BRRR Analysis Formula

[Brian Stieler]

I'm educating myself on how to properly analyze a BRRR property, and think I have the correct formula put together. Would you mind reviewing and let me know if I'm correct?

To Determine Purchase Price:

([After Repair Value] x .7) - [Repair Costs] - [Hard Money Costs] - [Estimated Purchase Price Closing Costs] - [Refinance Closing Costs] - ([Monthly Taxes & Insurance] x [Months loan held]) ≥ Purchase Price

Variables:

• [Hard Money Costs] = (((([Percentage] x [ARV]) / 12) x Months Held) + [Early Repayment Penalty*]) + ((([ARV] x [LTV Percentage]) + [Repair Costs**]) x [Points])
• [ Estimated Purchase Price Closing Costs] = [Estimated Purchase Price] x [Closing Cost Percentage {Usually 6-8%}]
• [Refinance Closing Costs] = [ARV] x [Closing Cost Percentage {Usually 6-8%}]
• [Monthly Taxes & Insurance] = Typically ~$100

Example:

• [Months Held] = 6mo
• [Hard Money Costs] = (((([12%] x [$100,000]) / 12mo) x 6mo) + [$500*]) + ((([$100,000] x [70%]) + [$20,000**]) x [3%]) = $9200
• [Purchase Price Closing Costs] = [$70,000] x [8%] = $5600
• [Refinance Closing Costs] = [$100,000] x [8%] = $8000

([$100,000] x .7) - $20,000 - $9200 - $5600 - $8000 - ($100 x 6mo) ≥ $26,600

Purchase Price = $26,600

Results:

I'll need to find a house that has an ARV of $100,000, but only pay $26,600. To help lower my overall expenses, I could look to reduce my hard money costs, shorten my hold time, and/or reduce my closing costs.

Does my math check out?

[John Leavelle]

Howdy @Brian Stieler

Agree with @Christopher Phillips you are making it too complicated.  

The first thing you do is get good comps to establish a solid ARV. Then apply the 70% rule to determine your all-in cost target. All-in costs are Purchase price, Rehab costs, Closing and Holding costs.

You incorrectly show a Hard Money loan for $100,000. That is your stated ARV. The loan should cover the Purchase price and possibly the Rehab costs. The HML costs would be points up front (example: 4% at closing) and interest only payments during the Holding period. The balance would be due at the end of the 12 month term in a balloon payment.

So based on a $100,000 ARV your All-in costs need to be $70,000 or less to payoff the HML and get all your cash back at the refinancing . I suspect the HML for the Purchase price and Rehab costs would be closer to $50,000 - $60,000. Closing and Holding costs might be $10,000 - $15,000. Of course this is all hypothetical overview.

There are three critical things I find that are necessary to complete a good BRRRR strategy.

1. Establish a solid ARV. If the Refi appraisal is way off from your ARV then you may not get any Cash back.

2. Get pre-qualified for the Refinance loan before purchasing a property. This speeds the process up. Helps you to do your Cash Flow analysis. And demonstrates to the HML you will be able to pay off the loan.

3.  Ensure the property will meet your Cash Flow criteria after the Refinancing.  If it doesn't then what's the point.