How to Analyze a Brrrr deal: Get Money Back

Introduction

For those unfamiliar with this approach, BRRRR stands for Buy, Rehab, Rent, Refinance, and Repeat—a proven investment strategy that involves purchasing a property below market value, rehabilitating it to increase its value substantially, and then renting it out before refinancing the property for more favorable terms.

However, analyzing a potential BRRRR deal can be complex and requires meticulous attention to detail. In this blog post we'll break down everything you need to know about evaluating BRRRR deals so that you can confidently take advantage of this powerful real estate investment method.

Key Takeaways

• The BRRRR method involves purchasing undervalued or distressed properties, rehabilitating them to increase their value, renting them out for cash flow, refinancing with a new loan based on the increased property value to recoup some of the initial investment costs and using this equity to invest in more properties.
• Key factors to consider when analyzing a BRRRR deal include the property location, type, ARV (after-repair value), rehab costs, and potential rental income and financing options.
• Verifying the ARV through comparative market analysis is crucial in ensuring profitability while identifying detailed rehab costs helps investors budget accordingly. Adequate reserves must be set aside for expected vacancies or repairs that may occur over time while financing options vary from traditional bank loans to private lending or crowdfunding. Strategic planning throughout each phase is essential in mitigating risks associated with leveraging these deals.
• Taking extra care when finding deals for Brrrr can lead to you adding money to your bank account on your refinance which allows you to scale faster.

Overview Of The BRRRR Method

The BRRRR Method, an acronym for Buy, Rehab, Rent, Refinance, and Repeat, has gained significant traction among real estate investors looking to build their portfolios efficiently.

A major advantage of the BRRRR approach is that it allows investors to scale quickly while minimizing their capital tied up in each deal. For example, suppose you acquire a distressed property at $100k with $20k needed in repairs; after rehabbing it successfully raises its ARV to $150k.

In this case, scenario where most banks allow refinancing up to 70-80% LTV (loan-to-value) ratio on investment properties can help an investor recuperate roughly $105-$120k which can be used for future deals—the funding cycle repeats itself.

Key Factors To Consider In A BRRRR Deal

When analyzing a BRRRR deal, it's crucial to consider the property location, type, ARV, rehab costs, potential rental income, and financing options. Learn how to break down these factors in the following step-by-step guide.

Property Location

Selecting the right property location is a crucial aspect of successfully analyzing a BRRRR deal. An ideal location should be in high demand, with easy access to transportation, shopping centers, and other essential amenities that will attract quality long-term tenants.

A strategic approach to identifying prime locations includes researching local real estate market trends and evaluating the potential for future property appreciation. Off-market properties are often preferred; they can offer discounted prices and less competition compared to listed properties.

Additionally, resources provided by experts like Investor's Edge can prove invaluable when it comes to selecting profitable locations for a BRRRR project.

Property Type

Selecting the right property type is a crucial aspect of successfully executing the BRRRR strategy. Since this investment approach revolves around purchasing undervalued or distressed properties, you should consider focusing on types that offer the best opportunities for growth and long-term cash flow generation.

For example, investors often target single-family homes in neighborhoods where renovations can significantly increase their value while also attracting reliable tenants who are willing to pay higher rents.

Additionally, some investors find success in transforming smaller multifamily properties into quality rental units with attractive amenities to appeal to potential renters.

Be sure to conduct thorough research on your target market and consider factors such as demand for specific property types and local rental rates before making a decision.

After-Repair Value (ARV)

After-Repair Value (ARV) is the estimated value of a property after it has undergone renovation and repairs. It's an essential factor to consider when analyzing a BRRR deal since it determines the potential return on investment for the investor.

To determine ARV, investors should compare the current market values of similar properties in the same area that have undergone comparable renovations. In addition, evaluating rental rates in similar properties will help calculate how much rental income can be generated from the refurbished property.

Understanding ARV is crucial since it influences financing options like loan-to-value ratios (LTV).

Rehab Costs

Rehab costs are a crucial aspect of analyzing a BRRRR deal. These costs can include anything from new flooring to updated plumbing and electrical systems, so it's important to itemize them and budget accordingly.

DealCheck's rehab cost section allows for detailed budgets that account for every aspect of the property's rehabilitation process, ensuring that investors aren't caught off guard by unforeseen expenses.

One effective strategy used by BRRR investors is using durable materials during the renovation process to account for wear and tear caused by tenants over time.

Potential Rental Income

One key factor to consider when analyzing a BRRR deal is the potential rental income. The monthly rent needs to be high enough to cover the mortgage, property taxes, insurance costs, and other expenses while still leaving room for profit.

Investors should research local rental rates by comparing their property to similar ones in the area.

For example, if an investor purchases a two-bedroom apartment that could potentially rent for $1,500 per month and their total monthly expenses (mortgage payment, taxes, insurance) are $1,200 per month they will have a positive cash flow of $300 each month before accounting for any additional expenses such as repairs or maintenance costs.

Investors should also keep in mind that vacancies can occur which would result in a temporary loss of rental income.

Financing Options

To execute a BRRRR deal, financing is crucial to acquire and rehab the property. There are several options available to investors in securing financing for their deals. Traditional bank loans, hard money lenders, private money lending and crowdfunding are all viable options.

While traditional bank loans often have more strict qualification criteria, they offer lower interest rates than hard money loans or private lenders. Hard money lenders can offer quick access to cash but at higher interest rates generally due within 6-12 months of loan origination.

The key is finding what works best for your situation while keeping costs under control by being comfortable with negotiations with the potential lender(s) you'll work with under these circumstances either directly or through partnership opportunities that could be available locally - this requires understanding how much leverage your current financial situation provides without making too many concessions against future returns while still meeting initial funding needs after purchase price considerations factoring in rehab expenses toward ARV requirements as outlined earlier in this guide.

Analyzing A BRRRR Deal: Step-by-Step Guide

To analyze a BRRRR deal, first gather due diligence data, verify the ARV and identify rehab costs before calculating purchase, sale, and holding costs.

Gathering Due Diligence Data

Before making any investment decision, it is important to conduct proper due diligence. This means gathering all the necessary information about a potential property and analyzing it thoroughly.

To start, you can import property data from public records or enter it manually into DealCheck's BRRRR calculator. From there, you can verify the after-repair value (ARV) and identify rehab costs by inspecting the property in person or hiring a professional inspector.

Additionally, researching the local real estate market can provide insight into potential rental income and appreciation rates of similar properties in the area.

It's also crucial to evaluate financing options and purchase and holding costs to ensure that your investment aligns with your financial goals.

Verifying The ARV

One of the key factors to consider when analyzing a BRRRR deal is the after-repair value (ARV) of the property. Simply put, ARV refers to how much the property will be worth after it has been fully rehabbed.

To verify ARV, you should conduct a comparative market analysis (CMA) by looking at recent sales of similar properties in the area. This will give you an idea of what buyers are willing to pay for renovated properties in that specific location.

Ultimately, accurately verifying ARV is essential for ensuring that your BRRRR project is profitable and successful in meeting your investment goals.

Identifying Rehab Costs

One of the crucial steps in analyzing a BRRRR deal is identifying rehab costs. This involves assessing the property's current condition, making a list of needed repairs and upgrades, and estimating the associated costs.

Rehab expenses can include everything from fixing broken appliances to major structural repairs such as roof replacement or foundation repair. It is essential to get accurate estimates for these costs before purchasing the property to ensure that you are not overpaying.

Investors can use tools like DealCheck, which allows them to input property information, including renovation costs, into customizable templates that generate detailed analyses including Cash Flow and Return on Investment (ROI) projections based on Repair Cost Estimation Expenses history within the system .

Calculating Purchase, Sale, And Holding Costs

One of the key factors when analyzing a BRRRR deal is calculating purchase, sale, and holding costs. These costs can have a significant impact on the overall profitability of the investment.

Purchase costs include expenses such as closing fees, inspections, and appraisals. Sale costs account for expenses such as real estate agent commissions and transfer taxes when selling the property.

It's important to properly estimate all of these costs to ensure that cash flow remains predictable throughout the investment lifecycle. It's also important to consider potential cost overrun scenarios by padding estimates with adequate reserves upfront.

Modeling BRRRR Financing

To successfully execute a BRRRR deal, investors must understand how to model financing options that will enable them to recoup initial investments and maximize returns. Financing options for BRRRR properties include conventional bank loans, local bank loans, private lenders, and hard money lenders.

Investors may also opt for no-money-down strategies such as seller financing or partnering with other investors.

With DealCheck's BRRR calculator tool, investors can easily model different scenarios to determine which financing option is the best fit for their investment strategy.

For example, an investor using a hard money loan may calculate higher interest rates compared to applying for an FHA Conventional Refinance or line of credit from a local bank.

Estimating Rental Property Income

To estimate rental property income, it's crucial to determine the potential rental value of a property through thorough market research.

Utilize websites such as Zillow and Redfin to gather data on comparable rentals in the area, taking into account factors such as location, size, amenities, and condition.

It's important to keep in mind that vacancy is inevitable when estimating rental property income. To factor this into your calculations, consider using a conservative estimate of 10-15% vacancy rate per year.

Additionally, don't forget to include other sources of income such as parking fees or laundry fees.

Evaluating Capital Expenditures (CapEx)

One key factor to consider in a BRRRR deal is evaluating capital expenditures (CapEx). These are major expenses required for the long-term maintenance and improvement of the property, such as a new roof or HVAC system.

Proper analysis of these expenses based on well-understood costs and lifespans of a home's major systems is important for proper capitalization. Failure to account for CapEx can lead to financial difficulties down the road.

For example, if an investor neglects to replace an aging roof that begins leaking, it could result in costly repairs and lost rental income. Therefore, it's essential for investors to estimate CapEx accurately and plan accordingly by setting aside reserves.

Reserves should be closer to 23% of receipts if the rental income is $750 per unit according to [IMPORTANT FACTS].

Key Performance Indicators And Metrics

Key performance indicators and metrics in real estate investment include cash flow, cash-on-cash return, and internal rate of return, which help investors assess the profitability of a BRRRR deal.

Cash Flow

Cash flow is one of the most critical factors when analyzing a BRRRR deal. The overall objective of any real estate investment is to generate long-term cash flow, making it crucial to consider this aspect in all stages of the investment process.

In evaluating potential returns on a BRRRR deal using DealCheck's calculator (found at dealcheck.io), investors can determine their monthly and yearly net cash flows based on these expenses as well as incoming rent.

For example: suppose an investor purchases a single-family home after rehabbing it for $100K with an ARV estimate of $200K. If they put down 20%, take out a hard money loan at 12% interest rate over six months ($80k financing), pay refinance closing costs at 2% ($4k) upon completion; assume total rehab costs are $50k ($30k borrowed from LoanMart at $500/monthly payment for five years); accounts for 6.5% sales commission; budgets for CapEx reserves like roofing repair or updating bathrooms; estimates monthly rental income of $1K with annual growth rate conservative at 2%; assumes mortgage payment T&I amounting to about $700 per month; Sets Vacancy Rate up to 3%.

Cash-on-Cash Return

Investors in real estate use various metrics to evaluate the profitability of their investment. One such metric is cash-on-cash return, which measures the annual cash flow from an investment property compared to the initial amount of cash invested.

For example, if an investor puts down $50,000 on a property and earns $10,000 annually in rental income after expenses, their cash-on-cash return would be 20%. This is a crucial metric because it helps investors assess whether they are earning enough returns on their invested capital.

An acceptable minimum rate of return based on the cost of capital is usually around 8%, but this can vary depending on the investor's goals and risk tolerance.

Internal Rate Of Return

One of the most critical metrics to consider when analyzing a BRRR deal is the Internal Rate of Return (IRR). IRR measures the potential profitability of an investment by calculating how much money an investor can expect to earn over time.

In other words, it's how fast your money grows. For example, if you invest $100 and receive $120 in return after one year, your IRR would be 20%.

Several factors contribute to calculating the IRR for a BRRR deal, including purchase price, rehab costs, rental income, operating expenses, and loan terms. The higher these numbers are relative to each other and compared to market expectations will affect the overall IRR.

Understanding these key performance indicators is essential in evaluating the performance of a BRRR deal and determining its potential success as a long-term wealth-building strategy.

Making The Deal Work: Strategies And Alternatives

Applying the 70% rule can help determine a maximum purchase price that allows for enough equity in the deal, while increasing rents and reducing expenses can also improve cash flow and returns.

Applying The 70% Rule

One popular strategy for analyzing a BRRRR deal is the 70% Rule, Following this rule an investor should pay no more than 70% of the after-repair value (ARV) minus repair costs for a property.

This rule helps ensure that investors can recoup their initial investment and make a profit when refinancing or selling the property. For example, if a property's ARV is $200,000 and it needs $30,000 in repairs, an investor using the 70% Rule would pay no more than $110,000 ($200,000 x 0.7 - $30,000) for the property.

Increasing Rents

One way to improve the performance of a BRRRR deal is to increase rents. This can be done by making improvements and offering amenities that will make the property more attractive to potential tenants.

Updating kitchens and bathrooms, adding extra bedrooms or storage space, or providing on-site laundry facilities are just a few examples of upgrades that could justify higher rental rates.

Conducting comparative market analysis (CMA) may also reveal what similar properties in the neighborhood are charging for rent, giving investors an idea of how much they can raise rents while still remaining competitive.

Reducing Expenses

Another way to make a BRRRR deal work is by reducing expenses. By lowering the operating costs of the rental property, investors can increase their cash flow and ROI.

For instance, investing in solar panels may cost more upfront but can significantly decrease electricity bills in the long run. Similarly, upgrading insulation and windows can reduce heating and cooling costs while making the property more comfortable for tenants.

In any case, reducing expenses requires careful management of day-to-day operations along with periodic reevaluation of CapEx projections over time.

Conclusion

Analyzing a BRRRR deal requires careful consideration of several key factors, including the property location, type, rehab costs, and potential rental income.

By following our step-by-step guide and utilizing DealCheck's powerful software, you can confidently evaluate your investment opportunity and make informed decisions that maximize long-term cash flow and returns on investment.

With the right strategies and alternative options at your disposal, you'll be able to successfully navigate the real estate market and achieve financial freedom through passive income.

FAQs:

1. What is a BRRRR deal and how does it work?

A BRRRR deal refers to buying, rehabbing, renting out, refinancing, and repeating. The goal is to purchase a distressed or undervalued property, renovate it to increase its value and rental potential, rent it out for cash flow, refinance the property to pull out most of the invested capital while keeping monthly expenses low by securing favorable loan terms through having long-term tenants in place. Then repeat the process.

2. How do I analyze if a BRRRR deal is worth pursuing?

When analyzing a BRRR deal look for properties that are under market value requiring little repairs that can be met with reasonable costs relative to post-repair value. Calculate potential revenue based on current market rents in your desired location or include up-to-date local real estate trends analysis from reliable sources.

3. Should I use hard money loans when financing my BRRR deals?

Hard money lending may be an option depending upon your creditworthiness and investment objectives if you cannot secure traditional bank mortgages due to high risk or lack of collaterals . They can offer quick access and flexible payment options but generally have higher interest rates than other forms of investing avenues like private investors might demand more equity concerns.

4.What key metrics should I consider before closing on a BRRR Deal?

Key metrics that should be considered when analyzing any based around ARV (After Repair Value), expected Cash Flow (income minus expenses), initial investment cost–which includes rehab cost plus acquisition price.) Other factors include projected vacancy rates in the area where you intend parking properties such as proximity schools/transportation/beach access etc; occupancy history; lease agreements length & opportunities available within neighborhood development plans over timeframes ranging between 5 – 10 years+