BRRRR Strategy Acquisition Question

2 Replies

I am still a relatively new investor and I have been studying the BRRRR strategy and wanting to take action. The one question that keeps lingering in the back of my mind I have not been able to find anyone to discuss or explain this yet. My one question is, does the purchase price have an affect on how well this strategy works? The ability to pull your money back out after the refi is largely (or solely) dependent upon the forced equity you create. For example; If you need to force 20% equity on a 100k home VS forcing 20% on a 200k home that is a major difference. Now I know it all depends on the ARV. If you know you can get the ARV that you need and buy at the right price it theoretically shouldn't matter. My one major reason for asking is I have yet to see someone on BP (or elsewhere) use a BRRRR strategy on a property valued more than 150k? Typically I see it being used on properties from 10-80k in value (granted the ARV is 150k range). I hope this question makes sense and please feel free to share links if you have seen examples on BP or somewhere else of someone using the BRRRR strategy Thank you!

The main driver of a successful BRRRR is the refinance. Your cash flow is going to be based on your mortgage payment. If I buy a 3 bed home for $200k, put $20k into it, the ARV can be $225k or $500k, it doesn't matter. All that matters is your re-fi amount. The reason it doesn't work well with SFR at higher prices is because the rental price usually isn't enough to offset the mortgage payment. It can work on higher priced multi family properties because the total of the rents is usually higher.

Howdy @Joey Webb

I totally disagree with @Jason D. regarding the answer to your basic question "does the purchase price have an affect on how well this strategy works?". One of the primary objectives of the BRRRR strategy is to be able to pull 100% of your cash invested out in order to do it again. If the purchase price is too close to the ARV as in Jasons example (Purchase for $200K plus $20K Rehab and an ARV of $225) you would not be able to get any of your cash out. You would not even be able to payoff the short term loan used to acquire the property. To meet this objective you have to consider your All-in Costs (Purchase price, Rehab Cost, Holding and Closing costs). Refinance Lenders are going to provide you a loan amount that is 70 - 80% LTV based on a current appraisal. Typically it is 75%. So in order to get 100% of my All-in cost covered I do not want them to exceed 70% of the ARV to stay conservative. That means for $225 ARV my All-in cost cannot exceed $157,500. Subtract the Rehab Cost ($20K) and you are left with $137,500 to cover your offer/purchase price, Holding and Closing costs. Even with an 80% LTV that $180K which still does not cover you. So what do you think, does the purchase price affect if it works or not?

However, Jason is correct to mention the importance of Cash Flow after the Refi. After all if it doesn't cash flow then what is the point. In his example if you get the other end of the ARV ($500K) then we are talking and All-in max of $350K. A purchase price of $200K and $20K Rehab definitely fit within that max amount. Do I want to pull all the excess cash out? It depends on what effect it has on the cash flow. I would only pull out the max that still leaves me with good cash flow. If I cannot get decent cash flow then I might want to change strategies and flip the property for the profit instead.