We always talk about “knowing your numbers.” But when it comes to BRRRR, what exactly do we mean? Here’s an example of an ideal BRRRR property using the 75% rule.
The 75% Rule
The BRRRR method is all about numbers. Beginners sometimes fail because they make a deal emotional and bid the property up. When buying properties, you have to stick to the math.
Your North Star for BRRRR investments is the 75% rule – the best properties only cost 75% of the after repair value.
The reason for the 75% rule is because that’s the number banks will rate-and-term refinance a conventional loan for. When you can do this type of refinance, you can finish up the deal without putting any of your own money in.
It’s smart to shop around for banks for your refinance loan, though. Some banks may allow you to buy up to 85% of the ARV, under certain conditions.
Example Breakdown of a BRRRR Deal
After repair value (ARV) is the number the house should sell for once it’s all fixed up and on the market. This number is often dictated by what similar properties in the area are going for.
To get the best long-term rates, you refinance with your second, permanent loan. In order for it to cover everything (i.e., you don’t have to put any money down), all your costs must be 75% or less of the ARV.
Purchase Price + Rehab + Carry Costs + Loan Closing Costs = 75% of ARV
Let’s say, for example, other properties in the area are selling for $200,000, so that’s your ARV. You want to spend 75% less than that, so we’ll do:
$200,000 X .75 = $150,000
When the ARV is $200,000, all costs of the job should be $150,000 or less. This includes the closing price, carry costs, rehab costs, and any loan costs.
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