1% rule in BRRRR - applies to ARV not purchase price, right?

[Angela Tod]

Hello BPers, long time reader, first time post-er :)

We are trying to refine our analysis and are getting a little confused.

Example:

Purchase Price $80,000

Rehab $40,000 (not seeing bids this low in reality...)

ARV $200,000

Refi 70% LTV = $140,000 pulled out

Assume 6% Closing Costs on the Refi (does this apply to the 140K Loan amount or the 200K property value?)

Assuming this applies to loan amount, closing costs = $8,400

140,000 loan amount - 8,400 closing costs = $131,600 pulled out

Pay back self: 131,600 - 80,000 - 40,000 = $11,600 "extra" to invest

^^^ Open to any/all feedback on the above

I know the 1% rule should be used simply as a quick way to filter whether a property is worth analyzing

In this example, we would want it to apply to the ARV, right? So we'd want to make sure it can rent for $2,000...

I can't see how it could apply to purchase price because that would mean only $800

Thank you in advance for your help!

[John Chong]

It would be roughly 1% of your ARV. You'll have a new PITIA at $140K and you'll want to make sure your rents can cover the 1.0x DSCR on your refi. If it doesn't, you'll have a lower leverage on your cash out or might need to bring cash to closing.

Just a quick check you'll be over 1.25x DSCR with $2,000 in rents. Even at $1,800 you should still be above 1.25x (depending on taxes, insurance, and FICO)

Closing cost would be on the new loan amount and not the ARV.

That's a good estimate on what to expect.