Help me to understand why this is a good or bad deal. BRRRR

Southeast Michigan · Member since 2023 · 23 posts · 13 votes

I'm analyzing one deal per day. I came across a house that needs work and seemed like a great BRRRR, but after calculating the numbers, I'm not sure if it's worthwhile.

I calculated 6mos of rehab/holding time and 6 mos before cash out refi. If all went according to plan, I would get my initial investment back, plus 40k after refi, but the property would have a negative monthly cashflow for the first few years. Which basically means that 40k is more like ~30k. This is assuming everything goes right and nothing goes wrong. What do you all think, is this a good deal or a bad deal, and why? Thanks!

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Najma Osman

Real Estate Agent · Columbus, OH · Member since 2023 · 161 posts · 217 votes

Hi @Michael Kotylo,

I would never recommend negative cash flow, even if your profits after refinancing can cover it. You may be better off rehabbing and selling or looking for another deal that does cash flow. If you can not find deals in your market that cash flow, consider other markets.

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Najma Osman
Real Estate Agent · Columbus, OH · Member since 2023 · 161 posts · 217 votes
3y
Hi @Michael Kotylo,
I would never recommend negative cash flow, even if your profits after refinancing can cover it. You may be better off rehabbing and selling or looking for another deal that does cash flow. If you can not find deals in your market that cash flow, consider other markets.
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Jaron WallingPro Member
Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
3y
@Michael Kotylo I'm more interested in those wild numbers! Assuming this property is distressed are you really buying a property for $7500? What class neighborhood? How did you verify the ARV?

These questions are massive if you're aiming for buy/hold property. Cash-flow is only one piece of the pie (a small piece long term). Think about your tenants (customers) and potential headaches you could have. If it's negative cash-flowing those headaches better be worth it. Otherwise it's a flip deal, take the profit, pay your taxes, and on to the next opportunity.
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Michael Kotylo
OP
Southeast Michigan · Member since 2023 · 23 posts · 13 votes
3y
Quote from @Jaron Walling:

@Michael Kotylo I'm more interested in those wild numbers! Assuming this property is distressed are you really buying a property for $7500? What class neighborhood? How did you verify the ARV?

These questions are massive if you're aiming for buy/hold property. Cash-flow is only one piece of the pie (a small piece long term). Think about your tenants (customers) and potential headaches you could have. If it's negative cash-flowing those headaches better be worth it. Otherwise it's a flip deal, take the profit, pay your taxes, and on to the next opportunity.

Oh yea, it's distressed. I still need to go and take a look at it, but it needs a lot of work. The neighborhood is not ideal, but it's on the upswing, could indeed be a lot of headaches. The ARV is a conservative estimate based on lack of comps, most of the recent solds have been very distressed homes. The closest after rehab solds are in the 200s. Rehab estimate might be low, but I think it's probably close. So not a good buy and hold, but possibly a good flip! Thanks for the feedback, it really helps to hear from others about what I'm looking at.
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Connor Cocklin
Real Estate Agent · Oklahoma City, OK · Member since 2022 · 6 posts · 2 votes
3y
Sounds like more of a headache than it is worth. If it isn't Cashflowing it isn't a "great" deal. Only reason you might want to run the mental gymnastics to make this work is if you have tangible evidence this is going to appreciate heavily in the next few years or from a tax haven standpoint imo.
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Jaron WallingPro Member
Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
3y
@Michael Kotylo If you're not already listening to podcasts check out the Rental Income Podcast with Dan Lane. It was either the BP pod or that one where they interviewed an investor that buys property in a small town at similar price points ($10K or less). The properties rented for $600-800 per month. He self manages the properties. Appreciation is next to nothing. It's a pure cash-flow play. The town has a handful of jobs but most of the people drive 1hr+ for employment. It's a unique situation. Maybe this applies to your market. Cheers.
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Michael Kotylo
OP
Southeast Michigan · Member since 2023 · 23 posts · 13 votes
3y
Quote from @Jaron Walling:

@Michael Kotylo If you're not already listening to podcasts check out the Rental Income Podcast with Dan Lane. It was either the BP pod or that one where they interviewed an investor that buys property in a small town at similar price points ($10K or less). The properties rented for $600-800 per month. He self manages the properties. Appreciation is next to nothing. It's a pure cash-flow play. The town has a handful of jobs but most of the people drive 1hr+ for employment. It's a unique situation. Maybe this applies to your market. Cheers.

Now I see why no one has touched this property. Bad area, might even be hard to sell. It would be a pure cash-flow play like you mentioned. I've been looking for deals daily, but haven't found a good one, yet. Again, appreciate the feedback!
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Alena Beecher-Ritchie
Real Estate Agent · Roswell, GA · Member since 2023 · 19 posts · 13 votes
3y
@Michael Kotylo
I have experience investing in up-and-coming areas in Atlanta. I had 3 properties with long-term tenants for a few years. I also self-managed those properties and boy did they call me for any and every reason. I later sold those properties and now only focus on nice areas in good school districts. When looking for homes, I go after poorly photographed homes with vague descriptions. I look for value that the listing agent hadn't highlighted well. In my market, I find there are more deals in the off-season ( October- January).
Your subject investment property seems quite a bit risky. How many bedrooms and bathrooms? SQFT? STR or LTR? Could it be converted to become a duplex?
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