Is the best way to build up cash the BRRRR Method?

Question

Hi Everyone,

I'm wondering what the best strategy is to build up cash relatively quickly? I have a single family home I have purchased and renovated in San Diego. I will be at the 2yr mark in November of this year which would eliminate any taxes on the capital gain I have. Should I sell for the gain and go into another renovation or is there another method that would help build cash more efficiently?

Thanks!

Eric

Dan H. · Answer

I view cash flow as a single parameter in whether a purchase meets our criteria.  Therefore I do not have a set minimum on cash flow but we have never purchased a property with negative cash flow projection but we would consider doing so.

Here are two examples of properties that we purchased that cash flow was not a primary consideration:

• A Duplex that penciled out at about cash flow neutral upon purchase using conservative numbers.  It had a ~$60K value add after which it would have moderate cash flow.  $60K can equate to a lot of months of a few hundred dollars of cash flow.  It is currently our second worse cash flow to value property but I would purchase it today if a similar deal was to be available.
• A STR duplex that I was very confident of both market and rent appreciation.  Upon purchase it penciled out as minor cash flow treating one unit STR and the other LTR.  The cash flow would be a little better if both units could work as STR but initially, on purchase, there was not the market to have both units STR and the STR was not significantly out producing the LTR.  Today both units are STR booked virtually 100% and the rent is ~$15k/month total.  The property has appreciated 7 digits.  The minimal cash flow at purchase is a distant memory.  This property cash flow to current value is not great (because its value is so high) but the cash flow compared to purchase cost places this as our best purchase.  Its minimal cash flow at purchase would have had it as our second lowest cash flow at purchase (only ahead of the one above that was about cash neutral at purchase).

If we used cash flow at purchase as the only criteria, we would not have purchased either of those properties.

There are many ways that an RE can make the purchaser money.  Cash flow is only one.  I find cash flow is often more important when investors are starting out and often more constrained on their resources.  More experienced investors often prioritize items such as the value of the value add, amount of market and rent appreciation projected, how passive is the purchase, etc.

It is my opinion that SFRs purchased at retail today in San Diego will have negative cash flow when financed at tradition LTV (all cash of course will cash flow).   This implies that an RE investor in San Diego must find other means to profit for a purchase of an SFR to make sense.  To me the least risky approach is to find good value add purchases.

Good luck

Dan H. · Answer

I am not disagreeing the flipping is faster than BRRRR.  However, flipping is a job.  Quit flipping and there is no more income.  Similar for wholesaling or RE agent/broker.  They are jobs.

If you want to create a low effort income stream (I would not refer to even buy and hold RE as truly passive) then BRRRR is a good approach.  My big concern is the RE you are starting with.  I have one of my ex-homes in my RE portfolio.  It is by far my worst performing property.  Why?  Because it was purchased to be a good home for me and my family and not to be the best investment RE.  In general, SFR will never cash flow as well as duplex to quad.

What I did not see is your cash flow projections (ROE), COC projection.

I suspect that this property is not the best candidate for BRRRR (Refinance versus selling) but best to sell it.  The best BRRRR are properties that project near top of market cash flow per cost, have a lot of sweat equity (the more trashed the more sweat equity), and ideally are in a rising area (ideally has both rent and market appreciation).

Good luck

Thomas S. · Answer

You could refinance and use th emoney to get into flipping homes. That would be the fastest way to build capitol.

Jonathan New · Answer

I love Poway.  I'd take my kids to the farmers market and train ride every weekend when I was stationed in San Diego.  Beautiful area.

When I calculate BRRRR viability, I don't even think about COC.   COC is infinite in BRRRR or 80%+ at worst.  If the deal comes short of 100% COC, I'd probably just flip it.  What kind of CF do you look for as a minimum?

Is the best way to build up cash the BRRRR Method?

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