When to Rehab to Flip Vs. BRRRR

Question

Scenario:

70% ARV - repairs= purchase price

70%($190k)- $80k = $30k

Purchase price: $30k

Repairs: $80k

All in: $110k of cash purchase plus repairs.

Market rent for 3/1 in area: $1200

To BRRRR you want the appraised value to be 100x the market rent. This is the problem I'm encountering.  If the bank will loan up to 75% LTV, the max cash out will be $47,500, correct? Therefore I won't recover my cash outlay. The new loan will be$142,500.

So, if we wanted to get all of our cash out it would have to be appraised much higher or require significantly less cash in repairs. This is why this would only make sense as a flip. Because even if I were willing to leave some cash equity in the deal, I would still be looking at a new ARV of $190k, so with a $1200 market rent rate, I won't be cash flowing.

Does anyone have a calculator or strategy for knowing when to BRRRR vs. straight up flip? I would like to hold on to my properties more long term, but if flipping make sense for these distressed properties, that may be what's best for right now.

There should be an equation to compare these 2 strategies. I'm just hoping there's a genius on here that's done the math! Thanks in advance for any help.

JD Martin · Answer

The banks I work with do 75% LTV after 6 months. Using your numbers:

ARV: $190k. 75% LTV: $142.5 Original cash in: $110 Net cash out: $32.5

I'm not sure where you got the $47.5 figure. That would be based on $63k, and I don't see that number in your figures.

As far as when to flip vs. hold, that's part of your own strategy. There are tax considerations, replacement considerations, long-term strategy considerations that no one here can answer. Short-term flipping has some high tax consequences that you need to consider. Are you looking for short-term wealth or long-term cash flow? Are you in a inclining or declining market?

Alex Saleeby · Answer

@Rachel Trimble

$190k X 75% = $142,500 potential cash-out and new loan amount, not $80k

$142.5k - $110k (purchase + rehab) = $32.5k excess cash out remaining after recovering the original investment of $110k.

In the original post you mentioned a $30k cash purchase + $80 rehab. To recover your investment you would need get the full $110k out using refinancing. Yes, I am certain that banks would let mind loaning at LTV's below the max. Makes the loan less risky.

$110k/$190k=58% LTV.

Rachel Trimble · Answer

@Brent Coombs and @Alex Saleeby

I read that the max cash out is 75% LTV. So are you saying that I can purchase and rehab, spending $110k and then take my new ARV of $190k to get a loan for only $80k? Therefore fully recovering my initial cash outlay? And the bank is ok with financing a 42% LTV ratio? This is where my confusion lies...

Brent Coombs · Answer

@Rachel Trimble, you wrote: "If the bank will loan up to 75% LTV, the max cash out will be $47,500, correct? Therefore I won't recover my cash outlay". I presume that means you would ALREADY owe the bank $95,000 (ie. the difference between your Lenders' contribution of the "all in" cost of $110,000 {= $95,000} and 75% of the new appraisal of $190,000 {= $142,500})?

So, does that mean you only had $15,000 of your OWN money into it in the first place? (In which case, cashing out $47,500 well covers your initial outlay)!

Or, does your being only able to cash out $47,500 mean something else?

For BRRRR to work, you need to make sure it will still cash flow positively even with 75% leverage. Otherwise, welcome to the world of Flipping! Cheers...

Alex Saleeby · Answer

Hello @Rachel Trimble. After the seasoning requirements of the lender you choose, you should be able to complete the cash-out refi and recover your investment, and then some, if the property does appraise at $190k. As far as the calculators you asked about, this site has very good calculators for you to use. You will need to use both the house flipping and rental property calculators. I don't know if one calculator that would help with the decision of flip vs. BRRRR. That really comes down to your investing strategies, goals, and tax implications.

The question is do you really want to max out the cash-out when you refinance? That's when you'd need to run your rental property analysis. If you were to keep this property, you might want to consider recovering only what you put into it, which is the $110k and retain a higher equity position (<60% LTV). There are a number of reasons for considering this option including risk management, debt service, cash flow, and net worth growth.

When to Rehab to Flip Vs. BRRRR

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