So many people in our company are having success using the BRRRR strategy in real estate investing to build and bring passive cash flow into their households. But what does the BRRRR strategy even mean? BRRRR is an acronym for Buy, Rehab, Rent, Refinance, and Repeat, and you apply this method to rental properties.
So what does the B in BRRRR Strategy stand for? B is for Buy at a discount. This is how you get your rental property portfolio rolling!
Today is the first of our five-week series going over each one of these initials. By decoding the BRRRR acronym step by step, we are going to teach you how to use this strategy in your own life to achieve your goals in real estate investing.
Buying houses at a discount to set up success
When you use the BRRRR method in your real estate investing, it allows you to scale your rental property portfolio by starting with a savvy property purchase. This first step is one of the most important things. All five steps build upon each other, but the key is to start by buying your investment property at a discount.
What does that mean, buy at a discount? Buying at discount will not only help ensure that your rehab is more financially viable, but it will also help you to make a profit at the end of the process. When we say “discount,” we don’t mean a few hundred or even a thousand dollars gets knocked off the initial listing price. In the BRRRR strategy, buying a house at a discount is figured with a formula.
How do you buy a rental property at a discount?
A good rule of thumb is to calculate your initial offer on the property with a special formula to keep you financially protected during the project. What you will need to know is:
- What is the ARV? This stands for After Repair Value. This means that when you have finished fixing up the property, there will be a specific, updated value associated with it. This value is determined by comparing it to the values and sales prices of surrounding houses in a similar style and size. “Pulling comps” in one area will help you use the smart buying formula.
- What work needs to be done? Assess what repairs will need to be done to get the property cash flowing. Check for things like refinishing the kitchen, replacing carpet with hard flooring, or even bigger repairs like updates to the roof or foundation. By identifying your repair to-do list you can start calculating a close approximation of the total cost of completing them. This is the other number you need to get a good deal at the beginning of this process.
To make sure you are buying deep—in other words, getting a great deal—take those two numbers and plug them into the formula (75% of ARV) – cost of repairs = MAO. Time to break down another acronym!
What is the MAO in real estate investing?
MAO stands for the Maximum Allowable Offer. This is the golden number you will need in order to successfully buy your rental property at a discount, because if you go over this number, it will be a lot easier to go over budget on the entire project. Even if you budget carefully, are thorough in pulling your comps, and detailed when assessing repairs, unexpected snags or construction costs could potentially add unforeseen costs that will prevent you from maximizing the BRRRR strategy to its full potential.
Let’s do an example. Say you want to invest in a rental property that comps suggest will sell for $100,000. If the ARV is $100,000, that’s minus the cost of repairs. So we have to take the repairs into account in order to make the purchase deal.
Say the cost of repairs is estimated and it turns out there will be $10,000 worth of repairs.
Going off of our formula here, you will have:
(75% ARV) – cost of repairs = MAO
(75% of $100,000) – $10,000 = MAO
$75,000 – $10,000 = $65,000
In this situation, your maximum allowable offer for buying the property to fix up and get cash flowing through rental will be $65,000. In this series will go more in depth with understanding and anticipating the cost of repairs, but today we want to stress that starting the BRRRR strategy by buying your rental property at or under your maximum allowable offer will truly be in your best interest in the long run.
The key to remember this is that you’re going to make your money when you BUY the property! Using this formula to find the sweet spot of %75 ARV and your MAO are important to understanding the BRRRR strategy and using it well!
Come back next week as we continue to decode each step of BRRRR! For further reading on using the BRRRR method to get you started on scaling your rental portfolio, click here.