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.

@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.

@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?

Jay HinrichsBusiness Member

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

7y

Originally posted by @Anthony Wick:

@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.

Anthony this was the same thinking that sunk thousands upon thousands of landlords doing this exact BRRRR cash back minimal cash flow.

the cash back went to buy a jet ski not reserves LOL.. and as much as anything your tieing up a loan slot to not even make 1k a year. And if its an area that does not go up at all like much of the mid west whats the point.. ? seems to me risk /reward is not there.. I would think one might want to use their very valuable 1 to 4 mortgage slot on a property that either will cash flow much better or a 2 or 4 unit so you can build doors.

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Michael BartleyPro Member

Real Estate Agent · Radcliff, KY · Member since 2015 · 24 posts · 10 votes

7y

Based off of what you detailed, I would do it. You have the asset, profit, and refi down the line. The cash flow each month isn’t huge, but its still cash flow after you’ve set aside all the funds for repairs and things.

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Dean Letfus

Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes

7y

It seems only people who haven't watched hundreds of investors lose fortunes doing this think it's a good idea..............

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Tanner Marsey

Rental Property Investor · San Diego, CA · Member since 2017 · 439 posts · 578 votes

7y

Do the deal. Be ready to come out of pocket here and there. Don’t take that additional 5.5k. (It prob won’t be there after you go over on your rehab budget). Realize that in 20+ years, when the house has been (mostly) paid off by the tenants, rent has gone up and appreciation has come into play is when you’ll really realize the value/potential. If you hold it for the long term, you’ll win. This fits into my strategy. Might not work for everyone though.

Would you BRRRR for $78/mo cash flow?

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