Can you really pay more for a BRRR over a flip?

[Kathleen Heine]

I keep hearing on the podcast that you can pay more for a BRRR property than a flipper can and I'm trying to understand this. I just closed on a foreclosure. The house is a 4/3 built in 2008 and only needs cosmetic work (10-20k), paid $224k. At most it could rent for $2100 but closer to $1800 is fair for the area. There's currently 3 houses in the neighborhood for lease (2 for $1800, 1 for $2100 similar sizes) and they've all been sitting for awhile. The ARV on this house is 340k. When I run the numbers with property taxes, repairs, cap ex etc brrring doesn't even seem like a possibility unless I leave a ton of money in it. Am I missing something?!? I appreciate any advise!

[Andrew Postell]

@Kathleen Heine this is a pretty complicated answer but if you can grasp these concepts then the BRRRR method will payoff in HUGE dividends. Now I couldn't tell if "doesn't even seem like a possibility" means getting cash flow or getting your money back so I'll tackle both.

1. Your "R"efinance Step - Knowing what your REFINANCE terms will be are CRITICALLY important to the BRRRR strategy. For example, if you are only prequalified for 75% of the After Repair Value (ARV) then that means anything you put into the property over 75% you come out of pocket. If you are prequalified for 80% of the ARV...that will give you 5% more to cover your out of pocket expenses. So on this property, if you are qualified for 75%, then 75% of $340,000 = $255,000. If you purchased for $224,000...then add your rehab of $20k...that equals $242,000. Add in your closing costs from your refinance and you should be pretty close to made whole on this transaction. All this being said, you should be PREQUALIFIED before making ANY offers. Now, you already purchased the property, so please go and get prequalified right away so you know if you can be made whole on your money you spent on the property. I hope you are following me on this. With any of these, feel free to ask questions.

2. Your "R"ent Step - I couldn't tell what market you bought your property in but I'll use the Dallas - Fort Worth market as an example. We try to follow the 1% rule in my market. Meaning, if you cannot receive 1% of the cost in rent....then you shouldn't buy the property. The reason for this is because the more the property is worth, the less rent you will receive proportionately to the value of the house. In other words, most properties with a ARV of $200,000 or more, won't cash flow. A $100,000 ARV house will likely rent for around $1100 in our market. A $400,000 home will rent for about $3,000 in our market. Do you see the % difference here? The percentage of the value is a sliding scale...and it slides downward the more the value of the home is. This is why we target properties below $200,000. And frankly, the lower the value the better they cash flow.

There's more to the BRRRR than those two steps but I think one of those, or maybe both, might be what you were speaking about. Feel free to ask anything additional. Thanks!