BRRRR, Hold, Sell: Anyone doing this?

Question

After the refinance on potential BRRRR properties they tend to leave $0-$25/m of cash flow for a couple of reasons.

1. Higher mortgage payment

2. Long term CapEx: I calculate $180-$200/m per unit and that's if everything got replaced during the rehab. This was calculated over a 30 year period (life of loan).

3. Property Management

To realize more cash flow, it seems it'd be best to sell in 5-15 years before CapEx becomes an issue. Is anyone practicing this strategy?

It seems you could acquire several rentals, hold for 5-10 years, sell some, and use the gain to payoff the mortgages on a few.

Brent Coombs · Answer

@William S., it's still arguable that even when cap ex is due, you should spend the money - for best resale price!

And then the argument becomes: It's as-new again for a fraction of its value - so why not KEEP renting it?

ie. You shouldn't need to decide IN ADVANCE that that's what your strategy is going to be.

There's many other factors that can lead you to decide that NOW is the time to cash in. My 2c...

William S. · Answer

@Nicholas W.

I have $10k in reserves upfront per house. My plan is to reinvest the monthly CapEx budget during the growth phase (5-10) years. After that I will go back and recalculate the budget to a monthly cost.

Nicholas W. · Answer

When you consider capex a monthly expense you aren't considering the time value of money. I'm not saying capex doesn't have a cost, but it does not have a monthly cost. If you do a BRRRR you aren't going to have any significant capex for the first 10 years which is why I ran the model with the first $12,960 capital expenditure on the 10th year. I realize that you wouldn't necessarily do $12,960 worth of work in that one year but some assumptions and estimations must be made.

William S. · Answer

@Nicholas W.

See Image. Hopefully it's not blurry

Nicholas W. · Answer

The problem is you're considering CapEx a monthly expense when it isn't. Capital expenditures are individual cashflow events. If you want to underwrite for a 30 year hold then you have to factor in everything. I ran a very conservative sample deal of a single family through my spreadsheet using the following info.

Value post rehab $200k

$150k 30 year loan at 5%

Rent: $1700

Vacancy: 8% (1 month)

Insurance: $600

Property Management: $200 (8% per month and one lease fee every 24 months)

Repairs and Maintenance: $50

Property tax: $3000

Your $180 CapEx budget works out to $64,800 over the 30 year hold. So I figured on a hypothetical $12,960 Capital Expense on year 10, 15, 20, 25 and 30. Rent growth and all expense growth were modeled at 3% annually.

Year

Annual Cash Flow

1

$  2,505.00

2

$  2,870.00

3

$  3,246.00

4

$  3,634.00

5

$  4,032.00

6

$  4,443.00

7

$  4,866.00

8

$  5,302.00

9

$  5,751.00

10

$  (6,746.00)

11

$  6,690.00

12

$  7,181.00

13

$  7,686.00

14

$  8,206.00

15

$  (4,218.00)

16

$  9,295.00

17

$  9,863.00

18

$  10,449.00

19

$  11,052.00

20

$  (1,286.00)

21

$  12,314.00

22

$  12,973.00

23

$  13,652.00

24

$  14,352.00

25

$  2,112.00

26

$  15,814.00

27

$  16,579.00

28

$  17,366.00

29

$  18,177.00

30

$  6,052.00

Total:

$  224,212.00

After year 10 when you make your first capital expense your cumulative cash flow has already added up to $29,905 which works out to an average monthly cash flow of $249 over the first 10 years.

The average monthly cashflow over the full 30 years works out to $622. Now on year 31 the house is paid off and the monthly cashflow is over $2,400 and the house is worth almost a half million dollars (again using 3% for appreciation.) Now you can argue with some of my assumptions, but if you're going to forecast a 30 year hold assumptions are a necessity.

Now if you were able to purchase the house and rehab it for less than the $150k refinance amount it would be tough to pass this deal up.

BRRRR, Hold, Sell: Anyone doing this?

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