Does the 70% Rule Still Hold Up for BRRRR Strategy?

Yes, the 70% rule also applies to the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) strategy. The BRRRR approach involves purchasing a property that needs renovation at a discounted price, rehabbing it, renting it out, refinancing after a set period of time, and repeating the process. This strategy can provide a steady cash flow and help investors build wealth over time. Here are some key points to keep in mind when using the 70% rule for BRRRR:
  • Determine the After Repair Value (ARV) of the property – this is the estimated value of the property once it’s been fully renovated.
  • Subtract the estimated costs of rehab from the ARV to get the Maximum Purchase Price (MPP).
  • Apply the 70% rule – the MPP should be no more than 70% of the ARV.
  • Don’t forget to factor in other expenses, such as closing costs, holding costs, and property management fees.
  • It’s important to note that the 70% rule is just a guideline, and every property and market is different. As a BRRRR investor, it’s critical to do your due diligence and research the local market trends, rental rates, and renovation costs before making an offer on a property. By following the 70% rule and being diligent in your research, you can increase your chances of success with the BRRRR strategy.

    Understanding the BRRRR Strategy

    The BRRRR strategy stands for Buy, Rehab, Rent, Refinance, and Repeat. It is a popular investment strategy in real estate, especially for those who are looking to build a passive income stream by leveraging rental properties. This investment strategy involves finding a property that is below market value, rehabilitating it to increase its value, and refinancing it to pull out the equity and fund further investments. The BRRRR strategy is a powerful tool that allows investors to acquire profitable rental properties without being limited to their initial investment capital.
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    The 70% Rule in Real Estate Investing

    The 70% rule is a popular guideline in the real estate industry, used primarily by flippers to determine the maximum amount they can pay for a property without losing money. According to this rule, the maximum purchase price of a property should be 70% of its after-repair value (ARV) minus the estimated cost of rehab. This rule helps investors ensure that their profit margin is substantial and helps them avoid overpaying for a property.

    Applying the 70% Rule to BRRRR

    The 70% rule is applicable to the BRRRR strategy to help investors evaluate the profitability of a rental property before investing in it. However, the rule needs to be adapted to the BRRRR strategy by taking into consideration some of the costs associated with the rehab and holding period. Investors should adjust the 70% rule to reflect the total cost of bringing the property up to rental standards, including closing costs and rental costs. This will ensure that the rental property will generate enough cash flow to pay for all expenses and provide a positive return on investment.

    Factors to Consider in BRRRR Investments

    BRRRR investments require careful consideration of several factors to ensure their profitability. These include:
    • The property’s location: The location of a rental property plays a significant role in its success. Properties located in high-demand areas with good schools and proximity to amenities tend to generate higher rental income.
    • The condition of the property: The condition of the property affects the cost of rehabilitating it. Investors should consider the property’s age, condition, and the extent of the necessary repairs before investing in it.
    • The rental market: The demand for rental properties and rental rates in the area should be considered to determine the property’s profitability.
    • The financing options: Investors should consider the cost of financing, including interest rates, terms, and fees, to determine whether the investment is feasible.
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    Challenges in Using the 70% Rule in BRRRR

    While the 70% rule is an excellent guideline for real estate investing, it has some limitations when applied to the BRRRR strategy. One of the main challenges is that it relies on accurate estimates of the rehab costs. The actual cost of rehabilitating the property may vary significantly, especially if unforeseen issues arise during the rehab process. Additionally, the rule does not take into consideration the holding period, which can significantly affect the total cost of the investment.

    Alternatives to the 70% Rule in BRRRR

    Investors can use alternative strategies to evaluate rental property investments in addition to the 70% rule. For instance, the 1% rule requires that the monthly rent should be at least 1% of the purchase price. This rule helps investors determine whether a rental property will generate enough income to cover the mortgage, taxes, and expenses. Additionally, the cash flow rule requires that the property generates positive cash flow after expenses, including mortgage payments, taxes, insurance, repairs, and vacancy allowance.

    Making Successful BRRRR Investments Without the 70% Rule

    While the 70% rule is a helpful guideline, successful BRRRR investments can be made without strictly adhering to it. Investors should focus on finding properties that generate positive cash flow and offer long-term returns. Additionally, investors should be vigilant about the cost of financing, the property’s holding costs, and the rental market’s demand and rental rates. By paying close attention to these factors, investors can make successful BRRRR investments without relying solely on the 70% rule.
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    In conclusion, while the 70% rule is a helpful guideline in real estate investing, it is not the ultimate determinant of a property’s profitability in the BRRRR strategy. Investors should carefully consider the property’s condition, location, rental market, financing options, and holding costs to determine whether the property is worth investing in. By using alternative strategies and focusing on long-term returns, investors can make successful BRRRR investments without solely relying on the 70% rule.

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