The BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat) is a popular method for real estate investors to build wealth. A key part of this strategy is calculating the return on investment (ROI) for rehabbing properties. Understanding this calculation helps investors make informed decisions and maximize profits.

Understanding the Components of ROI in BRRRR

ROI in the context of BRRRR involves evaluating how much profit you gain from your rehab efforts relative to your investment. The main components include:

  • Initial Purchase Price: The cost of acquiring the property.
  • Rehab Costs: Expenses related to renovating the property.
  • After Repair Value (ARV): The estimated market value after rehab.
  • Refinance Amount: The loan amount you can secure based on the ARV.
  • Cash Invested: Your total out-of-pocket expenses, including rehab costs and down payment.

Steps to Calculate ROI

Follow these steps to determine your ROI:

  • Calculate Total Investment: Add your purchase price and rehab costs, then subtract the refinance amount to find your net cash invested.
  • Determine Profit: Subtract the total investment from the property's ARV.
  • Compute ROI: Divide the profit by the total cash invested and multiply by 100 to get a percentage.

Here's a simple formula:

ROI (%) = (ARV - Purchase Price - Rehab Costs + Refinance Amount) / Cash Invested × 100

Example Calculation

Suppose you buy a property for $100,000, invest $30,000 in rehab, and the ARV is $180,000. You refinance and receive $140,000. Your total cash invested is $100,000 (purchase) + $30,000 (rehab) - $140,000 (refinance) = -$10,000 (which indicates cash flow from refinancing). For simplicity, consider your net cash invested as $30,000.

The profit is $180,000 (ARV) - $100,000 (purchase) - $30,000 (rehab) = $50,000. The ROI is ($50,000 / $30,000) × 100 ≈ 166.7%. This high ROI shows a successful rehab investment.

Conclusion

Calculating ROI for BRRRR rehabs is essential for evaluating potential investments. By carefully analyzing purchase price, rehab costs, ARV, and refinance options, investors can make smarter decisions and grow their real estate portfolio efficiently.