Would you BRRRR for $78/mo cash flow?

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Would you BRRRR for $78/mo cash flow?

Nicholas Morgan
Cincinnati, OH · Member since 2018 · 85 posts · 29 votes

Hello everyone!

I have an opportunity to potentially do a BRRRR deal where the current owner of the property funds the whole rehab (refresh 2 bathrooms and a kitchen) and I pay him back when I do a cash out refi.

After I pay back the current owner/lender, I'll be left with potentially $5,500 cash in my pocket and the monthly cash flow will be $78/month. Would you do this deal?

This would be my first rental property and a great learning opportunity. I wouldn't have to pay anything out of pocket during the process.

The $78/month takes into consideration a 30yr mortgage at 5% interest rate, 18% of rent set aside for vacancy, maintenance, and CapEx, property taxes, and $65/month in insurance.

I haven't fully assessed this, but I feel rent may be able to be raised. Hasn't been raised in over 6 years. But at a conservative estimate, $78 isn't a whole lot.....but it would get a deal under my belt as a learning opportunity.

What do yo think?

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Lucas Duce
Member since 2019 · 36 posts · 48 votes
7y
Hey Nicholas, How did you arrive at 18% for all those expenses? The standard is usually 7% for repairs and maintenance, 7% for CapEx (usually you can get away with 5% on a BRRRR if you're doing many big ticket items like roof, water heater, etc, but since you only mentioned bathroom and kitchen, I'd keep it at 7% to be conservative), vacancy from 8-10%. Property taxes aren't usually estimated as a percent. You can have your realtor calculate your likely property taxes after the final assessed value of the property. In my area (Wisconsin) if you purchase a $100K house, you're looking at around $1.5K a year in property taxes, $3.5K per year for a $200K property and so forth. You'll want to get a solid grasp on this number since it will be a big expense. You'll also need to consider what utilities the landlord (you) will be paying for. In some areas, its common for the landlord will be stuck paying for water and sewer, and garbage. So you need to factor that into your analysis if that's the case for your area. In some areas, you might be able to get away with sticking the tenant with all those utilities, just depends on the market. A good common rule of thumb is that 50% of your rental income will go to expenses, NOT including mortgage expenses. So if you're only at 18%, you might be significantly low balling your estimated expenses. But when you verify all your numbers and are still looking at $78/month of cash flow, for a first deal that's pretty good, if it's a reasonable mortgage. I wouldn't be accepting $78/month of cash flow on a property with a mortgage of $300K, but around $100K is good. Hope this helped and good luck! - Lucas Duce
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  • Bart H.
    Dallas, TX · Member since 2016 · 1k+ posts · 745 votes
    7y
    Originally posted by @Nicholas Morgan:

    Hello everyone!

    I have an opportunity to potentially do a BRRRR deal where the current owner of the property funds the whole rehab (refresh 2 bathrooms and a kitchen) and I pay him back when I do a cash out refi.

    After I pay back the current owner/lender, I'll be left with potentially $5,500 cash in my pocket and the monthly cash flow will be $78/month. Would you do this deal?

    This would be my first rental property and a great learning opportunity. I wouldn't have to pay anything out of pocket during the process.

    The $78/month takes into consideration a 30yr mortgage at 5% interest rate, 18% of rent set aside for vacancy, maintenance, and CapEx, property taxes, and $65/month in insurance.

    I haven't fully assessed this, but I feel rent may be able to be raised. Hasn't been raised in over 6 years. But at a conservative estimate, $78 isn't a whole lot.....but it would get a deal under my belt as a learning opportunity.

    What do yo think?

    For us it would depend on the rest of the deal.  Is it a property that is in an up and coming neighborhood where its essentially a capital appreciation play?  are there other opportunities with say something like multi family, or commercial development in the future?  How much equity would you end up with?  Is this your first deal?  How tight are your numbers?

    Do you have other ways to make money if the BRR doesnt work?  ie flipping the property?  or house hacking?

    In general, I think $76/month of cash flow unless there was a lot of equity or long term capital appreciation, I think I would pass.  The risk reward isnt there.  I mean one foundation issue, or electrical or plumbing or unexpected roof, or if the property doesnt appraise and that +76/month goes negative in a big way.

    2Reply
  • Josue Vargas
    Real Estate Agent · San Antonio, TX · Member since 2017 · 814 posts · 466 votes
    7y

    @Nicholas Morgan

    Yes, if you do nothing your property value remains the same, you don’t get the 5K in your pocket, plus the $75 cash flow.... $75/month on 30 years... have you calculated that with inflation etc? I would look for better interest rates though, your numbers will go just up!

    0Reply
  • Preston Quinn
    Rental Property Investor · Lynchburg, VA · Member since 2018 · 116 posts · 73 votes
    7y

    My question is this, if it’s rented for $995 now, why not just put the 20% down and keep it. Leave it alone, get a heloc on the property so you can still access the cash if needed for the “speed bumps” what’s wrong with leaving money in a deal for a safety net? Brrrr isn’t the only way to invest. Cashflow would look a lot better with 20% down. Refinance it after first turn and Reno it then  

    The deals I have been offering on give me back 5-10k and give me $150-$250 per door after allowing 28% for expenses plus PITI while capturing 25-30k in equity. Several folks have warned me about these numbers also. I feel like they're borderline deals. But it's whats in my backyard. I'd rather see them before I invest out of town. I have passed on deals that don't give me at least $150/door numerous times while searching. $150/dr is my minimum number while pulling all my money back out. But I also want a significant amount of equity to go along with it. My vote is bail if this is the only way to structure the deal.

    Keep in mind I Am new to buy and hold. I have flipped a couple houses and have a good reserve account built up before I even considered doing this. I wouldn’t recommend doing anything until you have good money set aside for s**t hitting the fan. 

    1Reply
  • Brent Paul
    Rental Property Investor · Shakopee, MN · Member since 2015 · 985 posts · 374 votes
    7y

    That is a pretty small amount left.  However if you are doing a pretty extensive reno with most of the major expenses taken care of it may be ok.  Is there a possibility in the next 10 years you could see some growth in equity?  How is the area?  Technically you will almost have it for free since someone else pays your mortgage.  My goal is to have 6 months expenses in the bank for each house.  I'm not quite there yet, but working on it.

    0Reply
  • Spencer Cornelia
    Investor · Las Vegas, NV · Member since 2017 · 321 posts · 524 votes
    7y

    @Nicholas Morgan Have you considered selling the property?

    The BRRRR method is all the fad for beginners. The idea of infinite return is tempting and seems bullet-proof.

    But there needs to be caution when buying a deal with such low cash flow.

    If one tenant doesn't pay rent and goes thru the eviction process, the lost rent and cost of eviction could cost you multiple YEARS of profit.  Jay Hinrichs' words of caution ring very true here.  He has seen what happens when deals with minimal cash flow are purchased.

    If you lose your main income source for whatever reason, you're one unfortunate break away from losing this property too.

    The last thing we as a community should ever do is deter others from buying deals, but be very cautious with the mania behind the BRRR method. The big ugly monster that has the potential of really impacting us is lurking around the corner....

    4Reply
  • Don Mangiarelli
    Rental Property Investor · HI · Member since 2019 · 38 posts · 93 votes
    7y

    @Nicholas Morgan The real question is, would YOU do the deal? You can ask here all day long and you will get as many answers as there are people who stop by to answer. In the end, YOU need to run the numbers and YOU need to feel comfortable that this is a good deal for YOU. If you ask here, you will be suffering analysis paralysis for ever. Is this a good deal for YOU?

    6Reply
  • Theresa HarrisPro Member
    Member since 2019 · 15k+ posts · 11k+ votes
    7y

    Ask yourself what your goals are, your risk tolerance and ability to save.  You aren't going to get as much cash flow because you've pulled all the equity out of the home and haven't put anything down.  So if you want to look at it as a learning experience and a way to get in the market, then it is a great opportunity.  Personally I think if you aren't putting any money into the property and are walking away with $5K (and a house), it isn't realistic to expect a huge amount of money at the end of every month.

    0Reply
  • Adam Harper
    Rental Property Investor · New York, NY · Member since 2018 · 64 posts · 7 votes
    7y

    @Nicholas Morgan I would do it if the number is accurate. Heck, I would do it if it breaks even. This is your first time so what’s more important than gaining the experience through the whole process?

    1Reply
  • Chris Kimsey
    Rental Property Investor · Brenham, TX · Member since 2018 · 3 posts · 1 vote
    7y

    Even with 78 cash flow if you get all your money back that is infinite ROI. Where else can you pay 0 for 20-30% equity on a cash flowing property.

    1Reply
  • Nicholas Morgan
    OP
    Cincinnati, OH · Member since 2018 · 85 posts · 29 votes
    7y

    I appreciate all the advice and knowledge shared in this thread! Thank you!

    I do feel like $78 is too low, but wanted to see what others thought. Wanted to know if I was being too picky for my first deal. To me, it doesn't seem $78/month is worth the headache/s of a tenant and as many of you have stated it isn't enough cushion to help when crap happens. My goal when looking at investment opportunities has been at least 12% Cash on Cash ROI and $300/month cash flow. This house doesn't meet my $300 cash flow number.

    I am going to try to go see a rental one street over that rents for $1400 to see how it compares. Rentometer doesn't show a lot of rentals near by tho I know they exist. I'm not sure how Rentometer pulls its listings. Anyway, if I could justify rent for $1200/month that would boost my monthly rent to around $250/month which to me I wouldn't hesitate on moving forward with. Also, I have good credit score and I would hope to get an interest rate of around 4.5% which would then put me right at $300/month cash flow (if I recall correctly - currently not able to check my spreadsheet). But I like to crunch numbers on the conservative side so I can be happily surprised vs disappointed/screwed.

    As for appreciation...I have no indicators that this neighborhood is going to take off and appreciate wildly. I also prefer to not look at appreciation except for just as a bonus. I don't want to bet my financial plan on appreciation.

    I have no problem leaving money in the deal except for I don't have a lot of capital to deploy into an investment like this. My wife and I are saving with the goal to purchase a house hack in 2020 and have $10k saved thus far. I would prefer to not tap into that for this property so that's why I'm looking at BRRRR. If I need to leave 1k-2k in the deal, that's fine. But I don't want to significantly dip into our househack savings.

    What cash flow amount would you look for in this deal to make it worth your time?

    2Reply
  • Account Closed
    Real Estate Consultant · new york, NY · Member since 2019 · 34 posts · 28 votes
    7y

    @Nicholas Morgan what are your equity gains/ tax benefits? Depending on your risk tolerance it can still work. Also, at that small of a monthly cashflow amount is your margin of error big enough?

    1Reply
  • Nicholas Morgan
    OP
    Cincinnati, OH · Member since 2018 · 85 posts · 29 votes
    7y

    @Michael Sjodin

    If I leave the 5500 in the property as equity as a lot of folks have suggested and assuming all the numbers work out as I've listed, I'd have 29% equity in the property which comes out to right at $38k.

    As for tax benefits, I don't have anything defined at the moment.

    0Reply
  • Angelo Mart
    Professional · Parsippany, NJ · Member since 2013 · 384 posts · 262 votes
    7y

    After you pay back the current owner/lender, you will be left with potentially $5,500 cash in pocket? Do you have guaranteed comparable sales that support this in an appraisal grid? Do you have a lender that will give you the cash out refinance in which you need? Me personally I would not take this deal as the margin in too thin and risky

    0Reply
  • Dean Letfus
    Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes
    7y

    Good way to lose a house.  No where near enough money in it to be safe.

    1Reply
  • Account Closed
    Real Estate Consultant · new york, NY · Member since 2019 · 34 posts · 28 votes
    7y

    @Nicholas Morgan assuming you have a full time job you would need to determine what your taxable income will be at the end of the year and work that into your calculations. For example, I pay a little over 15k in taxes annually (California taxes) and my house will bring me ~1k/month in tax benefits from interest payment and other factors (I bought with a 0% down VA so my interest payment is high). Therefore I will keep about 12k more wealth at the end of the year from owning a home because it goes into the expenses of an asset instead of to the gov. Also, I was referring to your monthly principal paydown when I mentioned equity. I get a pretty solid equity paydown from my house too. I just want to make sure you aren't ignoring the other wealth builders when you run your numbers.

    2Reply
  • Brett Holton
    Investor · Louisville, KY · Member since 2017 · 7 posts · 8 votes
    7y

    I would do the deal. Many additional benefits, you are growing wealth and you are conservative in your numbers. Seems like you will be able to raise rents as well. Also @Nicholas Morgan, I am in Cincinnati as well. Reach out to me when you get the chance, have a lot of wholesale deals available in the market and always looking to network. 

    0Reply
  • Brant Richardson
    Investor · Santa Barbara, CA · Member since 2013 · 658 posts · 315 votes
    7y

    You have $10k to your name and consider it sacred but are considering walking away from 38k in equity, handed over to you by a friend?   You could double your life savings with your eyes closed with this deal.  If you are too scared to be a landlord then sell it.  However, if I was your friend and you wanted to just sell it I would say "Hey man, I was trying to open your eyes on how to become financially free, teach a man to fish kind of thing, but it you just want to sell it for quick cash then forget it, I'll sell it myself."

    Strategy 1: Rental with minimal positive cash flow until rents go up.  Possibly cash flow negative at times for a while.  You have $0 into the deal, its okay if you actually put something into it.  I doubt you will put $38k into it though. 

    If #1 fails then strategy 2: You only live fifteen minutes away.  You live in your new house and commute for a while until you get it turned around.  It sounds like you know how to rehab a bathroom.  If that's true then you can figure out how to do a lot of repairs.

    If #2 fails then strategy 3: You sell. If I was your buddy I would want to see you give it a good shot for at least a couple years and I would want you to ask me for advice if things were going poorly. Unless things go horribly wrong or your ARV is completely wrong you will be okay. New roof, new furnace, new water heater...you still come out ahead in cash and way ahead in experience.

    A well established investor wouldn't waste his time on $70/month but that's not you.  There's $38k at stake here.  How much could you realistically save per month at your job and how long would it take for you to save up $38k?  Don't answer that, just think about it. 

    3Reply
  • Frank Maratta
    Rental Property Investor · CT · Member since 2019 · 105 posts · 68 votes
    7y

    @Nicholas Morgan

    My opinion is not to do the deal. As everyone else said the 78$ a month in cash flow is too tight. But most importantly - this is your first rehab! I PROMISE you will go over budget. My first BRRR I did when I first started I expected it to be a $50k project. Turned out to cost me $110k. It still ended up being a good deal as I was able to buy right before home prices started skyrocketing, and mid way through the rehab I found a way to add an additional bedroom and bath to each unit so my rent numbers went up considerably, market was on its way up and it appraised for a good number. But right now we're at the height of the market, your cash flow numbers are low and you don't have any experience doing a rehab. I think it is too much of a risk.

    2Reply
  • Niel Kluszczynski
    Flipper/Rehabber · South Bend, IN · Member since 2015 · 8 posts · 6 votes
    7y

    @Nicholas Morgan my vote is that I would not do it unless there’s tremendous equity upside that you can cash out right away if things take a turn.

    Monthly cash flow vs. potential expenses is too risky.

    Hope that helps! Good luck!

    Niel

    1Reply
  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    7y

    @Nicholas Morgan

    I would do a BRRR that had zero cash flow if I had no money in it. You still have someone paying down the mortgage on it. Slow and steady wins the race

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    1Reply
  • Cynthia Higgins
    Jacksonville, FL · Member since 2019 · 19 posts · 5 votes
    7y

    @Nicholas Morgan

    I agree with Jill , you need some kind of ownership before you do repairs. But I would do the deal

    1Reply
  • Tim Davids
    Real Estate Broker · NW Indiana · Member since 2014 · 99 posts · 30 votes
    7y

    Have a Realtor do a good comp report for you so your not guessing what it would sell for after rehab.

    I'd lean toward just flipping it. That monthly cash flow wouldn't buy an air-conditioner.

    2Reply
  • Jeffrey Grieshop
    New to Real Estate · Coldwater, OH · Member since 2018 · 105 posts · 61 votes
    7y

    @Dean Letfus Dean, your picture is tilted to the leftus.

    1Reply
  • Michael Ablan
    Real Estate Broker · Watertown, NY · Member since 2016 · 1k+ posts · 1k+ votes
    7y

    @Nicholas Morgan -  I would do this deal if you have other income to supplement you when things go wrong (which they will). However, I'm only saying this because it's your first deal.  I wouldn't touch this with a 10 foot pole at this point in my journey unless I could figure out a way to increase the cash flow (short term rental, add in a bedroom, convert a garage into units, ect). Just keep in mind that a  cashflow this low is basically you losing money, but it could be worth getting your first deal.

    1Reply
  • James Campbell
    Investor · Smithfield, RI · Member since 2017 · 26 posts · 13 votes
    7y

    @Nicholas Morgan it sounds like you already know what you should do

    0Reply
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