Mortgage Cost vs Rents on High Value Properties

[John McCormick]

My partner and I are just starting out and we would like to do buy and hold, ideally BRRRR. I am trying to understand how to make the numbers work when rents cannot pay the mortgage. For instance, on a recent BP podcast Brandon was talking about how the tenants on his $1.7M property are so much less work than the tenants in his $200K. Even if he got a screaming deal and bought the property and rehabed it for $1M, the mortgage alone is ~$5,000 per month. Rents on $1.3M homes are ~$5,000 (I'm sure it varies by area).

The properties I'm looking at are much less expensive, $150k to $250k, but rents in the area are relatively low.  They definitely do not meet the 1% rule, but there is not shortage of investors in the markets I'm shopping.

So my question is, if rents don't cover the mortgage, do I just have to leave my working capital in the property? Is BRRRR primarily just a strategy for lower end homes? Am I missing something else?

Thanks for your time and help.

[Steve K.]

@John McCormick

BRRRR works in any market wherein you buy and rehab the property for around 75% of it's ARV. Then, upon re-appraisal, the bank loans you 75% LTV and like magic you get all of your cash back out to "repeat".

In my Denver market, competition for fix and flips is so intense, investors bid them up to about 85% of ARV. So, it's not easy to find a fully BRRRRR here.

But, 3 years ago, I did four properties in the $450k ARV range that all BRRRR'd, and yes the rent did cover the mortgage on the 75% LTV loans

Admittedly, there are more stories of BRRRR in the modest priced mid-west markets.