BRRRR strategy question

9 Replies

First time with investing here in Upstate South Carolina and want input on how to go about the home I am rehabbing. 

The numbers:

112k purchase price (cash)

30k on updates and remodel

ARV recently went from the 180's to the 250's after a few solds in the area (I am a local Realtor)

Rent will be around 1250/mo +/-

I stand to make roughly $45,500 (see below to check my math)  on the refi which is fantastic, yet the mortgage will be a lot closer to the rental rate than originally planned and wanted to know if it would be silly to keep more money in the home for a safer cushion on rent/mortgage ratio, or take as much money out of the refi as possible to use for a second project.  

Hopefully appraised value at:

250k

take out 75% = $187,500

- 112k purchase

-30k reno

= $45,500

Principal - Interest - Taxes - Insurance would roughly be $1150/mo and a 2/1 in this neighborhood brings 1200-1300 per month.

No matter what the ultimate ARV is appraised at, be it 200k, 225k, or 275k the question is to take out as much as possible for other projects or is there a fine line as to what to take out because of the rent/mortgage ratio? Thanks - hope this makes sense.

if the ARV is, in fact, in the 250k range I would seriously consider flipping the house all together and finding another house better suited for rental income. Doesnt sound like there much cushion in this onerent wise.

@Blair Boan , I agree with Justin. If the property ends up being worth TWO hundred times what the maximum rent would be per month (even though you only paid ONE hundred times its rental amount), then hey: it's flipping time!

Just to remind you: there's (many) OTHER expenses than just "Principal - Interest - Taxes - Insurance".

Which means, with your 75% LTV refi, you'll be PAYING (instead of receiving) money on average, every month!

General rule-of-thumb: Areas that only rent out for 0.5%/m of their VALUE are not for BRRRR; they're for flipping! My 2c...

Originally posted by @Blair Boan :

You know-just out right selling never really crossed my mind.
So-don't even refinance-just fix it up and put it back on the market?

The answer largely depends on your goals, and, how readily deals like this can be found. If you're FANTASTIC at adding $100k equity in just 6 months (on a regular basis), then, does an extra $200k income per year appeal to you?

Or are you only interested in owning lots of assets over time, each of which nets you very little CASH per year?

I do also agree with Matt. You don't want to pay more tax than necessary, which is why ONE of those extra expenses I previously alluded to is: the cost of a good Tax Accountant. Ask them about "1031 exchange", and strategies of that ilk. 

As for Refinancing, BRRRR works just as well by only cashing out the SAME amount as your outlay! All the best...

@Matt K. I also think you'd be better off just selling if you have that much equity. However, if you own the home in your personal name, you will have to pay the capital gain. If you own it through a company and never claimed the property as a primary residence, you should be able to sell it and only pay the typical taxes any business would pay on income. But, definitely ask a CPA about that before making a decision. On the other hand, there's nothing wrong with taking out more than the property is worth and using that for another project, but I wouldn't take so much that the original property would no longer cash flow. Take just enough for all of your obligations and make sure you have enough cash flow left to cover any unforeseen expenses. Either way, it's a success.

Just in case you weren't aware.... you can re-fi for LESS than 75% in order to have better cash flow. What if you only refinanced out $150k? Would the deal be better for cash flow? I tend to agree that this mayh be a better flip because the rent is pretty low compared to cost, but play with the numbers to see if it ends up making sense as a BRRRR. I'm the scenario you have now, it's not a good rental candidate and will negative cash flow.

Brian

It all depends on what you personally are trying to achieve. If you are ok with the smaller cash flow because you are trying to accumulate many rentals than it is probably worth the hold and use that other 45k on another brrrr. If you aren't planning on accumulating a lot of rentals and you are trying to cash flow to earn a little extra income then either flip it or refi at what you have in it and hold the equity and use that equity down the line if you want to expand.

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