1% rule on a BRRRR?

Question

Looking to do my first out if state BRRRR in the next month. I was just wondering if the 1% rule still applies to a BRRRR deal? I understand I will be buying the property cash and then fixing it up to then refi and cash out. Example, I buy a property for 60k put 30k into it and have it be worth 120k but when I go to refi the deal and get a mortgage in 120k in my market that house will not rent for $1200 a month ( 1% ). Can someone please explain this to me? Thank you

Sean Harris · Answer

Thanks for the reply Aj that makes sense. As far as buying the property goes, knowing this will be an all cash offer I understand you will most likely wave all contingencys such as an appraisal, inspection ect. But before you place an offer on a house is it a typical practice to have a contractor go in and give you a bid on the rehab cost or after you secure the property? Seems like it would be wise to get an estimate on the rehab before purchasing so you could get close to that 75% of the ARV to pull your capital out. Thoughts?

Aaron W. · Answer

@Sean Harris Excited to hear you are working on your first BRRRR!

A BRRRR is just a modified buy and hold strategy, so when running the numbers you want to ensure your stabilized numbers still meet your investment criteria including the 1% rule.

More importantly, your post-refi rent needs to cover ALL your expenses plus your targeted cash flow and returns. This may not be equal to the 1% rule as the 1% rule is just a "rule of thumb" to target in order to ensure your property is cash flowing. Your BRRRR'd property rent may not need to actually need to be at 1% of the ARV to cash flow.

Hopefully this is helpful information.

Good luck!