325 (yes, negative $4,325.00 - which means at the closing of the refi, you received a check in the amount of $4,325.00)

6) So now let's review what we done so far Buy->Rehab->Rent->Refi is done:

     - Bought property: $57,800

     - Rehab & Carrying: $10,125

     - Tenant on lease for $1,000/mo

     - Refi: $72,250 (mortgage P&I of $398.13/mo)

     - Taxes & Insurance were captured in the assumptions @ $200.00/mo

     - Other expenses captured in the assumptions @ $250.00/mo

- HML and Partner repaid (they are happy :) )

     - You receive $150.00 cashflow/mo

AND

     - You have an extra $4,325.00 from closing the refi (To Do It All Again!)

Hope this helps your understanding.
-EMG

[Brandon Sturgill]

@Eric Gamble It's nothing personal really...I just have issue with the topic in general...BP starting promoting this term through Brandon Turner and it's killing inexperienced investors...they think, hey "I'll just BRRRR my way to 100-units"

And then I'm fielding calls from a first time BRRRR investor saying "****, my appraisal didn't come back at what I thought"...or they forget about seasoning...or that a conventional lender won't lend to an LLC...and they are busted...out of steam and no more deals for years...just want to shed some light on potential shortcomings of this strategy.

Take care.