How can I turn equity into cash flow?

Question

With the BRRR method, it seems it's a lot easier to accumulate equity than cash flow. For ex., say I buy a $100k property, ARV is $150k, bank gives me 75%, which is $112.5k.

So if I refinance, my monthly cash flow goes down but I get that $112.5k, correct? But I prefer cash flow over equity because I like that steady stream of monthly income coming in. I also don't feel comfortable relying on equity alone if the home market crashes. So my question is how can I turn that big load of equity into a steady stream of cash flow?

Another question I have is, is it possible to invest that $112.5k into an actual business, like maybe a gas station or store if I find a good opportunity? Is that legal?

Any education for this newbie would be very appreciated!

Andrew Postell · Answer

@Mike Brown the more equity you have in a property the more it will cash flow. So a property with 100% equity will cash flow great! But usually we are talking about how to acquire MORE properties with AS LITTLE out of pocket as possible. So if I gave you free properties with 20% equity in them, would you take them? That's what the BRRRR is. Even if you don't follow the BRRRR method and just put 25% down on properties your rate of return would be 10% even with just 4% of appreciation. Residential is easier to purchase properties with nothing out of pocket because of the BRRRR. Now, having 25% equity in a property should provide you enough cash flow to certainly make it worth it. That's what most successful investors target - 25%. And you earn income in 3 ways in residential real estate - cash flow, appreciation, and principle buy down.

For commercial real estate you are usually planning on a 4 year return. So if you BUY and REHAB a commercial property....you usually cannot refinance for 4 years because you need 2 years of P&L's with your higher rents reporting in order to refinance at a higher value. So commercial is a totally different investment philosophy and method. There is a good commercial forum here on Bigger Pockets that I would suggest to check out.

Hope this all makes sense.

For commercial real estate you are usually planning on a 4 year return.  So if you BUY and REHAB a commercial property....you usually cannot refinance for 4 years because you need 2 years of P&L's with your higher rents reporting in order to refinance at a higher value.  So commercial is a totally different investment philosophy and method.  There is a good commercial forum here on Bigger Pockets that I would suggest to check out.

Hope this all makes sense.

Whitney Hutten · Answer

@Mike Brown With BRRRRs you are trying for cashflow with as little of your own money in the deal as possible.  By forcing the equity on the property during the rehab, putting a tenant in place, and then refinancing out (I like 75% LTV as Andrew mentioned), you may end up (market dependent) with ~$200/mth in cashflow after reserves.  However, that $200/mth comes with very little of your own money left in the deal therefore you can recycle your cash and make it go further.

What I caution against right now with BRRRR is paying too much for a property and assuming $50/mth cashflow on 0% down will hold in this environment.  It leaves you with very little wiggle room to stay competitive on rents.  I know people do it because they are making "infinite returns", but it's not my game.

Then you harvest the 5 ways real estate pays you: Cashflow, tenant principle paydown, appreciation (leveraged since you have a loan), depreciation, and you now have an inflation hedge.

PM me with Q's!

Andrew Syrios · Answer

This is definitely true. I've even thought of writing an article titled "The Myth of Cash Flow" at least when it comes to BRRRR, although that would be a bit hyperbole. The way to turn the money into cash flow is use it to buy another property,or stock for dividends or whatever, including a business or in this case, part of a business. Although that's usually not done passively with small businesses from what I've seen.

Joseph Cacciapaglia · Answer

You only get that $112.5K if you made your original purchase all in cash. If not, you have to pay off the acquisition loan, and then you get the difference. If you want more cash flow, just don't take as much money out. Or, reinvest it into another property for additional cash flow. Another thing to keep in mind, is that if you choose your markets wisely, your rental income will grow over time. The BRRRR method allows you to scale your portfolio quickly, and over time your rents/cash flow will grow as rents increase. If you focus only on your initial cash flow, you'll miss out on a lot of the benefits of real estate investing.

How can I turn equity into cash flow?

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