Cash Flow vs Equity vs Net Worth: Is BRRRR worth it?

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Cash Flow vs Equity vs Net Worth: Is BRRRR worth it?

Elliot B.
Rental Property Investor · Biddeford, ME · Member since 2017 · 37 posts · 14 votes

Hey BPers -

I just listened to the excellent podcast show #327 where @David Greene lays out all of the details of the BRRRR strategy. It is clearly a powerful strategy that has worked well for him and many others but I'm still questioning how it builds wealth.

Here is what I'm struggling with...

If you execute the perfect BRRR, you are left with a renovated, rented asset with none of your cash left in the deal. The property has been refinanced at about 75% LTV at the maximum appraised value.
The issue I see is that rents track home values. So while you're trying to maximize your appraisal to get your cash out, you are effectively also killing your future cash flow. And when you're only cash flowing a couple hundred per month and a bigger maintenance expense comes up - you've killed your income for the year.

Poll: What does the average 75% LTV, conventionally financed SFR cashflow?

This is the classic equity vs cash flow debate. But even the equity in a BRRR deal isn't all that useful. Given the 75% LTV, you can't tap that equity until you pay down the principal or the asset appreciates. For example, a HELOC wouldn't be worth it because most banks want 80% LTV.

Perhaps, I'm missing other ways that you can use this equity - or ways in which that 25% equity boost to your net worth can be used. I can imagine that once you have a portfolio of BRRRed homes, you may be able to get a LoC on them, even at higher LTVs.

Maybe I'm not seeing the big picture but isn't the BRRRR approach effectively creating a risky portfolio of low cash flow, highly leverage assets?

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Cody L.
Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
7y

This is another instance where I feel like I’m the crazy one in this site. 

I hear “omg. Leverage is risky!” For who? The bank?

I sleep a lot better if I owe $1m on a $1m property than if I own it all cash.  If some unforeseen event happens, I can walk (with the repercussions that come admittedly) and I’m not out any $. Where as if I’m all cash in a property, if something happens I’m F’d

Leverage is ***the*** reason (not one of the reasons but THE reason IMO) people become WEALTHY in RE. 

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  • Steve Hall
    Rental Property Investor · TX · Member since 2019 · 303 posts · 364 votes
    7y

    @Elliot B.

    You're all caught up in "theory" and not thinking big picture. (Quite common.)

    You can BRRRR large apartment complexes (with high cash flow).

    As far as your concern about having "highly leveraged assets":

    1. You're missing a key word: "performing". These are "high leveraged performing assets."
    2. Everyone buys a house with 95+% leverage - and it's a non-performing asset. (Or quite possibly a liability!)
    3. "Highly leveraged" is subjective. if you think 75/25 is too much leverage, then do 70/30 or 60/40. You're in charge.
    4. Where's the risk in a leveraged lifetime buy and hold performing asset? If stocks crash, or another housing bubble bursts and my complex loses 50% of it's value (based on sales comparison valuation.) So what? I still make the same amount. I still pay the mortgage.
    9Reply
  • Allan Smith
    Contractor · Nashville, TN · Member since 2014 · 1k+ posts · 1k+ votes
    7y

    well that does about sum it up. It's a method to quickly build a rental portfolio using the same pile cash over and over, albeit in exchange for low cash flow and low equity position. Yes, in some ways it is risky indeed.

    The tradeoff is a snowball rolling downhill that gets bigger with time. With minimal cash, your net worth and passive income can essentially explode over 5 years. 

    2Reply
  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    7y

    @Elliot B., rents don't track home values. 

    In many markets they are very skewed. Sure they are intertwined and if the population of an area is growing, you'll expect both to rise. But there are many different factors that influence rents and home values independently.

    There are many markets where a SFH simply doesn't make a good rental. Imagine a neighborhood where the homes cost ~$300k. In order for this to be viable as a rental it needs to rent for at least $3k/month. The problem is that anyone who can afford $3k/month can easily afford a $300k house.

    You've pointed out some of the inherent disadvantages of SFRs. MFRs are another story because you end up paying less per unit and starting to realize economies of scale.

    You're not missing other ways to use the equity. You're going to have to keep 20-25%+ in an investment property. That's why I think an important metric that's often overlooked in REI is Return On Equity (ROE). If you're only seeing an ROE of 5% that's a pretty strong signal that you should sell a property and redeploy your capital.

    BTW: with 75% LTV, I want to see $150-200/month/unit cash flow and a CoC ROI in the mid teens or better.

    2Reply
  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    7y

    @Elliot B.

    You actually bring up a very good point. Using 75% LTV on most residential properties results in very little cash flow, initially. Overtime, as prices and rents increase, so will cash flow. There is a certain amount of risk at 75% LTV, but it is this leverage that can accelerate wealth accumulation - or bankruptcy should 1932 or 2008 reoccur.

    Private Mortgage Financing Partners, LLC
    WebsiteView Page
    1Reply
  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    7y
    Originally posted by @Elliot B.:

    Hey BPers -

    I just listened to the excellent podcast show #327 where @David Greene lays  maximum appraised value. 

    .

    Maybe I'm not seeing the big picture but isn't the BRRRR approach effectively creating a risky portfolio of low cash flow, highly leverage assets?

    Yes. Isn’t it wonderful? That’s what I’ve been doing. You’re describing my business model.  Eventually you get to the point where you buy a building for $1m cash. It appraises for 1.3m. You refi out and get a loan for $1m. You now have a property that cash flows and your $1m to do it all over again. 

    Obviously it won’t cash flow as much as if you had no debt but if your goal is to grow your portfolio that’s the way without being beholden to investors who take your equity. 

    The reason I have so many properties without investors is just what you laid out. But if you look at my debt against property value, due to appreciation and debt pay own I'm only ~65% global LTV even though almost every property I own has debt that exceeds my purchase price

    2Reply
  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    7y

    This is another instance where I feel like I’m the crazy one in this site. 

    I hear “omg. Leverage is risky!” For who? The bank?

    I sleep a lot better if I owe $1m on a $1m property than if I own it all cash.  If some unforeseen event happens, I can walk (with the repercussions that come admittedly) and I’m not out any $. Where as if I’m all cash in a property, if something happens I’m F’d

    Leverage is ***the*** reason (not one of the reasons but THE reason IMO) people become WEALTHY in RE. 

    12Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    7y

    The refinance is a "cash flow"...a big one. You can leave the equity in the property and "cash flow" more each month or you can refinance and get the "cash flow" now. Investors who BRRRR value the "cash flow" now because (1) it allows them to scale and (2) it increases returns (and the velocity of the cash flow).

    Buying properties in with high leverage and risks of extended vacancy and large declines in rent is a reckless strategy.  We can't help those people...they are not on BP learning how to invest.  Prudent leverage is not risky.

    3Reply
  • Tyler Bushey
    Investor · Biddeford, ME · Member since 2017 · 282 posts · 180 votes
    7y

    If you don't like the debt and minimal cash flow, why not just flip instead? 

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Allan Smith:

    well that does about sum it up. It's a method to quickly build a rental portfolio using the same pile cash over and over, albeit in exchange for low cash flow and low equity position. Yes, in some ways it is risky indeed.

    The tradeoff is a snowball rolling downhill that gets bigger with time. With minimal cash, your net worth and passive income can essentially explode over 5 years. 

     or in a market retrench in these areas of low value assets your net worth can implode.. in my mind 25% equity Is NO equity  you will eat that up in sales costs and fix up costs trying to sell a rental.. and rentals in cash flow markets only sell for their given cash flow .. if rents stay stable values wont rise unless investors employ the greater fool theory and buy with less return than you did.. 

    Keep in mind this is NOT a new strategy we did literally thousands of these deals as HML prior to 08 its how turn key worked in those days you have younger investors on BP who think they invented it .. they just coined the phrase and those who don't know what they don't know think this is some new fangled great thing.. its not..

    But like the dude said above if you have strong performing assets  that's the key .. you buy hood junk and your going to get cremated. 

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
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    3Reply
  • Daniel DietzPro Member
    Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
    7y

    There are a lot of different ways to look at the whole concept of BRRRR, or just buying rentals at say a 25% 'discount' to ARV.

    If we look at say a 200K rental that rents for $2200 per month (a higher end duplex in our area). If we could find one as a foreclosure for $100K and do a 50K rehab on it. We purchase all cash and leave of 50K of 'found equity' in it too, so we have a 200K investment.

    Using the BP Rental Property Calculator over 10 years we see that it will make about 150K of cash flow ($1300 per month average) and 50K of equity growth, for a total of 200K of profit, or about 8-10% ROI. Our total would be 400K

    If we took that same 150K of cash, bought the same type of property the same way, but refinanced it at 75% LTV on a 30 year 5% loan and left our 50K (instead of 200K) of 'found equity' in it, it would look like this;

    We would have about 60K of cash flow ($500 per month) and 85K of equity growth for a total of 145K of profit, or a return of 15-25% ROI. But remember we also have our original 150K back, so our total is 345K.

    So yes, we would have less 'total dollars', but the beauty is that we can do #2 over and over. Let's say the starts aligned and we did this 4 times the first year. Our total would then be 240K of cash flow (almost double the single buy-n-hold) and 340K of equity growth (7 times the single buy-n-hold) and 50K of 'found equity' in EACH property for a total of 200K. You also have your 150K back from your last refinance, for a total of 930K, or 530K more than the single buy-n-hold, or a total return of 15-35%. 

    For my goals, #2 is a no brainer :-) The trick of course is to find enough properties in your area to do this!

    Dan Dietz

    [email protected]608-524-4899
    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Daniel Dietz:

    There are a lot of different ways to look at the whole concept of BRRRR, or just buying rentals at say a 25% 'discount' to ARV.

    If we look at say a 200K rental that rents for $2200 per month (a higher end duplex in our area). If we could find one as a foreclosure for $100K and do a 50K rehab on it. We purchase all cash and leave of 50K of 'found equity' in it too, so we have a 200K investment.

    Using the BP Rental Property Calculator over 10 years we see that it will make about 150K of cash flow ($1300 per month average) and 50K of equity growth, for a total of 200K of profit, or about 8-10% ROI. Our total would be 400K

    If we took that same 150K of cash, bought the same type of property the same way, but refinanced it at 75% LTV on a 30 year 5% loan and left our 50K (instead of 200K) of 'found equity' in it, it would look like this;

    We would have about 60K of cash flow ($500 per month) and 85K of equity growth for a total of 145K of profit, or a return of 15-25% ROI. But remember we also have our original 150K back, so our total is 345K.

    So yes, we would have less 'total dollars', but the beauty is that we can do #2 over and over. Let's say the starts aligned and we did this 4 times the first year. Our total would then be 240K of cash flow (almost double the single buy-n-hold) and 340K of equity growth (7 times the single buy-n-hold) and 50K of 'found equity' in EACH property for a total of 200K. You also have your 150K back from your last refinance, for a total of 930K, or 530K more than the single buy-n-hold, or a total return of 15-35%. 

    For my goals, #2 is a no brainer :-) The trick of course is to find enough properties in your area to do this!

    Dan Dietz

    and the credit..   

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    1Reply
  • Brit F.
    Rental Property Investor · DFW · Member since 2017 · 143 posts · 120 votes
    7y

    @Elliot B., you may have trouble getting a meaningful answer to your question about the average recurring cash flow on SFR. There are just too many variables. Just evaluate one property at a time and decide if it makes sense given your market, risk tolerance, future plans, etc.

    One point you might be overlooking (not sure if it was covered in the podcast) is that for those us of using Fannie's delayed financing exception rule, the CO-refi amount is limited to whatever the initial investment was, which should be well below 75% of the appraised value presuming low acquisition cost and successful rehab. Maybe the final LTV is between 50-70%, for example.

    The alternatives to using the delayed financing exception are:

    • CO-refi again later to pull the remainder out
    • Forego the exception and wait the 6 mo's seasoning and do a CO-refi for the full 75% LTV
    • Go with a lender who writes non-conforming or commercial loans that have fewer restrictions with more expensive terms.

    So, while it's possible to get 75% LTV, there is always a trade-off.

    Also consider the impact of consistent 75% LTV on your debt-to-income (DTI) ratio. Unless rents are outpacing sales pretty dramatically, consistent 75% LTV may accelerate you into a DTI wall.

    There's not really a 'correct' answer for how much leverage is adequate...it depends on many factors specific to each individual/business.

    0Reply
  • Elliot B.
    OP
    Rental Property Investor · Biddeford, ME · Member since 2017 · 37 posts · 14 votes
    7y

    Awesome conversation - thanks everyone for sharing.


    I think there are a few core questions here that we all have our own answers for:

    1. What does wealth look like to you?
    2. What kind of a lifestyle do you want?
    3. How valuable is a "highly leveraged" (75% LTV) SFR portfolio?

    Does a large portfolio of highly-leveraged low-cash flow SFR feel like wealth to you? What's the end game?

    Does managing a large portfolio of SFR suit your lifestyle? (Or managing the people who manage your portfolio) How do you want to spend your time?

    What can be done with a 75% or even 65% LTV SFR portfolio? LoC? Sell and transition to MFR with better cash flow opportunity? What's the goal?

    -----------

    @Steve Hall Value-add / BRRR plays on MFR is a great strategy and takes time to get there. That's where I'm headed. I'd only call 75% LTV highly leveraged because I can't figure out what value that 25% actually has.

    @Jaysen Medhurst ROE is a good tip - thanks.

    @Cody L. How does the leveraged vs paid-off assets argument pan out when the **** hits the fan?

    @Mike Dymski Can you really call a refi cashflow when it was your cash to begin with? I call cashflow income generated by the asset.

    @Tyler Bushey No thanks - that feels like a job!

    @Jay Hinrichs Yeah - 25% seems slim. Definitely not a new things but it is nice to put a name to it!

    1Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    7y

    @Elliot B. If you do that a lot I think the leverage is going to be a concern. Balance it with low leverage and high leverage assets. Then you get best of both worlds.

    On a side note, David Greene has gone sort of full guru with all this long distance investing and long distance BRRR books and podcasts. It can work (I've invested long distance), but just make sure you know what you're doing. Listening to a podcast and assuming it'll go exactly as described isn't a good way to do things

    1Reply
  • Brian G.
    Rental Property Investor · Los Angeles, CA · Member since 2013 · 1k+ posts · 1k+ votes
    7y

    @Elliot B. you may not be able to easily access the 25% equity in a property but it absolutely counts on your balance sheet. Without a capital partner, you will need a healthy balance sheet to move into larger deals if that is your goal. In addition, SFH are easier to exit and roll the equity into larger deals via a 1031 say 5-7 years down the road. That equity is usable for qualifying/purchasing larger deals. 4 green houses, then 1 red hotel.

    1Reply
  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    7y

    Am I the only one that doesn't know who David Greene is?  Is he an actual investor with a portfolio or someone that makes money talking about it?

    0Reply
  • Elliot B.
    OP
    Rental Property Investor · Biddeford, ME · Member since 2017 · 37 posts · 14 votes
    7y

    @Cody L. haha he probably makes money both ways.

    He's the co-host of the BP podcast and he did an in-depth episode about BRRR investing (and wrote a book) that I referenced in my first post.

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    7y

    If you do BRRRs,  just don't forget seasoning and costs.  

    You can't get a conventional loan based on appraised value for 6  months +.

    It costs $5kish and 45 days of pain.  Commercial is worse with appraisals alone of $5k or more. 

    Just sayin what ain't bein said on all these podcasts.

    4Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Steve Vaughan:

    If you do BRRRs,  just don't forget seasoning and costs.  

    You can't get a conventional loan based on appraised value for 6  months +.

    It costs $5kish and 45 days of pain.  Commercial is worse with appraisals alone of $5k or more. 

    Just sayin what ain't bein said on all these podcasts.

     and many pay cash using the heloc on their home so they are paying interest while doing the Rehab part of the program tax's insurance utls  fuss with contractors etc.. this is very easy concept to write about as its old as the hills..  but can be a tricky one.. I get it if you live in the market but boy there are huge risks doing this when you live in WA and the property is in some other state 2k miles away.. said that from day one.. can it work sure.. can you end up in a world of hurt sure.. so just be very cautious on this model.. its the whole reason you have companies that provide already rehabbed and cash flowing homes.. takes a bunch of the risk out of it.. as long as you don't use Morris invest. 

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    3Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    7y

    @Cody L. He’s an investor but lately I feel like he’s becoming more of an RE educator than investor. He posts threads on BP pushing his own events that are meetups with him. I don’t think he’s gone full guru yet, but I think that’s a fine line.

    0Reply
  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    7y
    Originally posted by @Steve Vaughan:

    If you do BRRRs,  just don't forget seasoning and costs.  

    You can't get a conventional loan based on appraised value for 6  months +.

    It costs $5kish and 45 days of pain.  Commercial is worse with appraisals alone of $5k or more. 

    Just sayin what ain't bein said on all these podcasts.

     Disagree. With commercial you don’t have seasoning. Or if you do it’s up to the bank and your relationship, and not what the government approved vanilla loan guildlines say 

    I’ve bought many properties in cash only to refi them for more than I paid in less than 6 months.  All commercial 

    0Reply
  • Steve Vaughan
    Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes
    7y
    Originally posted by @Cody L.:
    Originally posted by @Steve Vaughan:

    If you do BRRRs,  just don't forget seasoning and costs.  

    You can't get a conventional loan based on appraised value for 6  months +.

    It costs $5kish and 45 days of pain.  Commercial is worse with appraisals alone of $5k or more. 

    Just sayin what ain't bein said on all these podcasts.

     Disagree. With commercial you don’t have seasoning. Or if you do it’s up to the bank and your relationship, and not what the government approved vanilla loan guildlines say 

    I’ve bought many properties in cash only to refi them for more than I paid in less than 6 months.  All commercial 

     I hear you, Cody.

    Conventional residentials need seasoning.  I was mentioning commercial being worse for costs, mainly appraisals.   

    Costs never seem to be mentioned in the brrrr strategy, yet it would cost me $5k or more just for the appraisal on one of my commercial buildings.  Up front.    

    1Reply
  • Eran Lifshitz
    Investor · Tel Aviv, Israel · Member since 2018 · 55 posts · 24 votes
    7y

    I have read the entire post & replies, indeed interesting and fruitful discussion.

    I have to say my opinion is very like @Cody L.

    The most important advantage you have when you invest in real estate is the leverage (and I am investing also in different segments such as stock market for example).

    You almost don't have any other investment segments in which you can leverage yourself, and use this "additional money" to increase your portfolio and income.

    And here is a thing I learned from one of the greatest investors I once meet - 

    The idea in real estate investment is not to invest your 100% cash. It can't get you far and fast enough.

    You should put the minimum cash required and start leverage yourself, and use your remaining cash to do more investments. And indeed - All of the big real estate investors giants use other people money they raise in the market to do their investments.

    If you choose correctly your investments and put the money on the right opportunities you shouldn't be afraid to leverage yourself.

    And I think BRRRR is like running a marathon - Indeed in the short term you immediate cash flow is getting lower, but in the longer term you can increase your equity dramatically.

    The question you should ask yourself how far you want to go.

    Eran

    0Reply
  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    7y
    Originally posted by @Steve Vaughan:
    Originally posted by @Cody L.:
    Originally posted by @Steve Vaughan:

    If you do BRRRs,  just don't forget seasoning and costs.  

    You can't get a conventional loan based on appraised value for 6  months +.

    It costs $5kish and 45 days of pain.  Commercial is worse with appraisals alone of $5k or more. 

    Just sayin what ain't bein said on all these podcasts.

     Disagree. With commercial you don’t have seasoning. Or if you do it’s up to the bank and your relationship, and not what the government approved vanilla loan guildlines say 

    I’ve bought many properties in cash only to refi them for more than I paid in less than 6 months.  All commercial 

     I hear you, Cody.

    Conventional residentials need seasoning.  I was mentioning commercial being worse for costs, mainly appraisals.   

    Costs never seem to be mentioned in the brrrr strategy, yet it would cost me $5k or more just for the appraisal on one of my commercial buildings.  Up front.    

     I normally pay about $2500 for an appraisal but yeah I hear ya. 

    What helps is scale. $2,500 on a $10m property is a rounding error. While $2,500 on a $250k property is 1%

    0Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    7y

    @Mike Dymski Can you really call a refi cashflow when it was your cash to begin with? I call cashflow income generated by the asset.

    You can refinance an amount less than your down payment, equal to your down payment, or more than your down payment...or you can consider your down payment left in the property (the equity created) and the refinance is extracting the value added from rehab (profit).  It does not matter.  Cash flow is cash flow (our bank accounts define it) and the monthly stuff is only one portion of it (and a small one at that).

    The rest of the business world operates this way and uses IRR to evaluate investment alternatives and track investment performance. There is a small contingent on BP that defines cash flow differently.

    1Reply
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