Trying to understand the numbers for BRRRR

[Luka Jozic]

Hi folks, I started out last year and just recently bought my second property. I am now in a position where I can buy cash and I figured instead of just buying nice properties until I run out of money, I want to supercharge my portfolio on start with BRRRR. I have been quite fortunate to land a solid team pretty quickly. I've read most the books, listened to podcast, read on the forum and most importantly, analyzed a ton of deals (mainly of the MLS). The issue that I have is that the examples in books, or numbers provided in other forum threads etc. don't quite make sense, at least not to me. It seems like most people that execute a successful BRRRR end up after financing with a deal right around the 1% rule. With the high interests rates right now it seems like the two options are 1. Pull out all your cash after the rehab and have zero or even negative cashflow or 2. leave cash in the deal and still have pretty low cash flow.

Like for example, say you buy a duplex for $70K, rehab for $40K, and then refinance at around $140K, that means Im leaving around 15K in the deal depending on closing costs and note that I don't even have any carrying costs here. At $140K and having only able to pull out 70% due to it being a duplex the PMI is just shy of $1000/mo. For the areas Im looking at (typical C) I can rent it out around maybe $850/mo per unit so 1700 total. The way i calculate is 10% vacancy, 10% repairs & capex, 10% management. So remove 30% and we have $1190 left. That means we have about $200/mo of cash flow. That sounds very little to me for all that work and if I were to do a hard money loan, it would be even worse! Is this about as good as it gets or am I missing something? Could someone help me make the numbers make sense?

[Shane Kelly]

I think your numbers sound very realistic, which is the unfortunate part. Deals are making less and less sense in the multifamily segment as of recent. Even some of the SFRs that I had thought were out performing multis aren't doing so well right now. Interest rates and high competition have limited the number of deals that I feel truly make sense to a scarily low amount.

[Nick Gober-Keller]

Hey there, congrats on your success so far!

You've got the gist of the BRRRR method, but remember, the goal isn't necessarily to pull out all your money in the refi, but to minimize how much you leave in. Even leaving some cash in the deal but getting a cash-flowing asset is a win.

About the cash flow, yeah, it does seem a bit thin in your example. But remember, the cash flow is just one part of the return. You're also getting the property appreciation, mortgage paydown, and tax benefits which should be factored into your total return.

Also, consider tweaking your numbers a bit – maybe find a better deal, negotiate harder, reduce rehab costs, or find ways to increase rent. Every bit counts and could help improve the cash flow.

Hang in there, keep refining your strategy and remember to take into account the whole picture! Good luck!

[Andrew Postell]

@Luka Jozic thanks so much for posting.  You have some terrific responses above.  All very good.  Real estate is one of those things that is very difficult - despite whatever those books and podcasts say.  But if you can figure it out, then it will change your life. 

Just to add a little math on to what was said already:

1. If you are an "average" person who is trying to buy a rental property you need 25% down (or so) to buy.  On a $300,000 home that's $75,000.  So if you buy a $300,000 home for $35,000 out of pocket, is that good?  And it is...as long as you have the $35,000!  Early in my career I didn't even have that so I had to negotiate very strongly to get my deals to work.  Make offers.  It's not your fault someone is asking too much for a home.  Keep making offers and make them to where you are comfortable with it.

2. Cash flow - Now this one I could spend a ton of time on. 

Here's what I want you to understand about “buy and hold” residential real estate:

• Let’s use a single family home with a property value of $300,000
• Let’s use an initial loan amount of $240,000
• Let’s use an interest rate of 7.25%
• And I’m going to give you $150 of cash flow per month
• Use a 5% appreciation amount for your property

Let’s see what happens after 5 years:

After 5 years…

• $150 of cash flow per month = $9,000
• Your mortgage has been paid down to $227,000 = $13,000
• Your property is now worth $382,000 = $82,000

So that’s $9,000 of cash flow, $13,000 of principle buy down, and $82,000 of appreciation. We make money in 3 ways with “buy and hold” properties…and cash flow is the smallest piece!

Will you cash flow in this environment currently? No, you will not. At least, I want that to be your expectation. Make your offer a little lower because of it. Also, don’t forget you will increase your rents in year 2, year 3, year 4, etc. So you WILL cashflow eventually but go into the property expecting not to cashflow now. And then you are still going to make $95,000 on a property. Remember Brandon Turner’s article on “How to Make $100,000 per year” – you can read it HERE.

Hope all of that makes sense.  Feel free to post anything else if you need.  Thanks!

[Luka Jozic]

Quote from @Andrew Postell:

@Luka Jozic thanks so much for posting.  You have some terrific responses above.  All very good.  Real estate is one of those things that is very difficult - despite whatever those books and podcasts say.  But if you can figure it out, then it will change your life. 

Just to add a little math on to what was said already:

1. If you are an "average" person who is trying to buy a rental property you need 25% down (or so) to buy.  On a $300,000 home that's $75,000.  So if you buy a $300,000 home for $35,000 out of pocket, is that good?  And it is...as long as you have the $35,000!  Early in my career I didn't even have that so I had to negotiate very strongly to get my deals to work.  Make offers.  It's not your fault someone is asking too much for a home.  Keep making offers and make them to where you are comfortable with it.

2. Cash flow - Now this one I could spend a ton of time on. 

Here's what I want you to understand about “buy and hold” residential real estate:

• Let’s use a single family home with a property value of $300,000
• Let’s use an initial loan amount of $240,000
• Let’s use an interest rate of 7.25%
• And I’m going to give you $150 of cash flow per month
• Use a 5% appreciation amount for your property

Let’s see what happens after 5 years:

After 5 years…

• $150 of cash flow per month = $9,000
• Your mortgage has been paid down to $227,000 = $13,000
• Your property is now worth $382,000 = $82,000

So that’s $9,000 of cash flow, $13,000 of principle buy down, and $82,000 of appreciation. We make money in 3 ways with “buy and hold” properties…and cash flow is the smallest piece!

Will you cash flow in this environment currently? No, you will not. At least, I want that to be your expectation. Make your offer a little lower because of it. Also, don’t forget you will increase your rents in year 2, year 3, year 4, etc. So you WILL cashflow eventually but go into the property expecting not to cashflow now. And then you are still going to make $95,000 on a property. Remember Brandon Turner’s article on “How to Make $100,000 per year” – you can read it HERE.

Hope all of that makes sense.  Feel free to post anything else if you need.  Thanks!

Really appreciate your response as well as other responses. And you do make a very solid point. I also listened to an episode of the BiggerPockets podcast today about exactly this, and they seemed to all be in agreement that finding a BRRRR where you can pull all your money out and still have cash flow, well lets just say you're gonna need some real magic to make that happen. So I think its more of pulling as much as possible out and as you said, not really expect cashflow but if you can get $1-200 a month thats great, 5 years from now that cash flow will be more.

[Andrew Postell]

@Luka Jozic I think that's a great view to have and I think any property you purchase today you will be glad that you did 5 years from now. 

[Vadim F.]

Quote from @Luka Jozic:

Hi folks, I started out last year and just recently bought my second property. I am now in a position where I can buy cash and I figured instead of just buying nice properties until I run out of money, I want to supercharge my portfolio on start with BRRRR. I have been quite fortunate to land a solid team pretty quickly. I've read most the books, listened to podcast, read on the forum and most importantly, analyzed a ton of deals (mainly of the MLS). The issue that I have is that the examples in books, or numbers provided in other forum threads etc. don't quite make sense, at least not to me. It seems like most people that execute a successful BRRRR end up after financing with a deal right around the 1% rule. With the high interests rates right now it seems like the two options are 1. Pull out all your cash after the rehab and have zero or even negative cashflow or 2. leave cash in the deal and still have pretty low cash flow.

Like for example, say you buy a duplex for $70K, rehab for $40K, and then refinance at around $140K, that means Im leaving around 15K in the deal depending on closing costs and note that I don't even have any carrying costs here. At $140K and having only able to pull out 70% due to it being a duplex the PMI is just shy of $1000/mo. For the areas Im looking at (typical C) I can rent it out around maybe $850/mo per unit so 1700 total. The way i calculate is 10% vacancy, 10% repairs & capex, 10% management. So remove 30% and we have $1190 left. That means we have about $200/mo of cash flow. That sounds very little to me for all that work and if I were to do a hard money loan, it would be even worse! Is this about as good as it gets or am I missing something? Could someone help me make the numbers make sense?

Deals are hard to come by, but look at it from the POV that you got a property for $~15k thats generating you $2400yr in cash flow, that gives you a 16% CoC return.

 Like others said see if you can tweak the numbers, maybe you can purchase the property for 60k, if its been on the market for some time and the seller is motivated. Also, does the property have newer mechanicals and roof? if so, while not ideal I would remove that from monthly expenses and add it to your monthly cash flow. The way I see it, if those items are newer I won't worry about putting away that $$ to the capex fund until a few years later. Furnaces last 30yrs, roofs 30yrs, HWT 15yrs, so i would only worry about the 5% for maintenance/repair.