FROM THE DESK OF Carrie Boyd

How many of you are like me and counted math class as your least favorite course in school? Thankfully, the math we use in real estate is basic and learned during our elementary school years. There are a few simple formulas for you to know, and once you learn those formulas, you will be able to analyze any property and decide if it makes sense for you to buy. The process is so easy that my 7th grader has learned how to evaluate properties, and you can, too!

Let’s apply this simple math to understand the BRRRR method we discussed in the last article. “BRRRR” stands for Buy, Rehab, Rent, Refinance, Repeat. BRRRR is great for small projects such as a single-family home or duplex. An investor starts off by paying cash for the property rather than financing it through a “fixer upper” bank loan, which allows for more equity withdrawal in less time to invest in other properties.

Consider Lisa, a mom who wants to make extra money each month through rental income while building equity to cash out for her daughter’s college expenses in 14 years. Lisa is willing to do an average amount of rehabilitation and pay no more than $100,000. At this time, there are 81 properties for sale that meet Lisa’s purchase amount limit in the Tallahassee metro area!

HERE IS THE MATH:

Purchase Price = $100,000/Rehab Costs =$ 15,000 (painting, appliances, fixtures, and flooring)

Total Costs = $115,000

Closing Costs = $0 (Seller Paid)

ARV = $150,000 (After Repair Value)/Monthly Rent (Market Rate) = $1,500

Four months after buying, Lisa found a lender who would lend on the rehabbed property for 75% of the ARV, or $112,500 ($150,000 x.75 = $112,500). This means Lisa can take out in cash 75% of the property’s new value.

HERE ARE THE NUMBERS: $112,500 - $4,000 Closing Costs for Loan = $108,500

Net Capital Recovered = $6,500 Down Payment/ Money Left in the Deal ($115,000 Total Costs$108,500 Net)

Monthly Mortgage Payment ($112,500 x 7% over 30 years) = $748

Monthly Tax (1% of the ARV = $150,000 x. 01 = ($1,500/12)) = $125

Monthly Insurance = $45

Property Management Fee (8% of $1500 rent = 0.08 x $1500) = $120

Total Monthly Expenses = $1038 (Total Monthly Profit = ($1500-$1038 = $462)

Return on Investment (ROI) = $462 x 12 = $5,544/$6,500 = 85% ROI (not including any other fees for simplicity)

Compare the BRRRR way to the traditional path of rehabbing a property where a fixer upper loan is obtained before the property is renovated. You can do the math on your own by following the steps above and using the same numbers with the addition of a down payment sum of 20% of the purchase price, which is typical if you don’t use the BRRRR method and until you develop a larger portfolio. Take a moment and try it!

If Lisa purchased the same property for $100k with the same closing and rehab costs, plus a standard 20% down payment included in the total costs (20% of $100k = 20k), you will see that the total costs including the down payment now equal $39k ($20k + $15k + $4k). A loan for $80,000 at a 7% interest rate over 30 years will have a monthly payment of $532. Adding the monthly payment plus the taxes, insurance, and management fees results in $822 per month of total expenses for a gross monthly profit of $678 ($1500 - $822). The final number is a 21% ROI ($678 x 12 = $8,136/$39,000). Again, this is simplified for explanation purposes and does not include other fees such as a homeowner’s association (HOA) fee, etc.

Using the BRRRR model allows you more than 4X your ROI on just this one project! An even better benefit is that your capital works harder for you and allows you to pull more of your funds sooner to invest in more projects faster. The BRRRR model is like a snowball for building your wealth and giving back to your community. It is truly the difference between acquiring one or two properties a year versus dozens, if desired.

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