When to apply the 1% and 50% rule to the BRRRR strategy

Question

Hey guys,

My name is Tomeikia. I am a new real estate investor in Kentucky! I’m looking over the BRRRR strategy, and I am wondering should I apply the 1% and 50% rules to the ARV prices instead of the actual purchase prices? Right now, I believe I am going to need that ARV rent to cover the ARV expenses.

Therefore, if I buy a home at $50,000 and according to the 1% rule rent should be $500 (yes, I am aware that purchase prices this low can also go by the 0.8% rule, which would be $400), but if I BRRRR this property to market value of $80,000. I should want to rent the place for $800, and I can see myself applying the 50% rule to $800 method rather than the $500, especially when it comes to covering the refinancing part of the property.

Am I making sense?

Joseph A. · Answer

Apply it to the ARV, but how much you pay for the property isn't what determines the amount of rent you will get. You should research what the market rent is in the area you are looking to purchase property.

Joseph Back · Answer

@Tomeikia Gray I believe I understand your question and agree that yes you want to be looking at how the number will shake out after you have fixed the property up. It doesn't matter as much how it is currently operating if your plans are to renovate the property extensively. I also will say that while the 50% and 1% rule are good short cuts when looking at a deal initially you want to make sure and drill down and lay out all of the numbers in detail as every property and city is different.

Andrew Postell · Answer

@Tomeikia Gray I can't speak for EVERY market here but generally speaking lower valued homes rent higher than 1%.  You can certainly check rental comps in your area to confirm this but generally speaking this is the case.  However, the maintenance ratio is also higher.  For example, replacing a ceiling fan is the same cost whether the house is worth $50k or $500k.  So replacing a $100 fan, is a higher PERCENTAGE of the home when it's valued at $50k.  So use a slightly higher expense ratio and your math should be a little more accurate when calculating cash flow.

Also, we usually target buying AND rehabbing a 75%.  Now this is mainly because a lot of refinance loans will refinance at 75% or 80%.  So if you buy at 50% and have to renovate an additional 40%...that's too much out of pocket.  So calculate your rehab costs and try to buy AND rehab at 75% and you should have great success. Thanks!

Eric Martin · Answer

Welcome, Tomeikia! I'm also learning about the BRRRR method and highly recommend David Greene's book. @Brandon Turner mentioned on the BiggerPockets real estate podcast that the 1% and 50% "rules" should be thought of as quick tests to determine if a deal is worth pursuing further. I wouldn't purchase a property solely because it meets either of these tests. I would also consider what percentage the purchase price + rehab cost is relative to the ARV and your cash-on-cash return after refinancing. The BRRRR calculator on here can help you dig deeper into the numbers once you feel a deal is worth further analysis.

When to apply the 1% and 50% rule to the BRRRR strategy

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