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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  • Wouter Ceyssens
    Augusta, GA · Member since 2019 · 7 posts · 3 votes
    7y

    Hi @Nicholas Morgan 

    Just one newbie to another, but I’ve not seen any property management percentages taken out of your CF figures. From all I’ve read in other places on BP, even if you plan to manage it yourself, it seems to be recommended to plan for PM and not use it, just so that on contingency your “good” deal wouldn’t become a possible “bad” deal if it became necessary. 

    I believe @Brandon Turner said something to the effect of, ‘if you’re not happy, your system is broken’, in his Book on Real Estate Investing (just finished this read—highly recommend btw!). Not planning for PM, then needing it, could be a quick way to get ‘unhappy’. 

    Best of Luck!

    1Reply
  • Nicholas Morgan
    OP
    Cincinnati, OH · Member since 2018 · 85 posts · 29 votes
    7y
    Originally posted by @Wouter Ceyssens:

    Hi @Nicholas Morgan 

    Just one newbie to another, but I’ve not seen any property management percentages taken out of your CF figures. From all I’ve read in other places on BP, even if you plan to manage it yourself, it seems to be recommended to plan for PM and not use it, just so that on contingency your “good” deal wouldn’t become a possible “bad” deal if it became necessary. 

    I believe @Brandon Turner said something to the effect of, ‘if you’re not happy, your system is broken’, in his Book on Real Estate Investing (just finished this read—highly recommend btw!). Not planning for PM, then needing it, could be a quick way to get ‘unhappy’. 

    Best of Luck!

     Good call! Thanks for the reminder. You're right, in the future I hope to turn over all assets to a property manager so I'll definitely want to account for that. Thanks!

    0Reply
  • Nicholas Morgan
    OP
    Cincinnati, OH · Member since 2018 · 85 posts · 29 votes
    7y

    @Jeff Ronningen @Josh Adams @Michael Ealy @Brett Holton

    To the guys that are local, this property is in North College Hill area. In the neighborhood by the Kroger at the corner of Ronald Reagan Hwy and Hamilton Ave. To me, this seems like a B+ neighborhood - do you agree? 


    That's good to know about the Hamilton County tax reassessment coming up. I was unaware of that. Also, I'll have to look into the water bill situation. My plan was just to require the tenant to handle that, but that may be problematic if I'm required to be on the bill.

    I've attached an image to give an idea of what the neighborhood is like.

    1Reply
  • Ross Denman
    Real Estate Consultant · Whitestown, IN · Member since 2014 · 549 posts · 933 votes
    7y

    @Nicholas Morgan with some tweaks, I think that this looks to be a deal. I am telling you though, make sure that you have some reserves and a back-up exit strategy. You may never need it, but being proactive is always best.

    0Reply
  • Michael Ealy
    Developer · Cincinnati, OH · Member since 2018 · 1k+ posts · 3k+ votes
    7y

    @Nicholas Morgan, yes - good area - a solid B based on my assessment (can even be B+). Without knowing the exact address, it's hard to know the rent & value.

    If you're serious about this deal, I suggest you contact a leasing agent in the area as well as a listing agent. Tell them you're buying a house that you might need their help now or in the future. Ask them the market rent/sales price respectively for houses similar to yours that are in great condition (no repairs needed).

    If they tell you for example that market rent is $1200-$1300 and sales price is $150K+, my vote is go for it. You'll have enough cashflow and equity to make it worth your while.

    1Reply
  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    7y

    If that's the neighborhood I'd jump on the deal (said that already). 

    The area I'm investing in doesn't even look that nice and it's C/C+ class. 

    0Reply
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