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?

expenses way low this will not end well.. saw this happen time and again last decade investors BRRR take out max leverage and only make 100 a month.. they lost those houses in droves.. too much debt to little cash flow and absolutely underestimating costs.. this is a loser in a non or very little appreciating rental market.. I know most will think its great and might be on paper in execution though.. UGH>

I would do it. There would be so many benefits outside of just the cash flow.

this current form of BRRRR running around bigger pockets is going to bury people.. between losing money on the remote rehab.. to thinking 100 a month is safety to taking refi proceeds and thinking its profit .. then when it does not work they have tied up their credit rating for what maybe 1200 month if all goes perfect.. its one thing for locals like yourself but if the best U can do is as described above its not a wealth builder on any level.. there just seems to be some irrational exuberance on these low end rentals or should I say non appreciating assets with next to no cash flow.. just because they get into them with little cash or get a little back. your still tying up a very valuable loan slot. And risking your fico..

No, not a chance. 30 year mortgage is too long. You won't build any equity via loan amortization for almost 8 years, and that's a LONG time. I never go over 15 years, and even that feels long. To give you an indication, I started in 2005, so I'm just NOW getting close to the halfway point on the first house I bought and put on a 30-year term. And my equity in the place is only about 28%. Yeesh... $78/month is chump change. You'll learn more (and EARN more), working for an active fix 'n flipper. That is, after all, what you said this deal is all about...education. Learn from a Pro who has done 50+ deals vs. screwing it up yourself on your dime. By the way, saying things like "I'd put $5,500 in my pocket" is of course not the same thing as making a $5,500 PROFIT. It's just a fancy way of saying "I'm going to borrow a bunch of extra money." On a 30-years note, it would take you almost 6 years to pay back that amount with your $78/month cash flow. Bleh.... 18% is too low for expenses + vacancy + CapEx. Realistically set aside 30%. Slow down a bit. Find a better deal. Get educated working for someone else, so when THEY screw up you can learn and when they succeed...you can also learn and earn!

@Jay Hinrichs always beats me to the punch :) The average BRRRR deal that I see only generates $1,000-$2,000 in annual cash flow and that'll likely get wiped out at your first vacancy. I think $78/mo is a little on the light side, but it's not uncommon. My question is why are you "cashing out?" I almost always leave money in my refinances. As long as I have less than 20% as the long-term investment, I'm better leveraged than conventional finance. My strategy/goals are to refinance at least 80% of my money back with a mortgage of 45% or less of the rents. I also keep ample reserves or some kind of back up capital that is easily liquidated (credit cards, stocks, etc.) The BRRRR method is not a "cash flow" method in 90% or more of all deals. It's a growth strategy. Let the tenant cover the overhead and build equity from a leveraged position. If you're looking for cash flow, hold in cash or sell owner finance as those are much better cash flow models. I also always incorporate principal paydown when a home is performing well. This allows for faster equity buildup, especially when working with a 30 year am. It's almost all interest for several years as @Erik Whiting mentioned above. Investors are BRRRRing with very small margins from heavily leveraged positions. This is why Jay keeps harping about how dangerous of a strategy it is for newer investors. It only takes one speed bump to derail your asset and I promise you that speed bump is always around the corner. I'm dealing with it from wind/storm damage at one of my rentals. I have ample reserves, but it still hurts when you have to dip in to $5,000 for reserves for a deductible or pay out of pocket. This is a newly remodeled home with a good tenant. Not even a pig in a tough neighborhood with a suspect tenant and it still hit a speed bump about 18 months after a huge investment. If the home is already considerably under market, you certainly need to raise the rent, especially if you are investing in renovations. Even if it means not keeping the current tenant beyond their current lease, you should get the rents up at least a little. Point being... understand leverage, cash flow, equity, and overhead. Whatever you do... don't spend that $5,500... you're probably going to need it at some point. I think that there's opportunity with the deal, but make sure that you have some back up capital and a secondary exit strategy lined up. Holding on to leveraged properties for even 5 years will usually double your invested capital... but getting there can be a rocky road, especially if you are not prepared.

I think we've got some misconceptions here on the numbers. You're saying ARV is $130K based on non-updated cookie cutter homes next door. That's not ARV: that's FMV (fair market value) today. If that's the case, then all I'd do is buy the house off your friend and turn around and sell it "as is" for $130K, pay off his mortgage ($62K), hand him his profit ($15K), forget the rehab, and pocket the remaining $53,000. That would be outstanding money for basically doing no work at all. Let's try again: what will it sell for TODAY "as is" no repairs? (FMV) What will it sell for after full rehab? (ARV) Don't use the dated house next door as a comp: use a home that is in the same condition you plan to rehab this one to for $15K costs.

@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?

Would you BRRRR for $78/mo cash flow?

Jeffrey Grieshop

New to Real Estate · Coldwater, OH · Member since 2018 · 105 posts · 61 votes

7y

@Michael Ablan can you please elaborate on why the $70 in cash flow is "basically losing him $?"

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Michael Ablan

Real Estate Broker · Watertown, NY · Member since 2016 · 1k+ posts · 1k+ votes

7y

@Jeffrey Grieshop - Any issue whatsoever turns into a loss at that cash flow.

1.) Higher than normal utility usage

2.) Any maintenance call whatsoever

3.) Property tax increase

4.) Insurance premium increase

5.) One tenant turnover that isnt instantly re-rented

That $70 isn't even enough to pay for his gas so he can personally drive to the property and fix issues himself with materials left over from the last landlord.

6 Reply

Luciano A.

Developer · Houston TX · Member since 2018 · 423 posts · 400 votes

7y

@Nicholas Morgan

Your friend needs to consider the taxes he will pay for having to recapture the depreciation he took all those years on his taxes. Might want to discuss with a qualified CPA about doing this deal.

In regards to doing the deal.

Rehab never goes the way you plan on paper. Once you open up walls you have to bring everything up to code. Unexpected things come up that cost more money than originally planned for.

The low cashflow for this house can make this house a potential money pit. You mentioned the rehab items so doesn’t sound like you will be doing full rehab just updating things cosmetically. If you are not handy a water heater can cost you $800-$1500 to replace. What about AC unit going out and needs replacing. Or foundation issues that can cost thousands. Many scenarios that can take a year or more to get you out of the red.

BRRRR a complete rehab so EVERYTHING is brand new and being able to put money in your pocket is home run. Otherwise take that $5k and put into savings for any potential issues you might come across in the near future until you have your reserves at a healthy amount to cover any issues.

2 Reply

Alexander Ball

Reston, VA · Member since 2017 · 67 posts · 68 votes

7y

I would run more conservative numbers and then go back to the owner with a lower offer. It seems you will lose money regardless on this one, probably best to find a project that's a bit safer.

0 Reply

Jaron WallingPro Member

Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes

7y

I would jump into this deal. The cash flow sucks but if you already have reserves, reliable contractor bids, and experience with construction it's going to be a win win. You have a few exit strategies too. The rehab budget and unknown expenses could be a little off. I would pay for a professional inspection as it would increase the confidence to move forward.

0 Reply

Jeff Ronningen

Investor · Cincinnati, OH · Member since 2015 · 242 posts · 182 votes

7y

@Nicholas Morgan. Let’s say the property was rehabbed and worth $130K as you suggest. Would you be willing to come out of pocket with $38K and borrow $92K to realize $78/month positive cash flow? Viewed through that lens it’s 2.5% Cash on Cash.

I think your research is insufficient and your business model isn’t well enough defined.

I’m local and I’ve got decades of mistakes, expensive lessons learned, and tenant nightmares on you. Glad to discuss by phone or over a drink. I enjoy teaching and mentoring.

3 Reply

Jerryll Noorden

Flipper/Rehabber · Wilton, CT · Member since 2015 · 4k+ posts · 4k+ votes

7y

You know...

I always.. ALWAYS was shocked when I heard Brandon say that $100 dollars positive cash flow on a door is "good".

I was so shocked. I wouldn't take on such risks for just $100 a month are you kidding?

I always laugh about it because I get a a monthly fee from a really stupid silly referal.

So I was thinking every time someone signs up to that program, it is like me owning an other door, bu tthen with 0 risk and zero expenses.

I always thought that that just couldn't be right!

100 a door? I want at LEAST 900 a door a month otherwise what is the point. You will have to collect 100 doors to make it worth it.

100 DOORS!!! thats 100 UNITS. Yeah.. no way man

If that were the case there a lot better ways to become financially secure other than investing in real estate.

1 Reply

Ola Dantis

Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes

7y

@Nicholas Morgan Hey Nicholas, I can empathize with your need to get your 1st deal under your belt.

However, the razor-thin cashflow seems to raise some concerns because remember some projects can take longer than expected and cost more than anticipated.

You might want to fully assess this deal before jumping all in. Fascinating that the owner is actually funding the whole thing (seems too good to be BRRRR'd) 🤔

Keep us updated with what you end up doing. Good luck!

1 Reply

Jaron WallingPro Member

Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes

7y

@Jeff Ronningen But... he's not coming out of pocket on $38K. You're point is mute.

Yes, $78 per month sucks but it's a huge education in real estate investing. If it all goes sideways he could just flip property given the market is still good. Based on the numbers he provided a lot of research went into it before he even posted on BP.

0 Reply

Curtis Hoffman

Member since 2018 · 2 posts · 0 votes

7y

@Nicholas Morgan I’m buying my first deal and I’m most excited ab getting the first deal done and moving forward. Action > inaction towards reaching our goals.

0 Reply

Joe P.

Philadelphia, PA · Member since 2017 · 824 posts · 1k+ votes

7y

Anyone saying he has immediate cash in his pocket and a cash flowing asset without a cent of his money in is missing the big picture.

He's now a property owner, and ostensibly a property manager. He has put aside very little for the inevitable issues that plague us, like things breaking, things needing replacement, finding tenants, dealing with vacancies, etc. $78 a month is NOTHING especially with such tight margins to begin with.

This seems like a great deal for his friend...why would he sell a cash-flowing property? Something isn't adding up for me here.

4 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

7y

Originally posted by @Jerryll Noorden:

You know...

I always.. ALWAYS was shocked when I heard Brandon say that $100 dollars positive cash flow on a door is "good".

I was so shocked. I wouldn't take on such risks for just $100 a month are you kidding?

I always laugh about it because I get a a monthly fee from a really stupid silly referal.

So I was thinking every time someone signs up to that program, it is like me owning an other door, bu tthen with 0 risk and zero expenses.

I always thought that that just couldn't be right!

100 a door? I want at LEAST 900 a door a month otherwise what is the point. You will have to collect 100 doors to make it worth it.

100 DOORS!!! thats 100 UNITS. Yeah.. no way man

If that were the case there a lot better ways to become financially secure other than investing in real estate.

for once I agree with you.. if these are non appreciating assets or historic appreciation Is not there and U have no way to get to scale at least 10 to 20 of these in a short amount of time there are far better investments than marginal real estate rentals.

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1 Reply

Cam Jimmy

Investor · Anchorage, AK · Member since 2016 · 222 posts · 294 votes

7y

@Nicholas Morgan I would definitely take this deal. It is your first deal ever, so just the learning alone is worth it. Plus you have extra cash in the end +$78/mo.. Your returns on this are infinite. Not to mention the equity and loan paydown. GO FOR IT!

0 Reply

Jerryll Noorden

Flipper/Rehabber · Wilton, CT · Member since 2015 · 4k+ posts · 4k+ votes

7y

for once I agree with you..

Well was about time big white brother. Sheesh!

Dude, 100 a door? Every SEO client I get then equates to X# of doors. Heck in that case my portfolio is a rocking! Without having to own any assets!

1 Reply

Junior Soares

Contractor · San Jose, CA · Member since 2018 · 262 posts · 407 votes

7y

I personally wouldn't do this deal, it sounds way over-leveraged in my opinion. We all have our own risk tolerance but i'm afraid this one will not end well, unless of course you're properly reserved to withstand a storm (That will come because they always do). This will help in the event of something major that needs fixing or if you stay vacant and need to hold the loan down for a while.

I Personally love the BRRR strategy. Out of my handful of properties, I've done 2 BRRR's one of them pulling out all of my down-payment and rehab money completely but I was only comfortable doing that because the final loan ended at 60% LTV with 40% equity and I have 1 year of reserves for each property I own. I prefer to stay a little more conservative as i'm in it for the rest of my life and am trying to keep my portfolio at 50-60% LTV in its entirety.

On the other hand, this property could go very well for you and you can win! Just have to be able to weather the storm, that's the most important part.

Best of luck in your endeavors

Junior

0 Reply

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

7y

I like the $38K of equity with no out of pocket and would recommend doing this deal if I believed your cash flow projection. Here is the issue: your numbers are no where near the 50% rule and in low appreciation markets, low unit count (such as SFR) I believe the 50% rule is too aggressive. I believe your costs, other than mortgage service, will be over 55% of the rent. I believe your projected small cash flow in reality, in the long term, is significant negative cash flow. Maybe the RE works as a flip. I have purchased RE that projected as no cash flow and did outstanding but my no cash flow projection was using conservative estimates and the investment was made on the basis of the value add (which returned better than I had projected). Good luck

2 Reply

Jonathan Boyd

Flipper/Rehabber · Springdale, AR · Member since 2016 · 79 posts · 41 votes

7y

@Dan Heuschele I'm new to this too but will give my take. First off, much wiser, seasoned, and successful investors have said yes and no. And I don't think any of them are wrong necessarily. Got to do what meets your goals, but also need that safety net. Personally , I'd probably take $78/month given the right house, but my reserve numbers are significantly higher- 7.5% repairs, 7.5% CAPEX, 10% vacancy, 10% management,paid to me but still factored, and then even a tad more on top. And I'd have or work to have a good nest egg for that property- like simply save the management fee and cashflow to build safety net. This is what we are doing. We recently had the opportunity to pay down a big chunk of our mortgage on our house hack, which we did, so that while we live here for the next few years, we can save up a large reserve fund for when we move. We'll refinance back to where we were- not over leveraged and still cash flowing- but with a $10-12k safety net.

On that house hack note, you said that was your goal in 2020. What if you take the suggestion of the other people and try to work out a deal to flip this house, then take your profit and put it toward your house hack.

And of course, be sure to have documentation and protection for who gets what and who is responsible for what.

Good luck! Anxious to hear what direction you choose

0 Reply

Anthony Wick

Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes

7y

@Erik Whiting

To be fair, if you started in 2005 you were buying everything at the marker peak. And believe me, many of us are making money with mortgages longer than 15 years. It’s called; “tenant pays my mortgage”.

0 Reply

Anthony Wick

Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes

7y

Hold up everybody. Why are you all complaining about the cash flow on a free property that is rehabbed? Seems to me his friend is going to take all the risk, and potentially pay him $5,500 to then take said property and risk off his hands at the end of the rehab. Anybody here willing to just get a free property after rehab? I’d do it.

Now, the bigger question is the numbers. Is the $130k value real? Will a bank finance the property? And how is he getting a 30 year fixed rate mortgage on a rental property?

0 Reply

Anthony Wick

Rental Property Investor · Ankeny, IA · Member since 2017 · 2k+ posts · 3k+ votes

7y

@Joe P.

Well, what he really has is $5,500 cash for reserves, $78 or more cash flow, and a rehabbed house. Unless the rehab is really bad, I’d definitely say the repairs will be smaller to start off ownership. Now, I certainly would not do this deal with a down payment of my own money. But for a free deal, it seems like a solid start to investing. Let’s not forget, when he refinances he immediately has 25% equity. Many start with 3.5% fha equity.

1 Reply

Ned J.Pro Member

Investor · Manteca, CA · Member since 2017 · 1k+ posts · 2k+ votes

7y

Seems about 50:50 of opinions...... with seasoned pros on both sides..... don't you just love these types of posts!!! Clear as mud what the best option is ... :) I would pass as a buy and hold...... I would see if you can work it as a flip with your friend..... Two reasons..... Your numbers are low and your cash flow is low too.... that's doesn't mix well And second is that you mentioned trying to save and do a house hack in 2020. If you do this deal, the payout...if there is some will be long and slow.....which means that your other plan probably isn't going to happen anytime soon. Try to work this as a quick "in and out " deal to get some more $$ for you to execute your other plan....

1 Reply

Derek Joyner

Flipper/Rehabber · Winston Salem, NC · Member since 2018 · 33 posts · 24 votes

7y

@Jay Hinrichs

I think on the wholesale conversation I didn’t agree with you but I do think on this one you are spot on. So my question to you is how much debt ratio should you have in house?

How much equity should you have in your first rental house?

What % do you think a new investor should set back for vacancy, capX, cash flow?

1 Reply

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

7y

Originally posted by @Anthony Wick:

Hold up everybody. Why are you all complaining about the cash flow on a free property that is rehabbed? Seems to me his friend is going to take all the risk, and potentially pay him $5,500 to then take said property and risk off his hands at the end of the rehab. Anybody here willing to just get a free property after rehab? I’d do it.

Now, the bigger question is the numbers. Is the $130k value real? Will a bank finance the property? And how is he getting a 30 year fixed rate mortgage on a rental property?

30 year fixed is easy to obtain on rental properties of 4 units or less. My issue is not the $5.5K that goes to buyer at refi or the $38K of equity from the value add but to keep it as a buy n hold. First, the cash flow projection is no where near following the 50% rule. It therefore does not pass the quick scrutiny test of being an accurate cash flow projection. 2nd, who would choose to PM a RE for that amount of money? No one that knows what they are doing. So I suggest buying it but not as a rental. SFR make good flips because they are purchased by home owners. Instead of refinancing to pay off the current owner, flip it to pay off current owner. Make the money on the value add and do not manage a property for a rate that there is likely no professional PM would manage it. The OP's time is worth more than that return on his effort.

0 Reply

Steve K.

Realtor · Boulder, CO · Member since 2016 · 3k+ posts · 5k+ votes

7y

@Nicholas Morgan Lots of potential pitfalls here: 1.$78/month cash flow on paper is highly likely to be negative cash flow in reality, especially since your expenses seem low. 2. Your rehab budget is extremely light 3. You’re undercapitalized 4. When you need everything to go right for a deal to work is always when everything goes wrong. If your buddy has the means and desire to bail you out if/when Murphy’s Law comes into play and the rehab costs twice as much and takes twice as long as expected, or the appraisal comes in low, or an unexpected capex issues arises at the worst possible time etc. then maybe do the deal just to get one under your belt, but it seems pretty risky and there are a lot of ways this deal could end up being really bad for you.

0 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

7y

Originally posted by @Derek Joyner:

@Jay Hinrichs

I think on the wholesale conversation I didn’t agree with you but I do think on this one you are spot on. So my question to you is how much debt ratio should you have in house?

How much equity should you have in your first rental house?

What % do you think a new investor should set back for vacancy, capX, cash flow?

On low value D to c- I think to be successful you want zero debt pay cash for them and stack them up.. those I know successful in that arena have 0 debt.. again depends on the property but 50% of rent up to about 1k per month is a good napkin math for all in running costs then deduct mortgage if any. I had at one time 350 C class rentals in 5 states.. and the 50% number is pretty much there up to 60% and sometimes as low as 40% and we did not pay for management.

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Would you BRRRR for $78/mo cash flow?

Would you BRRRR for $78/mo cash flow?

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