The Perfect BRRRR Doesn't Exist
For those who are unaware, the BRRRR strategy is a five step process to purchase a rental property. The steps are Buy, Rehab, Rent, Refinance, and Repeat. The BRRRR strategy has gained a great deal of traction because in theory, the same dollar can be recycled from deal to deal. It has also been a common talking point on the BiggerPockets forums and podcasts. David Greene even wrote an entire book on it!
Clickbait title aside, the “perfect” BRRRR is possible. However, these perfect properties are rarely on the market. So is the BRRRR strategy just a pipe dream?
I want to highlight where this strategy can be tough to execute and propose a new way to view each BRRRR deal you analyze.
The first challenge, and possibly the toughest, comes with the first step of BRRRR: buy. A common saying in real estate investing is, “You make your money when you buy, not when you sell.” This means that your purchase price is the main factor that determines your profit later on. In the case of the BRRRR strategy, I have found that to be very true.
When I find a potential BRRRR property, I use the below calculation to determine whether or not it’s a good deal:
After Repair Value * .75 - Estimated Refi Closing Costs - Estimated Rehab Cost = Purchase Price
ARV, Estimated Refi Closing Costs, and Estimated Rehab costs can be obtained from a Realtor, Lender, and Contractor, respectively! Having your estimates come in as accurate as possible is essential to buying a good BRRRR!! If your estimates are accurate, the equation above can be used to find your ideal purchase price!
If you find a good BRRRR and were able to purchase it for your ideal price, congratulations! You’ve completed the most difficult step of the BRRRR process.
However, if the seller’s price is a little higher than you wanted, don’t write the deal off yet! I will show you how to figure out whether or not the deal is still good!
The next step, rehab, also presents its own unique challenges. The accuracy of estimated rehab costs, in my experience, can be reliant on your scope of work. The larger the scope, the more possibility there is for projects to go over budget! In almost every property I’ve purchased so far, my renovation budget has gone over. I’ve had deals come in close to my budget and others that have completely blown the budget out of the water.
While these may sound like scary scenarios, I challenge you to start viewing BRRRR deals in a different light.
With the “perfect” BRRRR deal, you will be able to pull out every dollar that you put into it after the refinance step. When your purchase price is higher than ideal, your rehab estimate comes in high, or renovation costs go over, it may not be possible for you to get every dollar back out, but this doesn’t mean your deal is a “fail” or even a bad deal at all! It’s okay to leave money in a property after you refinance it. In fact, I go into new deals expecting to leave a little chunk of change in a BRRRR.
If I know before I purchase a property that the costs may exceed my budget, I figure out my Cash on Cash return to determine whether or not I still want the deal. BiggerPockets has a calculator that can figure out your CoC return. You plug in your numbers and it’ll give you your ROI percentage on the cash you left in a deal after refinancing.
If the purchase price and rehab estimates come in on budget, but unforeseen issues arise during rehab that make you go over the estimated costs, recalculate your CoC so you can reassure yourself you still found a good deal!
Every investor has a different CoC Return number in their mind on what constitutes a good BRRRR. You obviously want your return on investment to be as high as possible. However, if my CoC return comes back at 15%, I still consider it a good deal. If you invested your money elsewhere, your ROI will probably be more around the 8-12% mark and, on top of that, you won’t have equity in a home that could provide you with a myriad of benefits down the road.
I hope that this post took a little pressure off of you to find the "perfect" BRRRR deal. They're incredibly difficult to find and that's okay! The BRRRR strategy provides a secure, low cost, low risk investment method to help grow your portfolio. I'm using the BRRRR strategy on a majority of my own properties and I stand by it.
If you aren't finding your "perfect" BRRRR deals, try to shift your thinking and adjust your calculations a bit. You may find a lot of great, "base hit" deals that you otherwise would have missed out on waiting for the "home run!