How to Calculate ROI for BRRRR Investments

Real estate investing offers numerous strategies for building wealth, and one method that has gained popularity in recent years is the BRRRR strategy. For those looking to maximize their returns and rapidly grow their real estate portfolio, understanding how to calculate Return on Investment (ROI) for BRRRR investments is crucial. This blog post will guide you through the process, helping you make informed decisions in your real estate journey.

What is BRRRR?

BRRRR is an acronym that stands for Buy, Rehab, Rent, Refinance, Repeat. It's a popular real estate investment strategy that allows investors to build a portfolio of rental properties with minimal capital outlay. Here's a breakdown of each step:

• Buy: Purchase an undervalued property that needs work

• Rehab: Renovate the property to increase its value

• Rent: Lease the property to tenants to generate cash flow

• Refinance: Obtain a cash-out refinance based on the new, higher value

• Repeat: Use the funds from refinancing to purchase another property and start the process again

The BRRRR method can be an effective way to scale a real estate portfolio, as it allows investors to recycle their initial capital and potentially acquire multiple properties over time.

What Is A Good Rate Of Return On A Rental Property?

Determining a "good" rate of return on a rental property depends on various factors, including the local real estate market, property type, and investor's goals. However, here are some general guidelines:

1. Cash-on-cash return: Many investors aim for a cash-on-cash return of 8-12% or higher. This metric measures the cash income earned on the cash invested in a property.

2. Cap rate: A capitalization rate of 4-10% is often considered good, depending on the market. Higher-end properties in prime locations may have lower cap rates, while riskier investments should have higher rates.

3. Total ROI: When considering appreciation and equity buildup, a total ROI of 15% or more annually is generally viewed as favorable.

4. 1% rule: Some investors use the 1% rule, which suggests that monthly rent should be at least 1% of the property's purchase price. This is a quick way to estimate potential returns.

5. 50% rule: This rule of thumb suggests that operating expenses will be about 50% of gross rents. If a property meets this criteria and still provides positive cash flow, it may be a good investment.

Remember, these are general guidelines. The "good" rate of return can vary based on individual investment strategies, risk tolerance, and local market conditions.

What are the Key Metrics for BRRRR ROI Calculation?

To accurately calculate ROI for BRRRR investments, you'll need to understand and use the following key metrics:

1. Cash-on-cash return: This measures the cash income earned on the cash invested in a property.

2. Equity buildup: The increase in the owner's equity in a property due to loan paydown and appreciation.

3. Appreciation: The increase in the property's value over time.

4. Cash flow: The net income generated by the property after all expenses and mortgage payments.

How to Calculate ROI for BRRRR Investment: Steps by Step Guide :

1. Calculate Total Investment
   Add up all the initial costs, including:

   • Purchase price of the property

   • Stamp duty and legal fees

   • Renovation and refurbishment costs

   • Other fees (e.g., surveyor, mortgage arrangement)

2. Determine Monthly Rental Income
   Once the property is rented, note the monthly rental income. Subtract any property management fees if applicable.

3. Subtract Ongoing Costs
   From the rental income, deduct ongoing costs such as:

   • Maintenance

   • Insurance

   • Property management fees

   • Other regular expenses

4. Calculate Net Annual Rental Income
   Multiply your net monthly rental income by 12 to find the net annual rental income.

5. Work Out Rental ROI
   Divide your net annual rental income by your total investment, then multiply by 100 for the rental ROI percentage.
   Formula:
   Rental ROI (%) = (Net Annual Rental Income ÷ Total Investment) × 100

6. Factor in Property Appreciation (Optional)
   If refinancing, calculate the property's value after refurbishment. Subtract the original purchase price from the new value to determine how much it has appreciated.

7. Overall ROI Formula
   To include both rental income and appreciation, the overall ROI formula is:
   Overall ROI (%) = ((Net Annual Rental Income + Appreciation) ÷ Total Investment) × 100

Example

Let’s break it down with a simple example.

Scenario:
You buy a property, renovate it, rent it out, and then refinance it. Here's how to calculate your ROI.

1. Total Investment:

   • Purchase price: £150,000

   • Stamp duty and legal fees: £5,000

   • Renovation costs: £20,000

   • Other fees (surveyor, mortgage fees): £3,000

   Total investment = £150,000 + £5,000 + £20,000 + £3,000 = £178,000

2. Monthly Rental Income:
   You rent out the property for £1,200 per month. If you use a property manager, they take a 10% fee (£120).

   Net monthly rental income = £1,200 - £120 = £1,080

3. Ongoing Costs:
   Let's say your monthly expenses include:

   • Maintenance: £50

   • Insurance: £30

   • Other costs: £40

   Total ongoing costs = £50 + £30 + £40 = £120
   Net monthly income after expenses = £1,080 - £120 = £960

4. Net Annual Rental Income:
   Multiply the net monthly income by 12 to find the annual figure:
   Net annual rental income = £960 × 12 = £11,520

5. Rental ROI:
   Now, calculate the rental return on investment:
   Rental ROI (%) = (£11,520 ÷ £178,000) × 100 = 6.47%

6. Property Appreciation (Optional):
   After renovation, the property is valued at £200,000. The increase in value is:
   Appreciation = £200,000 - £150,000 = £50,000

7. Overall ROI:
   To get the total return, including appreciation:
   Overall ROI (%) = ((£11,520 + £50,000) ÷ £178,000) × 100 = 34.63%

Conclusion:

• Rental ROI: 6.47%

• Overall ROI (including property appreciation): 34.63%

This shows that while rental income gives a steady return, the real boost to ROI comes from the appreciation in the property's value after refurbishment.

What are the factors that can affect BRRRR ROI?

Several factors can significantly impact the ROI of a BRRRR investment:

Market Conditions

Local real estate market trends significantly influence BRRRR investment success. Property value appreciation rates, rental demand, economic factors like job growth, and neighborhood development all play crucial roles. A strong, growing market can boost your property's value and rental income, while a declining market can negatively impact your returns.

Rehab Quality and Costs

The extent and quality of renovations influence both the After Repair Value (ARV) and tenant appeal. Well-executed, cost-effective renovations can significantly increase your property's value and attractiveness to renters. Efficient management of the renovation process and staying within budget are key to maximizing ROI through rehabilitation.

Rental Market Strength

A robust rental market is crucial for BRRRR success. Local rental rates, vacancy rates, tenant demographics, and seasonal demand fluctuations all affect your investment's performance. Strong rental demand leads to higher rents and lower vacancy rates, ultimately improving cash flow and ROI.

Financing Terms

Your initial purchase loan and refinance terms greatly affect returns. Interest rates, loan-to-value ratios, closing costs, and loan conditions all impact your costs and profitability. Securing favorable financing terms can significantly reduce expenses and improve overall ROI on your BRRRR investment.

Property Management

Efficient property management minimizes expenses and maximizes rental income. Effective tenant screening, maintenance management, rent collection, and compliance with local laws are crucial. Whether self-managed or professionally handled, good property management maintains your property's value and ensures steady cash flow.

If you're interested in learning more about the benefits and drawbacks of the BRRRR strategy, check out our detailed guide on the pros and cons of the BRRRR method

How to Maximizing BRRRR ROI

To optimize your returns on BRRRR investments, consider the following tips:

1. Find undervalued properties: Look for properties with good bones in up-and-coming areas.

2. Manage rehab efficiently: Create a detailed renovation plan and stick to your budget.

3. Optimize rental income: Research local rental markets to ensure you're charging competitive rates.

4. Time the refinance: Wait until you've maximized the property's value before refinancing.

5. Build a reliable team: Work with experienced contractors, property managers, and lenders.

6. Conduct thorough due diligence: Carefully analyze potential investments before committing.

To learn how to find the best BRRRR investment opportunities, check out our guide in which explains the key steps to sourcing profitable BRRRR properties, from researching undervalued properties to identifying growth areas.

Bottom Line

Calculating ROI for BRRRR investments involves considering multiple factors and metrics. While it can be more complex than traditional rental property investments, the BRRRR strategy offers the potential for higher returns and faster portfolio growth. By understanding how to accurately calculate and interpret ROI, investors can make informed decisions and optimize their real estate investment strategy.

Remember, while the numbers are crucial, they're not the only consideration. Always factor in your personal financial goals, risk tolerance, and local market conditions when evaluating BRRRR opportunities. With careful analysis and execution, the BRRRR method can be a powerful tool for building long-term wealth through real estate.

Looking to maximise your returns with the BRRRR strategy? Reach out to Pluxa Property today and discover how we can help you grow your property portfolio successfully!