What do you suggest?

Question

I currently have a property under contract at $220,000, with little to no rehab needed. It should rent for $1,300–$1,600, and the ARV is around $310,000. I could net a solid return by holding/flipping, but I'm curious — would these numbers make sense for a BRRRR given that my PITI would be roughly $1,600?

Alioune Camara · Answer

With a PITI of $1,600 and rent of $1,300–$1,600, the cash flow would be flat or negative if you hold it as a BRRRR. That makes it risky as a rental, even if the ARV is $310K. For BRRRR to work, you want positive cash flow after debt service—otherwise you’re just leveraging debt without cash flow support. In this case, it might make more sense as a flip or long-term hold only if you can increase rent or reduce financing costs.

Randall Alan · Answer

@Fred McKinley Hughey

A cash out refinance (BRRRR) wouldn't work for you with those numbers.  You have to usually leave 25% of the value of the property 'in the property' when you refi (put another way, the bank will usually only lend to 75% of the value on a cash out).  That would mean leaving $77,500 of equity in the property.  Your cash out would probably be $12,000 BEFORE closing costs of probably $5,000+.  Plus there is typically a 6 month seasoning requirement (if you financed it to buy it)... so you would have to hold it 6 months before attempting that.

It doesn't look like a good BRRRR unless you were going to somehow drive further appreciation in that 6 months to increase the value above the $310k.

All the best!

Randy