The Numbers Behind BRRRR: Seeking Infinite Returns

Infinite Returns

If you are not familiar with the BRRRR strategy, it stands for Buy Rehab Rent Refinance Repeat. The reason the BRRRR strategy is great for the buy and hold investor is simple: infinite returns. Infinite returns? What does that even mean? Returns on Investment, ROI, is commonly defined as the returns earned on your principal investment over one year.

Numbers that you may hear associated with ROI may be 10%, 15%, or something along those lines. If you are making those kinds of returns, then good for you. You are doing better than most and better than stock market average returns. I hate to break it to you though, those are rookie numbers.

So what happens if you get back your entire principal within the first year? That essentially means that your principal is zero as you have left zero dollars in the deal. But wait, according to the equation to calculate ROI you would have to divide by zero and you can’t do that! True, but we can take the limit of it as your principal approaches zero.

If this sort of equation is foreign to you, don’t stress about it. All this means is that as your principal approaches zero, your ROI increases without bounds (goes to infinity and beyond!). If you can get back your entire principal, then you can achieve infinite returns. Infinite is a whole lot bigger than ten or fifteen percent. The wonderful thing about infinite returns is that once you pull out your principal, you can then use it to buy another investment, and another, and another, and so on. That is the beauty of BRRRR.

Maximum Purchase Price for BRRRR

Now that we see the benefits of BRRRR and infinite returns let’s take a look at how much we should pay for a property to achieve these wonderful benefits. An inequality that is commonly seen on BP for the purchasing of flip properties is:

Since BRRRR is basically a flip and hold let’s see how this works for us. If we have guessed our ARV (After Repair Value) and Repair costs correctly, then when we refinance we can pull out 75% of the ARV. Immediately after refinancing we will pay ourselves back for the repair costs and the 70% of the ARV. This leaves us with an additional 5% of the ARV in addition to our principal! Now don’t get too excited about that just yet. Keep in mind that while you renovate there are holding costs such as taxes, utilities, HOA fees, etc. In addition to that there are closing costs and if you used hard money or private money to fund the principal investment then there are fees associated with that as well! This can quickly eat up and exceed that 5%. I would suggest a slightly more accurate inequality to help us determine our purchase price.

If you can keep your holding, closing, and money costs below 5% of the ARV then the common 70% ARV - Repairs may work for you, but if you use hard money you will have to look for a better deal to achieve infinite returns.

How to Cashflow

Infinite returns is great, but unless you can support an infinite number of these investments, it can be unsustainable. To ensure you can keep buying them they must cashflow. As you may have noticed in the inequalities above, cashflow is not accounted for. Just because you purchased a property at a low enough price to pull out your principal upon refinance doesn’t mean it will cashflow! The equation for cashflow is simple:

Ideally you purchased a property in an area that has a high rent-to-value ratio. For example a property that is valued at $100,000 and rents for $2,000/month has a rent-to-value of 2%. This is very likely to cashflow. But what if the area you are buying in doesn’t meet that. What if it is the more common 1% rent-to-value? That is harder to make cashflow, especially if you are calculating property management into your expenses (which you should be). You’re not out of luck yet. There are a few techniques to force cashflow.

To force cashflow you can:

• Give up on infinite returns and leave more capital in the deal as equity lowering your mortgage thereby lowering your expenses.
• Increase the income by raising rents, keep in mind this may increase your vacancy costs and actually decrease your cashflow over time.
• Pay less for the property and leave more money in the deal upon refinance as long as you still pull out all of your capital. This is probably the best way to force cashflow if the rent-to-value ratio is too low.
• Invest somewhere else that has a higher rent-to-value ratio.

Let’s take a closer look at this third point because, let’s be honest, you don’t want to do the first two. If you pay $10,000 less for the property and when you refinance you pull out $10,000 less then you still achieve infinite returns. By pulling out less cash in the refinance, your mortgage will be lower and as such your expenses will be lower and your cashflow will be higher. A nice bonus with this technique is that you will end up with an additional $10,000 in equity! Now all you have to do is negotiate that $10,000 off of your purchase price. I didn’t say it would be easy! Let’s look at an example so we can see this a little more clearly. Please keep in mind that this example will use numbers that emphasize the point and may not match a real life deal.

We want to purchase a property that has an ARV of $100,000 and will take $20,000 in repairs. Keeping it simple we will use the flip purchase price inequality above.

This property sits at the 1% rule and rents for $1000/month. We want to refinance $75K at 4.5% which gives us a monthly P&I (Principal & Interest) of about $380.

Oh no! We have negative cashflow! Let’s see if we can force some cashflow by adjusting just two numbers: purchase price and refinance loan amount. Since we are really good negotiators we manage to get $15K off the purchase price. We will also decrease our refinance loan amount by $15K.

We will now refinance $60K at 4.5% which gives us a monthly P&I of about $304.

After re-negotiating this deal we have a positive cashflow of $29/month! Now this may not be a lot, but this example shows how cashflow can be forced while maintaining infinite returns. Negotiating or finding a deal this good may not work for you, and that is okay. You just may need to look in a new location for your future deals.

Velocity of Money

Once we have mastered infinite returns we can start focusing on the velocity of money. This is where title seasoning and rehab timelines come into play. Now that we know we can get all of our principal out of a deal the next largest factor in growing our wealth becomes how quickly we can do these deals. If you can rehab a property within 3 months and you have a bank that has a 3 month title seasoning period, then you can do twice as many deals in the same amount of time as if you took 6 months for rehab and had to wait 6 months for title seasoning. This topic is a blogpost in and of itself so I won’t go any deeper into it. Just look forward to finding ways to accelerate the velocity of your money.

In Summary

If you buy a property with a traditional mortgage and 20% down, then you have to wait until you’ve saved up another 20% down payment to purchase another property. If you use BRRRR you can buy another as soon as you’ve refinanced. Your new limited reactant is no longer how long it takes you to save up a down payment, it is now how quickly you can refinance. Of course, while you are doing this you can save up for another down payment and do multiple BRRRRs at a time. Now that’s some wealth building!