Flip or BRRR on single family home

21 Replies

I am currently getting the inspections completed on my first investment property (single family home). I was able to make a cash offer due to using my HELOC. I would like to BRRR but I will not be able to pull out all of my invested money. Any suggestions on how I can make the numbers work?

I agree with above. Leaving a little money as your basis still involved isn't the worst thing imaginable. But yes, need to look at the numbers to really evaluate. Put 'em up so we can see :)

@Jake Thornton @Jaysen Medhurst , I purchased the home for 220k. If I flip the house I budgeted 50k for renovations. If I rent the house I estimate 25-30k in renovations. My interest rate on my HELOC is around 5%. The property taxes are 10k. What are your opinions? Septic inspection tomorrow. Thank you for responding.


@Rob Bowness

OK, so I've been number crunching. Forgive me if you've done this already (I'm sure you have) but it's also partly for myself as I venture into my first BRRRR next year.

I'm going to assume you get the property rehabbed by the end of the first holding month, and have a tenant in there for one month, before refi-ing at the end of month three.

So you purchased with HELOC cash for $220,000. I'm going to say that you put $25,000 into rehab costs. Your monthly tax to hold the property is $833, for a total of $2500 for three months. Your cost for your total HELOC payment for three months is $3,062.

So your total cost to buy, rehab, and hold this property is:

$220,000 purchase plus

$25,000 rehab plus

$3,062 HELOC payments plus

$2500 property taxes

TOTAL 250,562. 

After three months you refi for an ARV of $330,000, leaving 25% in the home. You leave $82,500 in, and pull out $247,500.

So your HELOC cash in was $250,562, and your cash out is $247,500. A difference of $3062. That $3062 pulled from your HELOC at a 5% interest rate, and payable over 30 years is a monthly payment of $16.44.

BUT WAIT you made a pure cash flow month on the third month of $2500. So that $3062 is now only $562. So now to pay that HELOC rate is only costing you $3.02 a month.

If you get a rate of 5% on the refi'd mortgage your principal and interest payments will b $1329 a month. Property taxes of $833. I'm going to assume you aren't covering any other utilities. 

Your payment then is $2,228 per month. Plus your HELOC repayment of $3.02

Your rent is $2500. 

Your cash flow then is $268.56 per month. 

Yes, you still have money in the deal that you have to pay for, but it's such a low amount and is easily covered by the monthly cash flow. 

The numbers change of course if your mortgage rate is higher, the rehab costs more, you have to hold the property for longer before rented etc. But from this deal I can see that I think you're gonna be ok. 





 

@Jake Thornton , thanks a lot for putting that much thought into my property. From my understanding it’s very rare ton refinance the property before 6 months of ownership. Also, did you include vacancy rate, cap ex, and maintenance repairs as a monthly cost? I have read those costs should generally be 5% each of the monthly rent. It’s difficult to for me to estimate the renovations as well with 0 experience but i have to take the first steps to get into the game.

@Rob Bowness

You may be able to refi before 6 months, but I would not assume that $30k rehab will be done in a month. Unless you have someone lined up without seasoning, it’s safer to budget for a normal 6 month seasoning period.

Don’t leave out capex, vacancy, etc. Wildly important. You can either figure out true cash flow on this side of the deal, or the other side. It’s more fun to know the numbers before you do the deal.

My thought is that you might get a bit more freedom out of $40k on a flip than renting for $150 cash flow a month. That $40k might give you more room on the next deal to make a mistake, leave money in for more cash flow, or have some room for operating expenses in your business. IE, trying to get some of your own deal flow going, or speed dating contractors.

Just my two cents. I may indeed be wrong.

Respectfully, @Jake Thornton , you have a lot to learn about analyzing a property. I admire your willingness to try and help a fellow BPer, though. Thankfully, @Rob Bowness is already savvy about the actual costs of owning a rental property. If this were a newbie with less education and they took your advice, they could have found themselves in a world of hurt. A statement like "you made pure cash flow" is so ignorant as to be dangerous. There are a ton of great resources on BP about how to properly analyze a RE investment. Please take the time to master this skill before you lead someone to a ruinous decision.

Rob, bottom line this is probably better as a flip. I calculate it will be in the red each month as a rental.

$2500: GSR
($200): Vacancy - 8%
($375): Repairs and CapEx Reserves - 15% combined
($250): Management - 10%
($833): Property Taxes - Saw this quoted above, is it accurate? It's killing you.
($175): Insurance - My estimate, confirm with a local agent
($1338): Debt Service - $330k ARV, 20% down, 4.5%, 30 years
= ($671)/month cash flow

@William Wright @Jaysen Medhurst , thank you both for the advice. I think flip is a better option. If I can have more cash to use on future properties that does not have debt attached to it will be beneficial for me. I would love to rent the property for a year to avoid some tax implications but Idk that it is possible.

It may be possible, @Rob Bowness , but is it worth it? I'm no CPA so take this with a big ol' grain of salt, but what the IRS cares about is intent. There's no magical amount of time to hold a property. Sure, you'll have a stronger case to make if you hold for a year, but you're treading on somewhat shaky ground. You also have to consider of the logistics and additional costs around holding for 1 year, then trying to sell.

Personally, I don't mess around when it comes to the IRS. Play it straight, sleep well at night, move on the next deal.

@Rob Bowness , if you have it under an LLC your cash out should be about 70% if it is under your personal name you can get 80%. The answer is do both. Hold it until you find a better cash flow producing investment, then sell it. You will skip the capital gains at 25% and you will roll right into receiving rent.

@Rob Bowness I plan to employ the BRRRR strategy as well; however, I thought I would add my 2 cents.

It is certainly lender dependent, but the lender I am working with has no seasoning requirement if the property is purchased in cash (or like cash - such as HELOC or whatever). In that case, as soon as your repairs are completed and you reappraise, you should be able to pull your money out.

Originally posted by @Jake Thornton :

@Rob Bowness

OK, so I've been number crunching. Forgive me if you've done this already (I'm sure you have) but it's also partly for myself as I venture into my first BRRRR next year.

I'm going to assume you get the property rehabbed by the end of the first holding month, and have a tenant in there for one month, before refi-ing at the end of month three.

So you purchased with HELOC cash for $220,000. I'm going to say that you put $25,000 into rehab costs. Your monthly tax to hold the property is $833, for a total of $2500 for three months. Your cost for your total HELOC payment for three months is $3,062.

So your total cost to buy, rehab, and hold this property is:

$220,000 purchase plus

$25,000 rehab plus

$3,062 HELOC payments plus

$2500 property taxes

TOTAL 250,562. 

After three months you refi for an ARV of $330,000, leaving 25% in the home. You leave $82,500 in, and pull out $247,500.

So your HELOC cash in was $250,562, and your cash out is $247,500. A difference of $3062. That $3062 pulled from your HELOC at a 5% interest rate, and payable over 30 years is a monthly payment of $16.44.

BUT WAIT you made a pure cash flow month on the third month of $2500. So that $3062 is now only $562. So now to pay that HELOC rate is only costing you $3.02 a month.

If you get a rate of 5% on the refi'd mortgage your principal and interest payments will b $1329 a month. Property taxes of $833. I'm going to assume you aren't covering any other utilities. 

Your payment then is $2,228 per month. Plus your HELOC repayment of $3.02

Your rent is $2500. 

Your cash flow then is $268.56 per month. 

Yes, you still have money in the deal that you have to pay for, but it's such a low amount and is easily covered by the monthly cash flow. 

The numbers change of course if your mortgage rate is higher, the rehab costs more, you have to hold the property for longer before rented etc. But from this deal I can see that I think you're gonna be ok. 





 

Good analysis, Jake.

One thing is that there might be a seasoning period and the REFI mark at 3-month might be a little ambitious.