BRRR Rental Period Cashflow after Refinance

Fredericksburg, VA · Member since 2018 · 6 posts · 1 vote

I just purchased my first property and trying to decide whether I should Flip or use the BRRR strategy. I got the house for $111k, and Zillow says the house is valued at $207k. I understand Zillow is not always accurate (they say it is now within 4.5% accuracy), but two VERY similar homes within throwing distance are for sale at $210k and $214k. I expect rehab costs to be $40k - which I expect my ARV to be in the $215-$220 range. Using the BP BRRR Calculator, my "Initial Rental Period" cashflow is $5,300; but after "Refinance" my cashflow is -$15.93. Cash on Cash ROI is Inf%. I would've thought the cashflow would be in the positive territory given I got the house for 52% ARV (assuming my numbers are correct). What am I missing??? Thanks in advance...

0 Reply

9 views

Most Popular Reply

Mike McCarthy

Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes

@John C Rider that bothered me too when starting out. The house is a good deal, but the cash-out mortgage can actually outpace the rental rate. You can either get a smaller mortgage, or re-work your rental rates.

The real decision between a flip and rental is short term vs long term income and effort.

Some people love the ‘quick money’ of a flip, while others swear by the long-term growth and passive income of a rental. One isn’t better than the other - just what works better for you and your situation.

1 Reply

See this reply in the discussion

10 Replies

Jump to latestLatest

Sort by

Chris T.
Investor · Downers Grove, IL · Member since 2015 · 1k+ posts · 955 votes
7y
congratulations! You've a good problem on your hands.
Your cash on cash after refinance is Inf% is probably because you got all of your money out.
I would look at closed sales, not houses for on sale on the market. And use a conservative ARV, minus your rehab/holding/closing/realtor fees etc. And if it's worth while for you to flip.
1 Reply
John C Rider
OP
Fredericksburg, VA · Member since 2018 · 6 posts · 1 vote
7y
Thanks Chris T. I had my realtor run a comparative market analysis and it came up at $204k (Zillow was $207k). I tried to edit my post, but it went past the 15 minutes to allow. I used the BP calculators so all of the fees/costs are covered in my calculation. I'm not worried about the numbers for a flip; and I should have been a little more specific...I'm just wondering when and how a BRRR strategy would work, because at 52% ARV, the "Refinance" mortgage won't cover the rental income and you would think that it would.
0 Reply
Mike McCarthy
Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
7y
@John C Rider that bothered me too when starting out. The house is a good deal, but the cash-out mortgage can actually outpace the rental rate. You can either get a smaller mortgage, or re-work your rental rates.
The real decision between a flip and rental is short term vs long term income and effort.
Some people love the ‘quick money’ of a flip, while others swear by the long-term growth and passive income of a rental. One isn’t better than the other - just what works better for you and your situation.
1 Reply
John C Rider
OP
Fredericksburg, VA · Member since 2018 · 6 posts · 1 vote
7y
@Mike McCarthy thanks for your input. Again, I'm just kind of baffled because I hear @Brandon Turner and @David Greene discussing it a lot on the podcast and how excited they are with that strategy. I'm assuming that at that point a break even rent to mortgage ratio is acceptable if I can get my money back out tax free (not exactly free...) by refinancing; otherwise I would have to purchase the house at even a greater discount (less than 50%). I'll continue to run the numbers as I work on the house, but I believe I've made my decision to flip so I can use the profit to put a down payment on two other homes via a 1031 exchange. Hopefully I can respond to this discussion with some POSITIVE news in 90-120 days from now during the hottest month to list a home - May!
0 Reply
Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
7y
@John C Rider, rent and retail many times have converse relationship or no relationship. The more expensive a property is generally the lower the rent will be as a % of value. And that can greatly diminish the amount you can get back out in your refinance to stay positive. And remember that even though you bought it at a great discount to ARV you're still refinancing it at 75% probably. so your purchase price really doesn't have any impact on your cash flow after refi.
Each house will tell you what you need to do. It sounds like this ones telling you to "make me nice and sell". I probably agree with you. But there's another potential issue and that's with the 1031. In order to qualify for 1031 treatment the property must have been purchased with the intent of holding for productive use. In other words if you bought the property with then intention of fixing and flipping it does not qualify. And if you have to pay tax on the profit from a simple flip of this property you're going to leave another 15 - 20K of tax with the guvmmit.
The way I read your original post you actually bought that property with the intent of holding (to brrr). So that in theory would make the property eligible for 1031 treatment. But... while there's no statutory holding period to qualify, the longer the better and you want to be able to demonstrate your intent if ever asked in an audit.
So a couple of recommendations:
1. Don't make a final decision now. Continue to think of it as a brrr property for now. Attempt to line up financing. Keep massaging it. If you can't make it work then keep all the documentation of every calculation you did, every email you sent about it, every loan you applied for.
2. While this doesn't look like the greatest rental. It does sound like it's positioned as a nice primary residence for someone. Have you thought about a refi followed by a lease to a good tenant with an option to purchase. I've used this several times to enhance my noi because I can use the option money as a hedge against vacancy, repairs, or cap ex. And in many cases I can charge a little more than market rent because the unit is pristine upon move in. And with a 1-3 year option you can build in appreciation escalators. And at sale it becomes an easy 1031.
The 1031 Investor5137 Reviews
Website View Page
1 Reply
John C Rider
OP
Fredericksburg, VA · Member since 2018 · 6 posts · 1 vote
7y
@Dave Foster Thanks for that bit of info! I'm a little "green" with investing, but have owned several homes throughout my military career and still maintain one in Killeen, TX, while living in Virginia. I'm still not 100% sure which route I will take, because the mortgage will be low enough even if I decide to use it for a place to stay when I visit family (my family and my wife's family still live there). We always have to eat two Thanksgiving dinners and go our separate ways when we visit, so would rather have a place to crash and bring our dogs.
Again, thanks for the information and taking the time out to reply. I'll definitely look your company and up to learn more about the 1031 exchange, and hopefully maintain contact with you via BP or any other venue.
~ John
1 Reply
Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
7y
@John C Rider, the 1031 model is tailor made for military investors. It allows you to slowly build your portfolio as you post everywhere but consolidate as you end your posting travels. I'll pm you and give you a link to another serviceman who did exactly this using the 1031. It's quite an inspiring story.
The 1031 Investor5137 Reviews
Website View Page
1 Reply
Chris Levarek
Real Estate Syndicator · Phoenix, AZ · Member since 2018 · 903 posts · 1k+ votes
7y
@John C Rider Additionally, perhaps you could refinance to a lower amount to be positive in cash flow and then HELOC the now greater equity in the investment property to future investments. Does depend on how good of a HELOC you find though but allows for no capital gain taxes and continued use of equity. Obviously, you would like to not leave money in the deal. Or other ideas might be taking different loan types for better rates, ie. shorter terms with balloon payments or ARM loans if you plan on a 1031 anyway. Some properties do work better as flips so the BRRRR game is a risk/reward but having more offered on the refi is always better than less!
1 Reply
John C Rider
OP
Fredericksburg, VA · Member since 2018 · 6 posts · 1 vote
7y
@Chris Levarek Thanks! I appreciate your input and the various approaches...and kind of what I was hoping to get out of this discussion! I've thought about HELOC on my current home, but didn't really think about it for this house; and will run some calculations (sounds like a great idea). I have a good relationship with my lender(s) and banks (and a excellent credit score), so I'm pretty sure I can get some good terms. Thanks again for the input!
0 Reply
John C Rider
OP
Fredericksburg, VA · Member since 2018 · 6 posts · 1 vote
7y
Correction on my discussion (first paragraph / initial discussion at the top of this thread): "Initial Rental Period" cashflow should read $530, not $5,300.
0 Reply

Join the conversationCreate a free account to reply, vote on answers and follow this thread.