January 20, 2025 | 2.5 Minute Read
Recently, an out-of-state investor approached me for guidance on employing the BRRRR strategy. BRRRR, which stands for Buy, Renovate, Rent, Refinance, and Repeat, is a popular method to build wealth in real estate.
The investor had gone under contract for a property priced at $75,000, planning $20,000 in renovations. He sought assistance securing a hard money loan through REIBrokers.com
To better understand the process, let’s break it down into the two primary loans involved:
HARD MONEY LOAN
This loan is used to finance the purchase and renovation of the property. Based on the borrower’s credit score and experience, lenders typically offer:
Up to 90% of the purchase price
100% of renovation costs
…as long as the total does not exceed 75% of the after-repair value (ARV).
For this project, with an appraised ARV of $140,000, the investor could borrow up to $105,000 (75% of ARV). This loan typically comes with:
Interest-only payments ranging from 9% to 12%
Loan terms of up to 1 year
3% in fees
Loan Breakdown:
Purchase: $67,500
Renovation: $20,000
Total Loan: $87,500
Estimated Costs Over 6 Months (10% Interest Rate):
Interest Payments: $87,500 x 10% = $4,375
3% Points: $2,625
Closing Costs (4%): $3,500
Holding Costs (2%): $1,750
Total Cost: $99,750
REFINANCE LOAN
Once the property is renovated and rented for $1,300/month, the investor can refinance into a long-term loan. Assuming a 30-year fixed loan at 7.25% with a loan-to-value (LTV) ratio of 75%, the investor would qualify for a $105,000 DSCR loan.
Loan Details:
Principal & Interest: $734.18/month
Taxes & Insurance: $300/month
Total Payment (PITI): $1,034.18/month
Refinancing Costs:
3% Points: $3,150
Closing Costs (4%): $4,200
At closing, the investor would:
Pay off the hard money loan: $87,500
Secure the new loan: $105,000
Receive $17,500 as cash out.
From the $17,500 cash out, the investor would apply $7,350 toward refinance closing costs, leaving a net of $10,150 in his pocket.
Total Investment:
Mortgage: $105,000
Closing Costs: $7,350
Total Investment: $112,350
Monthly Cash Flow Analysis:
With a gross rent of $1,300/month, the estimated cash flow would be:
Gross Rent: $1,300
Mortgage Payment (PITI): – $1,034.18
Property Management Fee (10%): – $130
Net Monthly Income: $135.82
Is it worth it?
The BRRRR strategy can yield positive outcomes if all projections hold. However, this investor’s success depends on several conditions:
Hitting ARV and Renovation Budgets: Unexpected costs or lower appraisals could derail the plan.
Securing a Tenant Quickly: Prolonged vacancies could create cash flow challenges.
Achieving Projected Rent: Falling short of $1,300/month could lead to negative cash flow.
Risks:
Market Downturns: A decline in property values may reduce refinance or resale options.
Cost Overruns: Renovation expenses exceeding $20,000 could diminish profitability.
Cash Flow Gaps: In a worst-case scenario, lower rents or increased expenses may force the investor to wait years for rent increases or property appreciation to recoup losses.
Alternative Exit Strategy:
If renting and refinancing becomes unfeasible, flipping the property may offer a viable alternative. With the property appraised at $140,000 and total hard money loan costs at $99,750, the investor has $40,000 in equity. After selling, they could net approximately $32,000 in profit, offering a strong fallback option.
The BRRRR strategy can be a powerful wealth-building tool but isn’t without its risks—especially in today’s environment with interest rates exceeding 7%. Careful planning, accurate projections, and contingency plans are essential to ensure profitability.
If you’re considering the BRRRR method, always run the numbers, evaluate multiple exit strategies, and be prepared for the unexpected.