BRRRR with no cash flow vs Flipping

15 Replies

Hi all , I’d like some advice on my BRRRR strategy Currently the properties that I’m BRRRR’ing , at the refinance stage give me back all of my investment and sometimes more than my investment. However many of these rentals are not providing cash flow and some are negative cash flow. I’m comfortable covering the negative cash flow with my Flipping income and keeping a reserve to cover issues that come up I believe that generally it’s a poor business decision to purchase rental properties with no or negative cash flow and relying on appreciation however since my all in cost is zero or negative (because I profit from the refi sometimes) I’m wondering what you all think about doing BRRRR’s with no cash flow or if I’m better off flipping these properties. I’m comfortable holding these properties long term but would be relying on appreciation long term. Thanks in advance for the advice Isaac

@Isaac B. - I honestly think it's silly to do a BRRR and NOT have any cashflow after the REFI period. The whole point of all of this (REI) is to make money. Why would you want to lose it? I can understand you want to recoup your investment by doing the cash out refi, however your goal should be to also cashflow after the Refi. I consider this with all my BRRRs and ONLY do a property if I'm going to make a some good cash (NET) each month.. else I pass on the deal.

Perhaps when doing your refis, leave some skin in the game, e.g. $10K, if it would yield you $200/month NET for example. If you did this for 10 homes, you would (in theory) make $2K/month in passive income.

If you're going to hold a BRRRR with no cash flow, it should 1) be only a relatively small part of your overall portfolio and 2) you should have a very good reason to believe it will appreciate, i.e. new developments going in nearby. If not, I would flip it.

Howdy @Isaac B.

I agree with @Mike B. and @Andrew Syrios

Part of doing the BRRRR strategy is receiving positive cash flow. To answer your question I would sell the negative CF properties. It is not good business to pull income from one revenue source to cover a bad deal in another.

Perhaps you need to do a better job analyzing the deals completely prior to purchasing the property.  Make sure it projects the appropriate CF you require after refinancing.  If it doesn't then pass on the deal.

I appreciate the responses guys. 

My gut tells me you guys are right which is why I posted the question, however on paper the way it looks to me in theory I'd have Zero dollars invested and I can't imagine not seeing 50% appreciation over 30 years , and at that point I'd have my mortgage paid off as well and own the properties free and clear. 

With 10 properties averaged at 200k , that's $3,000,000 over 30 years or 100k annually. Or with no appreciation, $2,000,000 over 30 years or 67k per year. 

Ideally I'd love to be able to do this with cashflow along time way, however in my area it's much more difficult to find deals that I can pull all my money out AND cash flow after figuring all expenses...

Can you help me better understand why I shouldn't rely on long term appreciation and the mortgage pay-down?

Thanks again for your time!

Isaac

A lot of variables involved with you, your market in your area, do you have another job other than just real estate etc etc etc. I live in Southern California and I’m involved in SFR rentals/flips. I work as a paramedic/firefighter and make 6 figures a year and own the real estate business with another firefighter/paramedic. So we put our rentals on 15 year loans for now until we decide to leave the fire department and solely rely on our real estate business for income. SFR I’m so cal don’t cash flow well at all!!! Just purchased a SFR for 165K, with almost no repairs needed to rent, and it’s worth apx 220K as it sits and ARV is probably 235K. 2 bed 2 bath 1100sqft and rents for $1200 a month. I only need 10% down to purchase this property with private money and then refinance with putting minimal amount of repair money into the property. Should I pass on this deal???? I DONT THINK SO!!! And no one else would either. My market in SFR where I’m at with cash flow doesn’t work very well but I’m not going to not pick up rentals just cause it doesn’t cash flow. I have a secure job as well if needed to pick up the mortgage or other things if real estate market turns as well. Like I said, a lot of variable of your life, other jobs/income and your market. Do the math, sit down and figure it out. Just cause no cash flow at the moment doesn’t mean don’t do it.

To clarify, These properties are definitely worth buying because they make good fix and flips.

The dilemma is whether I should hold more of them instead for the added benefits of: appreciation, tax benefits, and amortization since I don’t need the flip income to cover my personal and business expenses and I’d have none of my own dollars invested.

Let’s assume break even on monthly expenses (all inclusive) vs rental income

Thanks again for the insights keep them coming !

@Isaac B.

I'd have Zero dollars invested and I can't imagine not seeing 50% appreciation over 30 years

You are assuming you can hold on for 30 years. That is a very high risk strategy. Only you can decide if that risk is worth it.  Personally I wouldn't consider it. 

I am curious how you are getting properties refinanced if they have negative cash flow.

What is your average purchase price on these homes? If your flipping then you should be getting a pretty good discount and there should be no problem on the cash flow on most of your deals from what I’m getting from this. At $1700 rent a month that is.

Some Great Advice here!

I'll add the details for 2 of my properties that I'm on the fence about.

1) Purchase price: 69k

Renovations: 55k

Mortgage amount (principal, Interest, insurance, & Taxes): $1500

Repairs / Vacancies: $300 

Rental Amount $1800

Holding costs until the Resale/ Refi : $12k 

ARV $185k

2)  Purchase price: 180k

Renovations: 15k

Mortgage amount (principal, Interest, insurance, & Taxes &HOA in this case): $2100

Repairs / Vacancies: $200

Rental Amount $2300

Holding costs until the Resale/ Refi : $12k

ARV $259k

Keep the great responses coming!

Hey @Isaac B. , did you end up doing those two deals, and keeping them as BRRRR? If so, do you regret it?

I'm considering a similar scenario to what you describe, a relatively high quality SFR BRRRR that about breaks even on cash flow after considering all taxes and equity paydown, but not Capex reserves.

I see what you mean about holding the asset and eventually owning it with no initial equity investment. That would still be a very nice return over the long long term, despite a few years upfront of fronting a bit of negative cash flow.

Also, another consideration is that any increase in rents caused by inflation can push these from $0 cash flow to positive cash flow.

@Mike Flora , how are you doing with your strategy since your posts here? Any change of heart?

I think this question hinges on the following 2 questions:

1) Are there really no available deals you can do that would cash flow, for $0 of equity in the deal?

2) What % of your total income would the negative cash flow be, in the first X number of years?

Originally posted by @Sean McCluskey :

Hey @Isaac B., did you end up doing those two deals, and keeping them as BRRRR? If so, do you regret it?

I'm considering a similar scenario to what you describe, a relatively high quality SFR BRRRR that about breaks even on cash flow after considering all taxes and equity paydown, but not Capex reserves.

I see what you mean about holding the asset and eventually owning it with no initial equity investment. That would still be a very nice return over the long long term, despite a few years upfront of fronting a bit of negative cash flow.

Also, another consideration is that any increase in rents caused by inflation can push these from $0 cash flow to positive cash flow.

@Mike Flora , how are you doing with your strategy since your posts here? Any change of heart?

I think this question hinges on the following 2 questions:

1) Are there really no available deals you can do that would cash flow, for $0 of equity in the deal?

2) What % of your total income would the negative cash flow be, in the first X number of years?

Thanks for Reigniting this topic, Sean.

I sold both of these homes in the end. I profited nicely on one, and just about broke even on the other.

My current feeling on this topic is that I should base my rent vs flip decision on how much I'd profit on the flip vs the value of the money.

For arguments sake consider a case where you'd break even on a flip, but can refi all your money out and break even on rental vs mortgage + capex etc... Flip= break even , Rental= long term profits on amortization, potential future cashflow as you mentioned, and hopefully appreciation. No brainer! Just make sure your math is right and you are factoring Capex

Now consider the other extreme case where you can make $100k on the flip, and break even on the rental. I'll take the $100k (after taxes) reinvest it to save future hard money costs (7k/ year guaranteed savings & less risk/ reward)

However The argument can be made to refi, get the amortization, cashflow, and appreciation; & 1031 into a new deal down the road!!

Unless I can Profit from the Refi of course, since those dollars are tax free, cost 6% or so, and can save me the same 14%

In conclusion my opinion at this point is to mix flips with rentals, keeping the lower profit flips as rentals, and selling the higher profit ones - I feel this is a safe middle ground

@Isaac B. I think you hit the nail on the head there. $100k profit on a flip definitely kills any potential BRRRR, when prices are this high and fully loaded cash flows are this low!