Rookie needing help??

8 Replies

We found a great property that already has a tenant. Other than the kitchen, the property is actually in pretty good shape. But in order to get my money back out of it using the BRRR method, I need to update the kitchen. Yet here is my dillema and the options in front of me....

Option 1 - don’t touch the property and cash flow $175 a month
Option 2 - renovate the kitchen, raise rent $200, and cash flow $225
Option 3 - renovate, raise rent, refinance and cash flow only $50.

So as you will see I do not have enough cash to do this multiple times without having to refinance and get my money back out.

I have been moving towards option 3 of course, but I really don’t like not having more cash flow. However, isn’t it still worth it since I need to get my money back out? What do you recommend I do?

I think that if your goal is to BRRRR so you can repeat the process, this just isn't the right property. Don't try to make a bad deal a good deal. This property just doesn't seem to be the right deal to fit your goals.

So is the problem just not enough cash flow?

With the scenario I gave, what is the problem you see?

The way I'm looking at it, if you do options 1 or 2, you have no leftover cash to buy more, and that why you are looking into BRRRRing. If that is incorrect then it may change my opinion. So if you're looking to BRRRR, $50 cash flow is way too low, in my opinion, unless you are very confident that appreciation will be your primary driver of profit for this property.

Great point. Thanks for your help and insight. To your point, I agree that $50 is too low for cash flow.

And to clarify my cash situation, I still have enough cash to purchase a few more rentals so I wouldn’t have to refinance if I didn’t want to.

If that is the case, scenario 2 may be viable, depending on what kind of down payment you would have to invest. A $50k down payment to make $250 a month is crazy but an $8000 down payment may be a good deal.

Howdy @Jason Hodges

Just ran across your post. It seems to me the basic problem is the property is not a good candidate for the BRRRR strategy. A property that is in pretty good shape (only needing some updates) and already has tenants will not typically allow you to force appreciation enough. It needs to be a distressed property that can be purchased at a significant discount. The primary reason is when you go to do your Cash-out Refinance loan the amount will be between 70 - 80% LTV (usually 75%).

Is this why your option 3 cash flow is down to $50?  In other words after the Refi?  Loan payment now to much?

A BRRRR deal really needs to look a lot like a Flip. It should be approached the same way. Shoot for your All-in cost to be around 70% of the projected ARV. The difference being you must account for rental income to be sufficient to cover the increased mortgage payment allowing an acceptable cash flow.

Why don’t you post your analysis here so we can provide better assistance to you.

This is all very helpful.  I'm certainly learning a lot.  John, to answer your question, yes, my cashflow would be low because of the refinance.  However, I thought the renter was paying $750.  It turns out they are paying $810 - I am going to raise the rent to $1000.

Here is the run down of my numbers right now. 

Purchase price: 64K

Rehab price: 14k

Closing costs: 2k

Total: 80k

Out of pocket: 15k

Loan: 65k, 15year loan = $565 payment

Rent payment would increase to $1000 after repairs are done

EstimatedARV: 105K

Buy and hold cash flow: $275

Refi cash out cash flow: $150

Should should this simply be a buy and hold?

Thoughts?

@Jason Hodges I think your expenses are a little light. If the mortgage is $565, you still have taxes, insurance, and reserves for maintenance. I find it hard to believe that all of those other items only add $150 in expenses. I still think this is a tight deal.... too tight for me personally

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