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