I'm about two hours into the behemoth BRRRR book. I have a question when pulling money out of the home and the one percent rule.
I understand that the home should rent for one percent of the total cash invested. Got that part.
The part I don’t understand is how much cash should I try to pull out? Say a home is worth $100,000, I cash out refinance to get 75,000 back. The home rents for $850 (market rate). With the taxes at $1700 per year and the insurance at $1100 per year included in my payment at 5.75 interest (the going rate with local community banks), my monthly payment is $682. That leaves me little money for property management and repairs.
Do I need to be looking in higher rent areas? I have yet to analyze a deal that would provide a good cash flow over $100-200 a month per unit doing the BRRRR method. I know people are BRRRRing in my area, I just feel like I'm missing something.
The lower the percentage you can rent as a proportion of the home's actual value the less you'll be able to pull out and still have a cash-flowing property. This is also true the higher your taxes, insurance, and interest rate as a proportion of rent value. So in your example, the home is only renting for .85% of the home's value on a monthly basis.
Let's say you only had $75k in the house. If you pull out $75k and your monthly costs are $682 and you are renting for $850, a lot of people would say you've hit a home run because your return is infinite (you have none of your own money invested) and you are clearing $170 per month not including your principal pay-off or your tax benefits. The flip side to that of course is that you don't have much cushion between you and a big capital expenditure, vacancy, or maintenance issue, which means you'll be pulling cash out of your own pocket if something comes up. That's a lot of risk to manage with not a lot of cushion. Of course, you could always put that entire $75k in the bank as reserves, and then you're practically home free in terms of those costs.
You don't have to take all of your money out. If you feel more comfortable with a $500 payment, then you can do that. Just work backwards. The limiting factor will be the minimum loan size the bank will make, and the fact that you have closing costs whether you pull $30k or $70k, so all things being equal pulling the most money relative to closing costs makes better financial sense.