First BRRRR - but what happens when you can finance too much?

Question

Hi,  I have been listening to and reading a lot about BRRRR and I am all for it, have been looking for property to fit the model for a long time to get started out.  I found a property that I was planning on fixing and flipping, but thinking instead to BRRRR this way I can keep the property because huge upswing.  I have been trying to crunch the numbers over and over to see what works better.  Would appreciate if some of you more experienced investors can look at this and give me your feedback.

Here are numbers:

2 family property

buying property for $400k, ARV $700k house needs $150 - $170k in work. - thats fix and flip

BRRRR

buying property for $400k, ARV $700K, will try to save in renovation but will still come out to about $140k

each 3 bedroom apartment in area is going for $2,300/month (confirmed with rentometer and local listings) Taxes are $5,300/year

so what I did was $2,300/month each unit = $4,600/month

75% of $700,000 = $524,250 at 4.25% = mortgage payment of $3,943.82/month

When you add water, tax, insurance, maintenance I am getting another $1,138.75/month

so in the end you negative cash flow ($482.57)

I know the property is being bought at the right price, compared to location, but can that be possible where a property makes sense as fix and flip and not as BRRRR?

Anyway to make this work out as a BRRRR?

Jason D. · Answer

@Isaac El You'd have to pay significantly less than $400k and cut your rehab to make it work as a BRRRR.

Many properties are good flips and bad BRRRRs, because the rental income is a non-issue when flipping.

Isaac El · Answer

@Stephanie P.  Im on board with you, so with this one BRFR (Buy Rehab Flip Repeat) ;)

Thank you for all the awesome feedback!

Stephanie P. · Answer

I agree, $485 isn't enough profit to get excited about on this deal and WILL be wiped out by one month of vacancy, but if he's set on BRRRR, he should know what his numbers really are.

You're right though; he should flip it and do it again.

Stephanie P. · Answer

Flip it.  Take your profit.  Repeat.

Isaac El · Answer

@Stephanie P. got it - I will use google, what I have been working on is an excel sheet where I pull eveyrthing together, and tried to calculate the mortgage there, but something is off, so I will use google going forward.  What is your opinion, to BRRRR this or fix and flip?

Lionel Li · Answer

@Stephanie P.

485/mo after PITI, not even including the water bill like Isaac mentioned in the first post is nothing I'd get excited for. All it takes is one full month vacancy for him to dip to or close to negative. I have about 10% reserved for vacancy/repairs/CapEx each for a total of 30%.

@Isaac El

If you're thinking long-term and that's exactly what a buy & hold is, you need to thinking long-term reserves. With this kind of margin, all you're doing is delaying your flip profit and attempting to compound that with appreciation. If you can make this kind of margin from your flip, why not just attempt to do it again. A flip property should be flipped, not BRRR'd. If you want to use that method take your profit and invest it where the rent to value ratio isn't 0.6%. That ratio sounds like Queens to me lol.

Stephanie P. · Answer

I went to Google.  In the search bar I typed in "mortgage calculator".  When the page populated, there was a calculator on the screen  I typed in the loan amount, the interest rate and then hit the drop down for 30 years.  Then realizing it was too low, went to 20 and then 15 years which gave me your number.

Not being flippant, but it's the easiest way to get a quick P&I payment for a fully amortized loan.  I have an HP 10BII that I've had for years, but Google is still fastest, especially when changing terms and rate.  The only other way to calculate a hard money loan would be simple interest which is described above (although the 12 month method is even easier math).  524,000 x .0425 = 22,280.63 / 12=1856.72 or the simple interest monthly payment although I don't think you'd get 4.25% on hard money.

@Isaac El

Isaac El · Answer

@Stephanie P. ok so its becoming obvious I am calculating my mortgage payment the wrong way.  Can you show me the math you used to get a $2,977/monthly payment?

Isaac El · Answer

@John Teachout  Hi John, I really appreciate that, so $1,711.64/mont being interest only, $3,943.82 could be right including principle

A simple interest calculation is PxR/T (the principle of 70% of $700,000.00 is .7 x $700,000 = $490,000 x .0435=$20,825 per year. Divide that by 365 days to get your daily rate of $57.05479 and multiply that by 30 days (month) to get $1,711.64. That's the interest only. To amortize the loan you'll need to know the payback period.

Stephanie P. · Answer

If you are fully amortizing for cash flow on a BRRRR, you wouldn't take the loan over 15 years, you'd take it for as long as possible, generally 30.  If you use a 30 year amortization, your monthly payment is  $2977 (principal and interest with a 5.5% interest rate).  Add in taxes and insurance etc... and you come to $4155.  If you're getting $4600 in rent, you are cash flowing $485 per month or $5820 per year.  Not a home run, but nothing to sneeze at.

First BRRRR - but what happens when you can finance too much?

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