Got a question about the brrrr strategy

[Hayden Prather]

So I dont think I’m thinking of this correct so I have a question for more experienced investors.

How would I determine what I could spend on a certain deal or how to find out if you can get all your money back or more?

Say there’s a deal for 80k

Your down payment of 25% equals 20k

You spend 35k cash on repairs

All in your at 55k of personal cash

ARv comes in at 120k so 75% of that is 90k

So that’d be your money back plus 35k?

I feel like I’m thinking of that wrong cause I rarely see anyone talking about that type of turnaround.

If anyone could bring more to my attention that’d be great!

Thanks

[Andrew Postell]

@Hayden Prather you are pretty close here. The above post is pretty good as well. Most of the time we work backwards from the ARV. Since the ARV is what most of our "acquisition loans" will be based on. So if your Hard Money Lender (HML) will lend 75% of the ARV, then that means your initial loan is $90,000. Basically your INITIAL out of pocket is $0.....but then you would need to come up with the remaining amounts out of your own pocket (and don't forget to factor in closing costs).

Let's assume for a moment that closing costs are $10k here for both the BUY and the REFINANCE steps of the BRRRR (I don't know if they will actually be that but it makes the math easier) so the scenario above means that you are buying a $120,000 home for $35,000 out of pocket and leaving 25% equity. Comparatively speaking, if you were to go buy a home off the MLS with a $120,000 purchase price with 25% down payment, that would be $40,000 out of pocket (25% down = $30k + $10k in closing costs).

So are you $5k better?  Yes, you are $5k better than a traditional buyer but this is NOT a deal.  In this scenario there is too much risk involved to just save $5k.  For example, what if your budget went over?  $5k is pretty thin.  Most of us would want to BUY & REHAB at 75% ARV...that way I don't come out of pocket very much at all. I mean, maybe I'm comfortable at 80%? That way I have enough of a buffer to counter act any risk involved. But ALSO I'm not coming out of pocket a HUGE amount....meaning, I am keeping enough money to do the REPEAT step of the BRRRR.

I hope all of that makes sense but feel free to ask anything else.  Thanks!