In real estate investing, the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat) has gained significant popularity for its strategic approach to building wealth. Within this method lies a crucial concept known as the “75% Rule.” This rule is essential for investors looking to maximize their returns while minimizing risks. In this post, we’ll delve into what the 75% rule is, how it works, and why it’s a vital part of the BRRRR strategy.
What is the BRRRR Method?
Before we explore the 75% rule, let’s quickly recap the BRRRR method. This strategy involves:
- Buying a property that needs work.
- Rehabilitating the property to boost its value.
- Renting out the property to tenants.
- Refinancing the property to extract equity.
- Repeating the process with another property.
The 75% Rule Explained:
The 75% rule is a guideline used during the refinancing stage of the BRRRR method. It refers to the practice of refinancing a property based on 75% of its after-repair value (ARV). Here’s how it works:
Determining the ARV (After-Repair Value)
- The ARV represents the estimated market value of the property after all renovations and upgrades are completed.
- It’s a projection based on comparable market analysis, considering similar properties in the area that have been recently sold.
Calculating 75% of the ARV
- This step involves multiplying the ARV by 75%.
- The resulting figure is crucial as it represents the maximum loan amount that lenders are typically comfortable refinancing, as most conventional banks prefer to refinance up to 75% of a property’s appraised valueāāāā.
Ensuring Total Investment is Within the 75% Threshold:
- Your total investment includes the initial purchase price of the property plus all rehabilitation costs.
- The objective is to keep this sum below or equal to the calculated 75% of ARV.
- Adhering to this rule potentially allows you to extract most, if not all, of your initial investment during the refinancing stage. This strategy makes the BRRRR approach sustainable for long-term property investment and portfolio growthāā.
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Why the 75% Rule is Crucial
- Risk Mitigation: It ensures that you’re not over-leveraging the property, which can be critical in a market downturn.
- Cash-Out Refinance: If done correctly, this rule allows investors to extract most, if not all, of their initial investment, making the method sustainable for long-term growth.
- Lenderās Comfort: Most lenders are comfortable lending up to 75% of the ARV, making it a standard practice in the industry.
Example
Letās say you buy a property for $100,000 and spend $50,000 on renovations. The ARV of the property is $200,000.
- 75% of $200,000 is $150,000.
- If your total investment (purchase + rehab) is $150,000 or less, you can refinance to get most of your money back.
Learn more about the BRRRR method
Additional Considerations:
Market Variability
The success of this approach depends on accurate ARV assessment and market conditions. If the actual ARV is lower than estimated, you might not recoup your entire investment.
Lender Specifics
Different lenders have varying policies. While many follow the 75% rule, some might offer different terms, impacting your refinancing options and outcomes.
Hidden Costs
Always account for additional costs like closing costs, carrying costs, and unexpected renovation expenses, as these can affect your total investment and the efficacy of the 75% rule.
Conclusion
The 75% rule is a cornerstone of the BRRRR strategy, providing a clear financial framework for investors. By adhering to this rule, investors can make informed decisions that align with their financial goals and risk tolerance. As with any investment strategy, it’s crucial to do thorough research and possibly consult with a financial advisor to ensure that your investments align with your long-term objectives.
Resources
To learn more about the 75% rule in BRRRR (Buy, Rehab, Rent, Refinance, Repeat) investing, here are some valuable resources:
REtipster provides a comprehensive guide on the BRRRR strategy, including insights into the 75% rule, refinancing aspects, and practical examples of BRRRR deals. This source is particularly helpful for understanding the step-by-step process of BRRRR and the financial intricacies involved. Visit their guide here.
Call Porter offers a beginner-friendly explanation of the BRRRR method, detailing how to find deals, estimate rehab costs, manage rental properties, and navigate the refinancing stage. It’s a great resource for newcomers to real estate investing who need a clear breakdown of each step in the BRRRR process. Learn more from Call Porter here.
REISift presents a detailed guide on the BRRRR real estate investing method. This source is particularly useful for understanding the steps involved in the BRRRR process, including buying, rehabbing, renting, refinancing, and repeating. They also offer tools and strategies for finding good deals and securing funds. Check out their complete guide here.
Hard Money Mike delves into the specifics of the 75% rule in BRRRR investing. This blog post provides a practical example of a BRRRR deal and explains the importance of sticking to the 75% rule for successful investing. It’s a great resource for understanding the financial calculations and considerations in BRRRR investing. Read more from Hard Money Mike here.
These resources cover various aspects of the BRRRR strategy and the 75% rule, from basic explanations to in-depth analyses and practical examples. They should give you a well-rounded understanding of this investment strategy.
Take your real estate investing to new heights withĀ Oambase, our advanced property investment analysis software. Streamline your deal analysis, access comprehensive market data, and make informed, profitable decisions with ease.Ā Start your journey towards smarter investing today!
