Working out the numbers on your BRRRR strategy property is slightly more involved than your standard Buy and Hold rental property.
With a couple of extra steps, you’ll be able to understand your return and ultimately, the value as an investment.
We’ll be looking at the effect of each phase on both the income/expense sheet as well as the asset sheet. The reason we want to pay attention to this is that it will help you understand the cash flows of each section.
Note: If you’d like to read more about timing your cash flows, here is a post I wrote on cash flow.
At the end of this blog post, I’ll go over my BRRRR strategy worksheet to showcase numbers, and how to set up your financial model. One interesting part of the worksheet is that you can set it up to analyze borrowed down payment.
Let’s work through the calculations for each phase:
The buy phase is roughly the same as buying any other investment property from a cost perspective. The main expenses when buying an investment property include:
This tax depends on which province you’re in. In BC we have Property Transfer Tax. You can learn more about PTT in BC here.
Note, some lenders may cover this or do an internal appraisal.
Your name and new mortgage (if applicable) will need to be registered on the land title
Getting an inspection is a must. It can also help you fully understand what upgrades will be required for Phase 2.
You may need to pay a loan origination fee depending on which mortgage product you select. Many private lenders or hard money lenders charge the origination fee.
The next phase is the phase where you start renovating the investment property. So far, this investment strategy is identical to completing a fix and flip. There are 2 main categories of expense: carrying cost and renovation cost.
This is an often forgotten piece. During the renovation, it’s unlikely you will have any rental income. Thus, you will need to make sure you have enough cash / liquidity to cover the mortgage payments.
Don’t forget, you now own a property. The standard carrying costs will still need to be paid. These will be with you through the rest of the investment.
This is where there is a huge variety in cost for the BRRRR strategy. It’s also where the investment strategy is made or broken.
You can either do the work yourself, have a professional do the work, or some combination of the two.
One suggestion I have is get this book by Bigger Pockets that goes over everything you need to know about Flips.
Refinancing is the piece that makes the BRRRR different from fix and flips. There are a few hidden costs to this phase.
Usually you find out through experience.
And not a good experience!
That’s really the reason I wrote this post – I wanted to make sure you know they exist!
Depending on the lender and the loan product you used to buy the BRRRR strategy, you may have to pay a breaking penalty to restructure your mortgage. It’s very important to your success to select the optimal mortgage product for this strategy.
Depending on which lender or product you use, there may be a fee to originate the mortgage.
There wil be a new appraisal done to confirm the increased property value.
This is very important to get right.
In some cases, it can be helpful to have comparable properties. You may need to be ready in case you need to negotiate with the appraiser.
The mortgage charges will need to be changed at the land title office again. This involves a lawyer or notary to convey the mortgage.
Now, we’re back into regular buy and hold territory. The expenses that normally come up during buy and hold are:
Now that you’ve refinanced and pulled equity out, you will have new mortgage payments on your investment property.
Part of these payments will likely be interest and the other part will go towards principal.
There will be standard expenses as owning any property including taxes, utilities, and heat.
Often these expenses can also be passed down to the tenant to pay.
Things will break.
You should be prepared for this. They normally come up sporadically but you can estimate an annual % cost to this number.
Err on the side of caution on this.
If you want this to be completely passive then you’ll need a property manager. They charge a percent of the rental income. From my findings between 7-10% of the rent
Because not everyone is a math connoisseur, I created a spreadsheet to help you run scenarios.
The difference between this and others you can find on the internet is that this one allows you to use borrowed down payment.
Since many investors will look to get 100% financing, or borrow the down payment from their HELOC it’s important to understand the cost of those funds.
You can access the spreadsheet below, along with a video on how to fill it in:
These are the main high-level costs to determine your ROI on the BRRRR strategy.
Are you ready to get your financing plan started?
Learn about Land Transfer Taxes and Title Fees in Canada, essential closing costs that vary by province. Find out how they’re calculated, typical costs, and tips for budgeting effectively.
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