BRRRR Method Confusion- How does it Cashflow??

Question

Hey guys! I'm a little confused as to how a rental property acquired by the BRRRR method ends up cashflowing after all expenses are taken out. Of course this depends on the numbers so let me give you a common example with numbers that I encounter in my market quite often.

Purchase price: $90k

Repairs: $8k

ARV: $140k

Rents: $1400/mo

This deal meets the 70% rule and also exceeds the 1% rule so it looks like a great deal! BUT once you go and refinance with the $140k ARV at a 70% LTV ratio at 5.5% interest over 30 years your cashflow is only around $100/mo after conservative expense estimates (I assumed $3k in taxes/year, this is typical for my market, $1k insurance a year, and 5% cap ex, 5% repairs, 10% property management, 5% vacancy, and only $50 yard services.)

As I said, this is just a common example, but the cashflow is even WORSE as the ARV gets higher, unless you can charge a ton for rent, but typically it's hard to get over $2k in rent in my market without getting into luxury housing.

I'm confused! How do yall make the numbers work on these BRRRR properties?

Brent Coombs · Answer

To put what Joseph posted into perspective, if by using the BRRRR strategy, a person can recoup all their outlay quickly by scaling their buys over time, then $100/m per property will soon be massive cash flow! [No doubt, David Greene's 2-3 properties per month requires dedication].

And the main point of BRRRR is: each property ends up costing you none of your own money!

So, even if you're only getting $1 per month (forever), for zero cost to you, that's infinite returns!

Mike Dymski · Answer

If you invest $30k and then get $30k in cash flow within a couple of months, that's a strong return.  Monthly cash flow is only one component of profit in real estate investing.  Use IRR to capture all the profit.

Dennis M. · Answer

Oddly enough Many investors on here are happy with a pittance like 100$ a door ( some are happy to break even !) after borrowing 300+!grand blood sweat tears and sticking their necks out .

Eric James · Answer

Some properties aren't good rentals due to refi value in relation to rents. If your numbers are accurate I would flip that place, rather than hold for  $100/month.

Aaron K. · Answer

A lotof people would be happy with $100 a month after refinancing.  If this is a SFR you can put in your lease that the tenant is responsible for maintaining the landscaping.  Also if your repair costs are only $8k your all in total is $98k it you refinanced with 20% equity down you would be borrowing $112,000 when you only need $98k so you pulled $14,000 out of the property and are still cash flowing $100 per month unless I'm missing something.

Whitney Breedlove · Answer

Interesting. Thanks for the input guys! As soon as I feel like I have a good grip on things, I run the numbers on a deal like the one above and get discouraged when i see the cash flow. I am happy though that I’m at least on the right track in thinking that a deal like the above isn’t that great despite hitting the 1% and 70% rule. Wasn’t sure if I was missing something.

Latimer Luis · Answer

I'm fairly new myself, but I didn't think the BRRRR method was focused on pure cash flow. Isn't it more focused on gaining immediate equity? For example, in your scenario, you would have earned almost enough from the cash out refi ($22K) to have covered your initial down payment ($18K) and repairs ($8K), while also immediately gaining an additional $20K in equity? Personally, I'd take $100 a month knowing I'd already be up more than $10K (even after closing costs), especially since I could also tack on depreciation at tax time for additional returns.

Ali Boone · Answer

The reality is- numbers won't always work on them. Numbers don't work on about 80% of properties in general. And this is really a good explanation of why not to go off the "rules" that so many people throw around. My stance has always been- go off hard numbers. Which you did.

This is a little more broad to house-hacking, but it does hit on numbers-

https://www.biggerpockets.com/renewsblog/considera...

But yeah, they won't work on everything and therefore, house-hacking isn't always a 100% winner!

Marina Draper · Answer

Hi Whitney,

It looks like your house is not a great deal. If you are looking at higher ROI, consider buying properties that are cheaper and typically need more extensive rehab or even better - multifamily properties that collect more rent per building.

Another way is to negotiate with the seller and offer lower price on the property that will make sense for you. It's a bit of a work to find the good property, so stick to your numbers, keep looking, negotiate a lot and make offers that work for you. One of them will get accepted eventually!

BRRRR Method Confusion- How does it Cashflow??

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