BRRRR Calculator
One of the most used models among the real estate investors is the BRRRR method, which is an acronym for Buy, Rehab, Rent, Refinance, and Repeat. A BRRRR calculator can simplify the generally dull work of analytical calculations and ensure investors estimate the efficiency of their investment real estate. In this blog post, the user will be in a position to understand what a BRRRR calculator is, how it works and its importance when investing in properties.
What is the BRRRR Method?
The BRRRR method is a real estate investment strategy that involves five key steps:
- Buy: Purchase a distressed property below market value.
- Rehab: Renovate the property to increase its value and make it rentable.
- Rent: Lease the property to tenants to generate rental income.
- Refinance: Refinance the property to pull out the increased equity, typically through a cash-out refinance.
- Repeat: Use the cash-out funds to purchase another distressed property and repeat the process.
This method allows investors to build a portfolio of rental properties using the same initial capital repeatedly.
What is a BRRRR Calculator?
A BRRRR calculator is an online tool that enables an investor to determine how profitable a BRRRR investment would be financially. Depending on the input of different financial ratios, it is possible to find out the profitability of the investment activity.
How Does a BRRRR Calculator Work?
A BRRRR calculator typically requires the following inputs:
- Purchase Price: The price actually paid for the property i.e. the price agreed between the buyer and the seller.
- Rehab Costs: The total cost that was incurred in the renovation project of the property in question.
- After Repair Value (ARV): The value of the property in the market when all the refurbishment has been done.
- Loan Amount: The credit that has been secured with reference to the property.
- Interest Rate: The interest charged for the agreed period of borrowing usually expressed as the annual percentage rate on the total amount borrowed.
- Monthly Rent: This is the income got from the process of leasing the property for a specific period of time.
- Operating Expenses: The fixed costs that are incurred periodically for instance, monthly expenses including property management, maintenance, taxes and insurance.
- Refinance Details: The conditions under which a new refinancing loan with a certain loan to value ratio and at a certain amount.
Based on these inputs, the calculator will provide various outputs, including:
- Total Investment: The total expenses required for the purchase of the property plus the cost of rehabilitating the property if any.
- Monthly Cash Flow: The idea behind calculating the gross income derived from the rental income in relation to operating expenses.
- Cash-on-Cash Return: The actual cash invested hence, the return on the actual cash invested.
- Refinance Proceeds: The cash balances withdrawn on the course of refinancing.
- ROI (Return on Investment): The absolute amount of money that would be got in the end for the investors in terms of profitability of the investment.
Benefits of Using a BRRRR Calculator
- Financial Clarity: Offers a precise look at the monetary side of a BRRRR property to enable the investors get to make good decision.
- Risk Assessment: It has the advantage of revealing possible risks by pointing out the flows and expenses required for it.
- Comparison Tool: Facilitates application the different properties and investment profile in order to select the most appropriate investment plan.
- Efficiency: Cuts down the amount of time spent doing complex arithmetic, thus giving the investors sufficient time to search and manage properties.
Key Considerations
When using a BRRRR calculator, keep the following in mind:
- Accurate Data: To have accurate and detailed results always input valid data.
- Market Research: Carry out proper market research so as to arrive at proper estimates of ARV and rental income.
- Contingency Planning: Factor in a reserve for an additional cost of rehab or in the likelihood of units being vacant most of the time.
Practical Example
Let’s for instance use an example of an investor buying a building at $100,000 after incurring $30,000 for building repairs. According to the current market rate of the property, the average rental value is $1,500 and the after repair value is $200,000. The investor obtains a loan at 4 percent interest rate. Plug the above variables into a BRRRR calculator and the investor is able to generate the monthly cash flow, the cash on cash return, and from the proceeds from refinancing.