From the $245,000, you need to budget out $50,000 for the repairs you’ve calculated. That leaves you with $195,000 to offer the sellers.
Although the real estate market is often fickle, your offer is accepted. The owners weren’t prepared to do all they needed to do to get the house on the market, so this works well for them, too.
Your permanent initial purchase mortgage loan ends up with a payment of around $1,200 per month. You rent the property for $2,500 per month, giving you a healthy cash flow and one that will be sustainable with the higher refinance amount. (Most banks will want you to continue to cash flow after the refinance stage, as well as before it.).
The bank then allows you to refinance your mortgage for 80% of the value of the rehabbed property. The property’s value is now $350,000, which is exactly what you anticipated. So you’ve now successfully mortgaged the property for $280,000, repaying the $245,000 you put into it.
When it’s all over, you have an extra $35,000 in cash to use to invest in the next property (along with whatever cash from your pocket you put into the first one). Pretty neat trick!
Pros and cons to using the BRRRR method
There are pros and cons to anything, including the BRRRR method. Here are a few to consider.
Pros
- In a market where home values continue to climb, you can build both equity and cash quickly.
- Long-term renters will keep the mortgage covered, the home in good shape, and the utilities paid.
- You’ll know your rental properties inside and out.
Cons
- If market conditions deteriorate, you may not be able to “repeat,” and the cycle will end until the market recovers.
- Unexpected repairs or code compliance issues can wipe out a budget in no time flat, possibly forcing you to sell before you’ve finished the job.
- Choosing the wrong renters can mean added expenses simply from the wear and tear of people moving in and out too often, not to mention any actual damages.
The bottom line
The BRRRR method can be a clever way to build capital for a rental portfolio in a relatively short time frame, but it’s definitely not a get-rich-quick situation. You’ll need to commit a lot of thought and energy to the property you choose and what it will become.
But if you’re good at planning ahead, and you’ve got ample experience in home improvement -- or better yet, professional construction -- your very first BRRRR can open up a world of possibilities. Just remember that you absolutely must stick to the budget and choose good renters to keep the cycle alive. No banker will refinance a rental property that can’t pay for itself.
