Review my BRRRR situation...Please

[Jared McCullough]

Hi,

I am new to BP and generally new to real estate investing although I have some family members to lean off of who have a handful of SFR. My original investment strategy was built off of buying county tax sale properties at very low prices in cash. While I am still continuing down this path as I think cash purchases make the most sense from a profit margin perspective the growth plan is also slow. Thus this brings me to what I have come up with as a modified BRRRR strategy.

This being said as I am new to this I am wondering if there are things that I am missing and looking for guidance on how the largest short term profit can be recognized. The one major struggle I have right now is how to balance the Cash Out Refinance Loan Term versus the profit margin to determine what the best answer is (i.e. The earnings per unit after debts/taxes/insurance come off to me that you need a substantial portfolio to make any decent money per annum). 

This is meant to be a 10-15 year portfolio in which I plan to make no gains but reinvest the money into additional property purchases. Currently I have $30K working capital and I am working about a (3) county spread in which rentable SFR are easily obtainable on a decent frequency for between $20-40K. Depending on location rent can be expected from $600-800.

My current investment plan is as followed:

House 1: Purchase Price $25,000 (listed for $29,000 and bank owned so assuming this is manageable)

Taxes/Insurance: $2200/$500 (would plan to have taxes reassessed)

Rehab: $5,000 (grossly overestimated as I have been in the house)

Estimated Appraisal: $55-60,000 (i.e. maybe more but being conservative)

Cash Out: $30,000 on 10 year = $333/month @ 6%

Estimated Rent: $650 * 12 = $7800

Estimated Net Profit (not including repairs/vacancy) = $7800 - $500 - $2200 - (333*12) = $1104 or $92/month

The plan would then be to take the $30K cash and redo the same process. My problem is the net profit almost does not seem worth the hassle except that in 10 years when the loans are paid of you now have assets turning full profit. What am I missing?

The alternative is buy first property but don't refinance. Then you would be making an estimated yearly net profit of $5100. This is essentially the equivalent of managing 4 to 5 properties under the BRRRR model to make the same yearly profit which then means your taking on the extra hassle of 3/4 houses from vacany/tenants/maintenance to make the same money I don't see the benefit other than once you hit that 10 year mark then you will be making some good money because at that point you will have bought 5 houses in 2019 instead of 1 (i.e. larger portfolio).

Hopefully the length of this post does not scare anyone away and I greatly look forward and appreciate any responses I get. 

Jared

[Jaysen Medhurst]

@Jared McCullough, most investors in SFR and small MFR use loan terms of either 30 or 15 years. Although, I would bet that 30-year is by far the most popular. This maximizes cash flow.

I understand where you're coming from when you talk about "full profit" and I'm going to ask you to think about it another way. Having a paid-off property does not maximize your potential profit. In fact, most sophisticated investors would argue that having no leverage is the worst way to invest...except for having too much leverage.

100% equity in a property means you're not making cash flow as much as you have bought it through all of that equity. Intelligently deploying that equity (cash) is the best way to maximize your profits. The opportunity costs of keeping all your cash locked up in equity is significant. A dollar sitting in equity can't be used to expand your portfolio. Is it better to see appreciation of 1 property or 4? Is it better to have the rent of 1 SFR go up by $50 or 4 SFRs go up by $50. I think you see where I'm going here.

I can't say what "most" people are doing with their profit, but a responsible entrepreneur balances the need to have reserves / deployment of capital / personal income. That formula will change as a business changes.

Bottom line: everyone needs to define their own investing strategy. If you feel safer having all of your properties paid off, I completely understand. Money is emotional and don't let anyone tell you differently. Just keep in mind that you are paying for that "safety" with foregone profits, it isn't free. A paid-off property isn't 4X "safer" than a property with 25% equity.