Where is the Cashflow?!

Nashville · Member since 2019 · 56 posts · 21 votes

Hello BP! I've been on the hunt actively for 7 weeks. I'm an impatient person (super high D if you're a DISC person) so I know I just need to keep looking. I've been outbid on 5 houses and most by a significant margin. Most of those houses weren't "home runs" but the numbers worked for BRRRR. Most cashflowing around $200/mo and leaving at most a years of cashflow in the deal after refi.

Over the last 3 days I've evaluated 3 houses and came up with the same issue. The houses have been well below market value. Comps are good and are able to pull out cash and reno costs after refi. However, they aren't cash flowing! They are basically breaking even. What am I missing? Is the market rent too low? Are my lenders numbers too high? Any advice would be helpful!

Below is a property I evaluated this morning for reference.

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Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

@Matt Hudson my friend your drinking the BRRRR cool aid.. that's a very slow way to scale lets run the math.

you have 250k that buys you two properties.. you look and you look it takes you months to find them maybe more ergo your frustration.

you finally find the two pearls.. takes you about 30 days for a normal cash escrow.. now it takes you 30 to 90 days to do the rehab.. and then another 3 months to season in MOST cases to refi.. then your refi takes another month.. and of course your refi appraisal comes in low and you end up leaving money in the deal anyway ( this is quite common but not talked about.) so your going to grow at 2 homes per 7 to 8 months..

now lets say you put 20% down or 25k on each house and financing them you can buy 10 in a matter of 6 months..

your going to be 3 to 4 years getting to the same scale.. and if you saved 250k then while you making money on rentals and saving again you probably buy 1 to 2 a year after your first slug of 10... ???? so in my mind BRRR should have another R for RISK.. risk that the rehab goes wonky and way over budget. Risk that refi does not work he way you think or hope it will.. and of course 2 to 5 years from now maybe you don't get the great rates you get now if you just go out and buy 10 homes in the next 90 days at historic low rates and lock those in for 30 years.. your risking rates being 50% higher and cash flow not as good.

So that's the other side of the coin.. think about it.. and maybe you really want to buy a 750k mutli family and bunch the whole SFR idea.. if its rental income you want.

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
7y
in this market to expect all your money back and to be positive 200 a month is a pretty tall order.
people get 200 a month when they put 20 to 30% cash equity into the homes..
hard to have your cake and eat it to.. or you need to TAKE the risk of buying paper tigers.. IE houses that look great on paper but can eat your lunch when the tenant does what low end tenants do.. and they are very good at what they do.
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Tim Herman
Member since 2018 · 2k+ posts · 1k+ votes
7y
@Matt Hudson couple things I see. 1 your rental income does not meet the 1% rule. The most cash out should be no more than $130000 to cash flow. 2 you are using a 25 year mortgage. It is the job of your tenant to pay the mortgage.
You will get your a** kicked if you hold this long term. I use 23% for vacancy,repairs, and capex, you are at 15%. Let's say you rehabbed everything new. Don't know the size of this property so making up numbers. Capex for a 1200 sf flooring @ $6 sf = $7200 / 8 year life span /12 months in a year = $75 per month capex for floors. Just one item exceeds your capex budget. You need a budget for roof,appliance,hot water heater,hvac,painting,etc.
Some areas it might be better to flip. Just my .02 Good luck on your investing journey.
13 Reply
Matt Hudson
OP
Nashville · Member since 2019 · 56 posts · 21 votes
7y
@Jay Hinrichs
But Jay, unreasonable expectations is kinda my thing! In all seriousness, I've set aside $250k to start my real estate business and chose the BRRRR method for scale purposes. My goal was to buy 2 houses, in a market just outside of Nashville, by the end of this year. I've avoided the D or less neighborhoods and have only made offers in C neighborhoods. Tenant wear and tear, cap ex expenses, etc is why I'm concerned about cash flow. Scale is why I'm concerned about leaving too much money in deals (ie 20-30% down). I feel like I need to change methodology. Maybe I need to be looking for more expensive SFH in B neighborhoods or multi-family in those C neighborhoods. I wanted 2x houses by the end of this year for economy of scale purposes, but if the numbers aren't working I need to shift. Or maybe I need to find even better deals...lots to consider.

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
7y
@Matt Hudson my friend your drinking the BRRRR cool aid.. that's a very slow way to scale lets run the math.

you have 250k that buys you two properties.. you look and you look it takes you months to find them maybe more ergo your frustration.

you finally find the two pearls.. takes you about 30 days for a normal cash escrow.. now it takes you 30 to 90 days to do the rehab.. and then another 3 months to season in MOST cases to refi.. then your refi takes another month.. and of course your refi appraisal comes in low and you end up leaving money in the deal anyway ( this is quite common but not talked about.) so your going to grow at 2 homes per 7 to 8 months..

now lets say you put 20% down or 25k on each house and financing them you can buy 10 in a matter of 6 months..

your going to be 3 to 4 years getting to the same scale.. and if you saved 250k then while you making money on rentals and saving again you probably buy 1 to 2 a year after your first slug of 10... ???? so in my mind BRRR should have another R for RISK.. risk that the rehab goes wonky and way over budget. Risk that refi does not work he way you think or hope it will.. and of course 2 to 5 years from now maybe you don't get the great rates you get now if you just go out and buy 10 homes in the next 90 days at historic low rates and lock those in for 30 years.. your risking rates being 50% higher and cash flow not as good.

So that's the other side of the coin.. think about it.. and maybe you really want to buy a 750k mutli family and bunch the whole SFR idea.. if its rental income you want.
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Matt Hudson
OP
Nashville · Member since 2019 · 56 posts · 21 votes
7y
@Tim Herman
Yes, this is not an ideal purchase for many reasons including the 1% rule. In regards to amortization terms I chose 25 years in an effort to maximize cash flow. I could get 15, 20 or 25 year terms from several institutions I’ve spoken with. What length term would you recommend? And would you sacrifice cashflow for a shorter term?

Depending on the house and amount of rehab I will change these numbers. On this particular one, I haven’t done much thinking on it yet as it just got on my radar. However, it would be basically a full rent ready reno…including new roof and HVAC. I purposely decreased cap ex and repairs, however, obviously too much. I appreciate your breakdown of flooring as it gave me a new way of thinking on capex.

My concern at this point is lowering the amortization terms and increasing my expenses will drive down my cashflow even further. What is the solution? Better deals?
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Alexander FelicePro Member
Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
7y
5 outbids is nothing, if you have a 5% closing ratio you should bid on 20 units before closing one.
200 a door is about what I net on my portfolio last year on Schedule E, it's DEFINITELY harder to do that these days and especially in a hot market like Nashville.
the deal you posted is OK, it doesn't make me drool, but that might be market average. Margins are shrinking as real estate becomes more popular, this trend is expected to continue. The question I want to know is, will someone else buy this house to do the same thing you're trying to do, or will they also pass?
The market doesn't care about your ambition, this is the same burden everyone who buys real estate at this point in the economic cycle must bear.
How many wholesalers are you networking with regularly? Finding good deals is key! if you're buying only what happens to be easily available you're fighting with the masses for the low hanging fruit. Low hanging fruit SUCKS.
If you really want scale, don't bother with SFR at all.
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6 Reply
Matt Hudson
OP
Nashville · Member since 2019 · 56 posts · 21 votes
7y
@Jay Hinrichs

You may very well be correct on the BRRRR kool aid! I like the idea of keeping my hard earned cash if possible. You're timeline seems about what I have budgeted outside of I have 3 lenders willing to refi with no seasoning...assuming I have a lease agreement. I am very nervous about appraisal and subsequently am very conservative on comps. This is likely another reason I'm getting outbid or the numbers aren't working.

I see what you're saying and though with much less experience and knowledge, I went down this path as well. I hit roadblocks from lenders in regards to DTI on the initial purchases. Being self-employed banks do not like my books! HA! With the cash out refi they can use the lease agreement as income and it is essentially a wash on my DTI. I also hate to part with my cash. I've cashed it all out in ones and sleep on it.

Rental income is exactly my goal. My plan was to eventually graduate to multi-family but am not opposed to jumping in the deep end either. Again, financing would be the hurdle.
0 Reply
Tim Herman
Member since 2018 · 2k+ posts · 1k+ votes
7y
@Matt Hudson you should be able to get a 30 year amortization. have you looked into small multis? Take your time looking for a deal.
1 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
7y
Originally posted by @Matt Hudson:
@Jay Hinrichs

You may very well be correct on the BRRRR kool aid! I like the idea of keeping my hard earned cash if possible. You're timeline seems about what I have budgeted outside of I have 3 lenders willing to refi with no seasoning...assuming I have a lease agreement. I am very nervous about appraisal and subsequently am very conservative on comps. This is likely another reason I'm getting outbid or the numbers aren't working.

I see what you're saying and though with much less experience and knowledge, I went down this path as well. I hit roadblocks from lenders in regards to DTI on the initial purchases. Being self-employed banks do not like my books! HA! With the cash out refi they can use the lease agreement as income and it is essentially a wash on my DTI. I also hate to part with my cash. I've cashed it all out in ones and sleep on it.

Rental income is exactly my goal. My plan was to eventually graduate to multi-family but am not opposed to jumping in the deep end either. Again, financing would be the hurdle.
actually loans on 5 units or more will be much easier for you . as they are not fannie freedie guide lines.. maybe do some shopping around and see. Also if you have cash and in a decent market U may want to consider flipping can be some good money partnering with the right contractors .. will make more money most likely than you will in rental income by a long shot.

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7 Reply
Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
7y
This is a flip rather than a hold.
5 Reply
Alan Grobmeier
Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes
7y
@Jay Hinrichs, although we do have low interest rates TODAY, I think we MIGHT be on our way to zero or negative rates. Maybe @Matt Hudson should wait? ;-)
3 Reply
Alan Grobmeier
Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes
7y
@Matt Hudson, you have a number of discrepancies on your model. They are seriously flawed.
- You will not be able to refi for 140k, even if the property appraises for 170k. The MOST you will be able to get is a 80% LTV ($136k) and that will come with a lot of points and fees. More than you have budgeted.
- You gotta put some money down to get to the $110k loan. You're looking at 20%+ = 22k.
- Amortize over 30 vs 25. It will drop your PITI a few dollars.
- Your refi is going to cost you $4k to get back $25k remodel costs? Not a good return on your money. You would be better off looking at the $25k in remodel costs as a cost of doing business. I know that will seriously hamper your business growth, but it's really 'sunken' money if you gotta pay $4k to get back $25k (and it won't be 25k anyway).
IMHO you are really looking at plowing $47k into this project, 22k down, 25k remodel. Redo the numbers and see how that looks.
Alan
5 Reply
Matt Hudson
OP
Nashville · Member since 2019 · 56 posts · 21 votes
7y
@Alan Grobmeier
I appreciate your input.
-The $140,038 refi loan number is the ARV/appraised value of 80% LTV plus an estimated 3% loan fees. $169,922 (ARV) x .80 (LTV) = $135,938 + $4,100 (fees) = $140,038. Is that not correct?
-I'm not looking not looking to get a loan as I'm paying for the initial purchase in cash.
-I've been hunting for 30 year amortization. The most I've found (shopped 25+ lenders) is 25 years on the commercial side. On the standard mortgage side I think I can find 30 however their lending parameters are much more strict and LTVs are lower.
-I very much dislike closing costs for many reasons we won't get into. However, it's the cost of doing business and I can't avoid them unless I pay cash and never try to pull money out. I'd rather sink that $4100 that's wrapped back into the loan over 25-30 years and have the renters pay it down than be without $4100 in cash. I like my cash. I do like your thought process here...
0 Reply
Matt Hudson
OP
Nashville · Member since 2019 · 56 posts · 21 votes
7y
@Mike Dymski
I've gone into this RE process with the goal to buy and hold. More than one or two times over the last 7 weeks I've said, "I think this works better as a flip.". Mostly because the BRRRR will work but it doesn't cashflow as a long term hold. Thanks for your input!
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Alan Grobmeier
Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes
7y
@Matt Hudson, your max loan will be 170k x .8 = 136k, but your cash will be MINUS your fees to cashout. Based on your 3% number, you will walk with 132k on a 135k investment. You’re probably looking at a half a point or more depending on your credit score/credit worthiness. $500+ appraisal fee. I think your numbers here might be a little low, but I don’t know your area.
A 98k loan @ 5%, 25 yr am - about $573 a month. Your piti would be about $740. If your rent is $1300, that’s pretty decent cashflow. You had to put $47k into it. That’s still a pretty decent return.
1 Reply
Alan Grobmeier
Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes
7y
@Matt Hudson, @Jay Hinrichs hit the nail on the head when he said BRRR is overrated.
You are better off with a B+/A- property in a great school district vs buying a job/hobby. Your overall return on your money (and time) will be better. On top of it, there is no excuse to having a property manager. You should be able to manage it yourself easily.
3 Reply
Matt Hudson
OP
Nashville · Member since 2019 · 56 posts · 21 votes
7y
@Alan Grobmeier
I've heard many have reservations about BRRRR and I'm open to any methodology that help me accomplish my RE, personal and financial goals. I'll keep studying and will take your advice to heart.
I suppose why I was looking in smaller submarket outside of Nashville and in C neighborhoods was for economies of scale. I don't like the idea of having all my eggs in the basket of one property. With my current funds I can buy 2x properties in a C neighborhood or one in a B. However, if I can't find deals in the C neighborhoods and it may cause me more headache/money down the road then I should start looking elsewhere.
I am 100% not "excuse guy" but very much live in reality. I'm fully aware of what my capacity is and am self aware enough to say it's pretty high. With that said, I'm currently a small business owner of 2 businesses, an Airbnb owner, a dad of a 5 & 7 year old, a husband, a dog owner and a person that has more over-ambitious side projects and hustles that I care to share. HA! So the thought of taking calls about a leaking toilet doesn't sound like something I'm feasibly able to do at this point in my life. It's not beneath me it's literally a time problem. In addition, the market I'm looking at is 45min-1 hour from Nashville so it would make self managing even more difficult.
1 Reply
Alan Grobmeier
Rental Property Investor · Phoenix, AZ · Member since 2013 · 919 posts · 911 votes
7y
@Matt Hudson, I self manage in San Diego (and Phx), had a job that required me to travel internationally. I live in Phoenix. Anything can be done with the right systems. I use home warranties for all my minor issues. Obviously I still have to engage on major items. But those are truly few and far between. ;-)
3 Reply
Anthony GaydenPro Member
Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes
7y
@Jay Hinrichs
I agree with your assessment on the BRRRR process. I did it one time and it was difficult to make work and it was slow. I honestly would rather skip the rehab and refinance part.
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Account Closed
Rental Property Investor · Torrance, CA · Member since 2016 · 724 posts · 1k+ votes
7y
Originally posted by @Jay Hinrichs:
@Matt Hudson my friend your drinking the BRRRR cool aid.. that's a very slow way to scale lets run the math.

you have 250k that buys you two properties.. you look and you look it takes you months to find them maybe more ergo your frustration.

you finally find the two pearls.. takes you about 30 days for a normal cash escrow.. now it takes you 30 to 90 days to do the rehab.. and then another 3 months to season in MOST cases to refi.. then your refi takes another month.. and of course your refi appraisal comes in low and you end up leaving money in the deal anyway ( this is quite common but not talked about.) so your going to grow at 2 homes per 7 to 8 months..

now lets say you put 20% down or 25k on each house and financing them you can buy 10 in a matter of 6 months..

your going to be 3 to 4 years getting to the same scale.. and if you saved 250k then while you making money on rentals and saving again you probably buy 1 to 2 a year after your first slug of 10... ???? so in my mind BRRR should have another R for RISK.. risk that the rehab goes wonky and way over budget. Risk that refi does not work he way you think or hope it will.. and of course 2 to 5 years from now maybe you don't get the great rates you get now if you just go out and buy 10 homes in the next 90 days at historic low rates and lock those in for 30 years.. your risking rates being 50% higher and cash flow not as good.

So that's the other side of the coin.. think about it.. and maybe you really want to buy a 750k mutli family and bunch the whole SFR idea.. if its rental income you want.

Well thanks Jay for bursting my bubble, and making me re-evaluate my entire life's plan lol. I've been thinking this for awhile, but haven't been able to bring myself to admit it quite yet. Reusing my capital to infinity...that's the BRRRR investors dream. Even if it's a pipe dream.
Joking aside, BRRRR strategy definitely works. The problem is the timeline. 1 BRRRR could easily take a year to complete. Of course that's after months of looking for the deal. How many properties could I have by now if I did as you say and buy them conventional and compound the cashflow?
I feel like I’m getting nowhere sitting on this cash and waiting for the home run. My agent is really good, and works the OOS investor niche. Maybe I should tell him I want to try a different approach.

1 Reply
Aaron Taylor
Olathe, KS · Member since 2018 · 148 posts · 207 votes
7y
@Matt Hudson if you have $250k in the bank already, then I don't think I'd start with BRRRR, it'd be a waste of your time. You BRRRR when you have more time than money, and it appears like you have the opposite issue. It seems like you could just buy a single family home or duplex to get your feet wet, then look for a small multi to scale up some. With 250k, I'd concentrate on getting deals (deal flow) as finding just one good deal will probably make you as much equity as you'd gain working on this BRRRR in a fraction of the time.
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Joe Scaparra
Investor · Austin, TX · Member since 2013 · 662 posts · 1k+ votes
7y
This discussion is driving me crazy!!!! STOP! STOP! Lets start over and at the beginning. Let's define the goal and invest to the goal. Tie your goal to your WHY! It will help keep you on track to accomplish your goal. For example: My goal is maximize rental income to become financially independent and my Why is to enable me to live a robust live style, or stay home with the kids and or wife, or to give you more time to do what you want. In other words to become financially independent. Just remember this, most people go to work because they need a paycheck. When you retire where is your paycheck coming from? Financial Independence is achieved when you have more monthly income coming in from than you need, without having to clock in and out each day.
I am going to make a few assumptions: 1. You're a newbie to real estate investing. 2. Keeping it simple is good (especially for beginners). 3. Your goal is to maximize rental income while minimizing risk. 4. You have 250k ish to invest in real estate.
If your goal is to maximize income then quit thinking SFH. Start thinking duplex. Yeah, you could do triplex or 4 plex but let's walk before we run, especially because you're a newbie. Buy a duplex because you have less risk in a downturn. If you have a duplex with each side renting at 1k or a SFH renting for 2k which is better? The duplex. It is easier to find two 1k renters than one 2k renter. When a tenant moves out you still have income coming in the duplex but the SFH no so much!
Buy with the 1% rule in mind. Put 20-25% down, and do your own property management. 1st year hold back all profits for maintenance reserve. Years 2-14 take the extra profits and pay down the 30-year mortgage. After 14 years you will own the property outright. Now your building wealth. When you get two or more properties, combine the profits of all and pay down one note maybe in 8 years. Once you get the first paid off, your cash flow builds but your motivation skyrockets! After two properties are paid off you are now able to see the light at the end of the tunnel. Your experience is better, you lived through some situations that have made you stronger. You're now ready to buy that beat-up duplex for a steal because you have the experience and CONFIDENCE to rehab it. Don't throw away 10% on property management, otherwise, you will get taken by the PMs. Find you a grey hair old man who has been there and done that and pick his brain. Buy him a cup of coffee or lunch every now and then and he will mentor you through this process. But don't sign up for the Master Mind classes that will teach you to become rich on other peoples money! It doesn't work that way, save your money. Good luck. Cheers.
11 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
7y
Originally posted by @Matt Hudson:
@Alan Grobmeier
I've heard many have reservations about BRRRR and I'm open to any methodology that help me accomplish my RE, personal and financial goals. I'll keep studying and will take your advice to heart.
I suppose why I was looking in smaller submarket outside of Nashville and in C neighborhoods was for economies of scale. I don't like the idea of having all my eggs in the basket of one property. With my current funds I can buy 2x properties in a C neighborhood or one in a B. However, if I can't find deals in the C neighborhoods and it may cause me more headache/money down the road then I should start looking elsewhere.
I am 100% not "excuse guy" but very much live in reality. I'm fully aware of what my capacity is and am self aware enough to say it's pretty high. With that said, I'm currently a small business owner of 2 businesses, an Airbnb owner, a dad of a 5 & 7 year old, a husband, a dog owner and a person that has more over-ambitious side projects and hustles that I care to share. HA! So the thought of taking calls about a leaking toilet doesn't sound like something I'm feasibly able to do at this point in my life. It's not beneath me it's literally a time problem. In addition, the market I'm looking at is 45min-1 hour from Nashville so it would make self managing even more difficult.
so with all this ambition and a desire to move at warp speed why real estate rentals.. that's a very slow wealth builder.. you want action take your funds and do value add flips or new construction.. or buy any number of small business that will make far more cash flow than rental houses.. FAR more.. real estate on the rental side is great for long term wealth accumulation but to have it fast and now there are many other ways to make better money.

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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
7y
Originally posted by @Anthony Gayden:
@Jay Hinrichs
I agree with your assessment on the BRRRR process. I did it one time and it was difficult to make work and it was slow. I honestly would rather skip the rehab and refinance part.
Anthony we have identified Omaha as a Market for our new patented software that finds hidden pearls.. IE Omaha land use mirrors Portland Or were we have been very successful with this custom software we created.. please PM me so we can discuss Omaha opportunities that are there to be plucked and 99% of investors will have no clue..

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Cliff H.Pro Member
Rental Property Investor · Nashua, NH · Member since 2014 · 587 posts · 477 votes
7y
@Matt Hudson it takes a long time to find the right deal. I always assume the rule of 10x: 100 deals > 10 offers > 1 closing.
Like great tenants, finding the right one takes time and being your first property you’ll definitely make mistakes, but the worst of those mistakes is putting your good money in the line for a bad deal which then siphons all the other good dollars away.
My first rental took 10y to reach $400/mo Cashflow and I don't know that it ever truly broke even after CapEx, while its newer sibling rental meets the 3% rule at only 1/5 the purchase price.
Good deals take time.
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