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mbrowne
12 January 2025
BRRRR Strategy Highlight: How to Calculate The Expenses
- mbrowne
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:
- Buy – The purchase of the asset
- Renovate – Increasing the value of the asset
- Refinance – The refinancing of the asset
- Rent – The income and expenses of renting out the asset
BRRRR Strategy - Phase 1: Buying the Investment Property
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:
Property Transfer Tax or Land Transfer Tax
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.
Appraisal Fee
Note, some lenders may cover this or do an internal appraisal.
Legal Fee
Your name and new mortgage (if applicable) will need to be registered on the land title
Inspection
Getting an inspection is a must. It can also help you fully understand what upgrades will be required for Phase 2.
Loan Origination Fee
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.
BRRRR Strategy -Phase 2: Renovate to Increase the Value of the Asset
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.
Mortgage Payments / Interest on your investment loan (Carrying 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.
Property Taxes, Utilities, Heat, etc.(Carrying Cost)
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.
Renovation Cost for your BRRRR Project
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.
BRRRR Strategy - Phase 3: Refinance and pull out the equity created
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!
Mortgage Penalty to break the bRRRR purchase loan
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.
Loan Origination Fee
Depending on which lender or product you use, there may be a fee to originate the mortgage.
Appraisal Fee
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.
Legal Fee
The mortgage charges will need to be changed at the land title office again. This involves a lawyer or notary to convey the mortgage.
BRRRR Strategy - Phase 4: Rent out the Investment Property
Now, we’re back into regular buy and hold territory. The expenses that normally come up during buy and hold are:
Mortgage Payments on your BRRRR Property
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.
Property Taxes, Utilities, Heat, etc.
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.
Maintenance and Capital Expenditures on your Investment Property
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.
Property Management
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
My BRRRR Strategy Spreadsheet
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:
And that's that...
These are the main high-level costs to determine your ROI on the BRRRR strategy.
Are you ready to get your financing plan started?
Let's book a mortgage strategy conversation:
P.S. If you want to read an in-depth guide on the BRRRR Strategy... check out my Guide:
Everything you need to know about Flipping to yourself and the BRRRR Strategy
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