Investing in rental properties can be a lucrative strategy, especially with the BRRRR method—Buy, Rehab, Rent, Refinance, Repeat. However, understanding how to accurately adjust your numbers for property management fees is crucial for maintaining profitability. This article guides you through the process of adjusting your BRRRR calculations to account for these fees effectively.
Understanding the BRRRR Method
The BRRRR strategy involves purchasing a property, renovating it, renting it out, refinancing to recover your investment, and then repeating the process. Each step impacts your overall profitability, especially when factoring in ongoing expenses like property management fees.
Why Adjust for Property Management Fees?
Property management fees typically range from 8% to 12% of the monthly rental income. If these fees are not incorporated into your calculations, you may overestimate your cash flow and ROI. Proper adjustment ensures your analysis reflects real-world expenses, helping you make informed investment decisions.
Calculating Management Fees
To adjust your BRRRR numbers, start by determining your expected monthly rental income. Then, calculate the management fee based on the agreed percentage. For example, if your rent is $1,500 and the fee is 10%, your management fee will be $150 per month.
Adjusting Your Cash Flow
Subtract the management fee from your gross rental income to find your net income. Continuing the example:
- Gross rent: $1,500
- Less management fee (10%): $150
- Net monthly income: $1,350
This net income should be used in your cash flow analysis and ROI calculations, providing a more accurate picture of your investment’s performance.
Incorporating Management Fees into Your BRRRR Model
When running your numbers, always adjust your expected rental income by deducting property management fees. This adjustment impacts your mortgage coverage, cash flow, and overall profitability. Make it a standard part of your analysis to avoid surprises down the road.
Example Calculation
Suppose you purchase a property with a monthly rent of $2,000, and management fees are 10%. Your calculations would be:
- Gross rent: $2,000
- Management fee (10%): $200
- Net rent: $1,800
Use the net rent of $1,800 in your cash flow and ROI calculations to ensure your analysis reflects the true income after management expenses.
Conclusion
Adjusting your BRRRR numbers for property management fees is essential for accurate investment analysis. By deducting these fees from your rental income, you gain a clearer picture of your actual cash flow and return on investment. Incorporate this step into your regular calculations to make smarter, more informed property management decisions.