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?
So is the problem just not enough cash flow?
With the scenario I gave, what is the problem you see?
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.
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
Out of pocket: 15k
Loan: 65k, 15year loan = $565 payment
Rent payment would increase to $1000 after repairs are done
Buy and hold cash flow: $275
Refi cash out cash flow: $150
Should should this simply be a buy and hold?
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