Low money BRRRR - Too good to be true?

Question

Good afternoon! So I’m relatively new to the real estate market and learning about the different strategies that I could deploy. One that has peaked my interest is BRRRR due to being able to get into real estate with a lower capital requirement (sometimes none?)

So this post is mainly to get some feedback/experience in this area. So I’m gonna lay down a “Deal”(hypothetical) and it would be great to see if I have it correct!

So in my local area the average rent is between 500-1500 dollars a month depending on area. In this case I’ve found most of the 50-65k property value areas renting between 800-1000 dollars a month.

So looking at a home with a expected ARV of 60k and expected rent of 900.

So purchase price of: 32k

Reno: 8-10k

So all into the property at 40-42k

So inspect house - worth 60k

Do a 75% refinance to pull out 45k leaving 15k in the property.

So if you were doing this with little money. Take out private lender loan of 75% ARV of 45k at 10% interest pay for all of the Reno/costs maybe have some payments over that you cover. Then rent the house out. Take out a 4% interest loan of 75% and pay back the private lender. Then you own a house, for the price of the interest/closing/vacancy?

It just sounds too good to be true to me. I read success stories all the time on here. Just to me this sounds so good!

Haven’t factored in other costs because I don’t quite know exactly the industry average percentages for those yet.

Thanks,

Dalton

Greg Miller · Answer

I am a real estate investor in the St. Louis and can tell it is highly possible.  We own 10 single family houses and have used your same thought process on all of them.  While I have not cashed out 100% of my investment costs (purchase price + rehab costs), I have earned a very solid 18% cash-on-cash return on our portfolio.

Here are some financials metrics you should look to achieve on each rental:  $150 in monthly cash flow, 10%-ish cap rate, 20%-ish cash-on-cash return, $15k+ equity capture, and buy in an area of appreciation.  It you hit yes on all five of these financial metrics, then execute quickly because another investor will not pass on the same opportunity.

I would find a local bank and set-up a line of credit. This will let you borrow money much cheaper than the 10% you mentioned for the purchase price and rehab costs. Remember that every penny counts! Just know your rental market and the clientele. Buy investment properties that fit YOUR numbers!!! The best deals have multiple exit strategies, which is one the main reason I love single family rentals.Y

Maxime Tremblay · Answer

There is no correlation between rent and fixed costs. i dont know anyone who would use that as a rule of thumb without getting actual figures.

Jaron Walling · Answer

Those numbers are spot on and it's highly possible. People are doing this in my market and everywhere else. The biggest issue is the finding that house for $32k, and the rehab. You'll budget for $8-10k and spend $20k in the blink of an eye. If you don't have experience with estimating rehab costs start learning.

Example: Exterior brick repair (tuck pointing, partial rebuild), I budgeted for $3500k, ended up dropping $6500... lesson learned). Good luck man!

Shonari Wynter · Answer

@Greg Miller @dalto I have also heard about the 50% rule. It says whatever the rent is take 50% of that for expenses and the other 50% subtract the mortgage and what ever is left is your cashflow.

Greg Miller · Answer

All of my tenants cover the utilities.  Therefore, I am only responsible for the mortgage, taxes, and insurance.  I have never heard anyone mention that expenses should be 50% of the rent.  I would focus on your monthly cash flow, cash-on-cash return, and equity capture.  This is what grows your net worth over time.

Dalton Eschberger · Answer

@Greg Miller Thanks for the advice and basic numbers!

I see the value of single family homes over multi due to the easier exit. I’ve been running every deal I can in my area and am really excited to pull the trigger. I am though taking a bit of time to learn more about financing and the legal side of things.

One number I’ve always heard is that your expenses are probably gonna be 50% of the rent. Would you say this is true? I’ve been running the numbers with this and it’s really hard to find anything that cash flows more then 100 dollars.

Low money BRRRR - Too good to be true?

Low money BRRRR - Too good to be true?

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