Is this Potential BRRRR a good deal?

Question

Hi Everyone about to start my investing journey and here's where I stand:

Bought a single family home for 189000 in 2016. (179500 @ 3.75%) - Worst house in a great Raleigh neighborhood.

Currently appraised at 325 to 335k due to latest comps this year. 39k in Rehab for two new bathrooms/Deck/Floors/Paint/New Water Heater/Open Concept wall removal etc

Looking to rent out for 1550/month. (~1101 mortgage/124 property management/191 taxes/2mil insurance coverage). This leaves me cash-flowing around 100 a month before refinancing.

I'm looking to pull out most of my money when I Refinance so my questions are:

1. Is this a good deal?

2. Should I refi for 30 or 20 years?

P/S - The home has a full unfinished walkout basement I plan on turning into a one bedroom apartment in the future for extra income. I just got done with the bathroom rehab so about to start the process for getting tenants in.

Dave Chimobi · Answer

Thanks Tucker! Everyone seems to agree with your sentiment.

Adam Cole · Answer

Why not just sell it?

If your all in investment is $228k and you're estimating that it could sell for ~$330k, then I would offload that immediately. Especially with the cash-flow only being $100 per month. If you can net $75k after all of your expenses are paid... you could move on to the next project with your pockets busting. However, if you chose to rent it out, it would take you 62 years to make that amount of money.

Todd Rasmussen · Answer

@Dave Chimobi

You are using a 20% expense ration before P and I and that doesn't strike me as nearly enough to reflect what your experience will be over holding a property long term. I think you need to annualize capital expenditure projections and add that to your expense ratio. I think you have realized a solid appreciation, but think you are holding a negative cash flowing property currently. So, I would not have it cash flow more negative to buy another property like this unless you are focusing on appreciation and can carry the negative cash flow. Make sure you are comfortable with this as negative cashflow holdings are not infinitely scalable.

1) If it's a good deal depends on it's appropriateness for your situation. This would not be a good deal for me, but that's a very subjective question.

2) Objectively you should refi for 30 years, but there are many subjective influences that can make 20 years the best choice for your personal situation.

Sorry, this only qualifies your question!

Dave Chimobi · Answer

Hi Todd. Thanks, you make some very good points! I didn't think about it that way.

Danielle Jackson · Answer

Also, the question on 20 vs 30...my vote is 30. Leverage your cash.

Maurice D. · Answer

Maybe finish the basement (adds value), sell it (Flip) and use the funds to find a better BRRRR

Dan H. · Answer

First I agree that your property is cash flow negative when properly allocating for all expenses (and upvoted first post to indicate this).  Rent of $1550 for $325K value (0.48%) is bad.  How bad? Worse than average priced SFH are in my outrageously expensive market.

You may think I am advocating for selling, but not necessarily.  1) I look at total return and do not prioritize cash flow over the other sources of return. In fact, I value cash flow behind value add and appreciation.  2) after the refinance you will be achieving infinite return which is the holly grail of returns.  3) your monthly appreciation has been ~$1.6K/month over your hold period ((($325K-39K (upgrade expenses) - $189k (purchase)) / 5 (years) / 12 (months in a year)).   The places that have better initial cash flow are unlikely to have this rate of appreciation.  There is a reason this is likely.  RE markets are efficient.  The initial better cash flow markets are unlikely to produce the same long term return which is reflect in their better price to rent ratio.  Basically the price of an RE market is based on numerous parameters two of the largest being perceived risk and perceived appreciation (property and rent appreciation).

Your first investment has been outstanding.  Those that advocate better cash flow markets likely have few, if any, properties in those markets that have produced infinite return or appreciated anywhere close to $1.6K/month.  Can you do better?  I suspect you can, but not in the markets that most of these posts are advocating.  I think you could do better in your market (Raleigh) with a residential MF (duplex to quad) because it would have similar appreciation, have better cash flow, you would still be able to leverage all of the advantages of you being local (self manage if desired, able to know the market, be able to perform heroics if necessary).

As for cash flow, I consistently argue that I value it less than value add and appreciation and this is why: Value add and appreciation allow me to extract my investment to leverage it quicker than cash flow would allow.  Extract investment allows for highest rate of return (infinite in your case and all but one of my cases).  That extracted value allows quick scaling.  It is remarkable how fast one can obtain multi millionaire status without really anything invested using this process.

Good luck

Dave Chimobi · Answer

Hi Adam, thanks for the response! Looks like that might be the plan with the responses I've gotten.

Tucker Cummings · Answer

Your current numbers aren't even taking into account maintenance, capex, vacancy. Even if the property is in good shape, you'll inevitably have repairs to take care of. On top of that, your cash flow will weaken after you refinance so you may be in the negative.

If this were my property, I'd sell take the 100k+ profits and 1031 it into a better cash flowing property. Maybe a small multifamily or just a few houses in a better cash flowing area.

Dave Chimobi · Answer

3Beds/2baths with a bonus room and 1550 is on the conservative side relative to the market to attract a great pool of candidates. Properties typically go for 1600 in that range.

Is this Potential BRRRR a good deal?

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