512% cash-on-cash return on one rental using BRRR strategy

512% cash-on-cash return on one rental using BRRR strategy

Flipper/Rehabber · Portland, OR · Member since 2014 · 119 posts · 121 votes

Hi BP,

Wanted to share a successful BRRR deal I finished recently, it was actually my first time using the BRRR strategy instead of just flipping the house and I must say I am hooked. Also, the title of this post can be a little confusing or unrealistic to those who don't know what the BRRR strategy entails, those who are versed in it likely immediately realized the reason the cash-on-cash was so high was that such a small amount of my capital was left in the deal after the refinance.

If you scroll below you can see photos of the finished product.

Here are the details:

I bought a property that had on it 2 detached single family homes on 1 tax lot, the city and the bank recognized it as a duplex even though it technically isn't a duplex. I paid $200k using private money to fund the entire purchase price. I spent about $75-80k renovating the front and back unit completely with new everything. My all-in cost after all of the renovation cost, financing cost, utilities, refinance fees and closing costs was about $305,000. After renovation was complete, I rented out one unit for $1,650 and the other for $1,500 for a combined $3,150 per month on a 12-month lease. Total cash flow after accounting for PITI expenses ONLY is $1,282 per month. The yield would obviously be a little lower after accounting for vacancy, capex, PM but 1) for the time being I am self-managing and 2) the property is fully renovated and turnkey so capex should be very minimal for the first few years at least.

The bank appraised the property at $440,000 and allowed me to do a cash-out-refinance at 70% loan-to-value. I took out the full 70% which came out to $308,000, leaving roughly $3,000 of my own cash into the deal.

When you look at this deal through a cash-on-cash analysis the yield looks insanely high but what that analysis fails to account for is the amount of equity I left in the deal. That equity could have been cashed out and put to use if I flipped the property but instead is parked in this rental property so there is some opportunity cost there that brings my true yield down further if you factor it in to calculate the return on equity. However, if I had cashed out I would have to pay the capital gains tax on the earnings. It was a hard decision trying to decide which way to take this deal and ultimately decided to make a long-term play on it and keep it, I think I will thank myself for it in the future. 

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Most Popular Reply

Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
8y

there are no deals on the west coast you must be making this up !!!   :)

See this reply in the discussion

91 Replies

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  • Investor · Deridder, LA · Member since 2014 · 298 posts · 185 votes
    8y
    @Michael Conklin We use a local lender First National Bank of Deridder. Jeff V
  • Investor · Deridder, LA · Member since 2014 · 298 posts · 185 votes
    8y
    @Samuel Garrett I have used 2 local lenders but one had an investor friendly loan officer who knew the business. He was able to help setup a line of credit. Lender is First National Bank of Deridder, it's a local community bank. Jeff V
  • Investor · Deridder, LA · Member since 2014 · 298 posts · 185 votes
    8y
    @Jonathan Taylor Smith We used a local community bank First National Bank of Deridder. Jeff V
  • Hatfield, PA · Member since 2018 · 12 posts · 3 votes
    8y
    @Omid A. This is awesome. How did you know this property was a good fit for brrrr instead of regular flipping?
  • Charlotte, NC · Member since 2016 · 82 posts · 41 votes
    8y
    @Omid A. Awesome story. Thanks for sharing. Hoping to find my first deal this year!
  • Rental Property Investor · Mechanicsburg, PA · Member since 2017 · 18 posts · 3 votes
    8y

    Great work!  Love to see such positive success like this!

  • Rental Property Investor · Bardstown, KY · Member since 2018 · 3 posts · 0 votes
    8y
    @Omid A. Congratulations on a job well done
  • Philadelphia, PA · Member since 2018 · 81 posts · 27 votes
    8y
    Originally posted by @Omid A.:
    Originally posted by @Alex T.:

    Nice work, but I think you're looking at it the wrong way. You said you're in for 305k cash. You cashed out 70% of the appraisal for 308k, so it sounds like you ended up with your entire 305k cash back, another 3k cash "bonus", and then 30% equity in a 440k duplex that generates around $1200/month NOI. On paper, you have to view it like you paid 30% down for this new investment, which is 132k. So your upcoming cash on cash is around 11%, and ROI is around 15% (assuming 5% interest on the mortgage). Those both sound good to me. The cap is 7-8, but frankly, it doesn't mean much without knowing your market.

    Now if you want to look at the total ROI of your investment right as you're about to start managing the duplex, it's simple. It's just the 440k appraisal minus what you put in, divided by what you put in. So (440k-305k)/305k=44% ROI over X period of time. Everything here is phenomenal as far as I'm concerned, but nowhere would I say your cash on cash is 512%.

    Really, the only question to ask yourself is what you could have done with the extra 30% of 440k. If you had another deal you projected to generate more than 11% cash on cash per anum, then you should've sold this. If not, then you made the right call.

    Of course, this is all predicated on the property actually being worth 440k. As other people have mentioned, it's only worth what someone is willing to pay, which could be far less than 440k. Either way, it's still fine to use the 440k number as the basis for your calculations...because it's the best thing you have at this point. Anyway, good luck. I would kill for something that good...and in your shoes, I absolutely would have held the duplex.

    Hey Alex,

     What you are talking about is return-on-equity, which is an important point to consider but you have the numbers a little mixed up. When factoring in the equity and treating it like it was a down payment, my cash-on-cash would not be 11% because in order to tap into the full 30% I would have to sell the property, thus paying income taxes. 

    Cash-on-cash is a very simple calculation. In your analysis, you are basically replacing the cash-on-cash value with a skewed return-on-equity value and calling it a more accurate COC value, instead of just calculating for each metric independently and analyzing both. Hope that made sense.

    Like many things in RE, there are different ways to think about it. I view your situation as two separate investments where you bought a house, flipped it, sold it, then bought a rental and rented it. That's how I think about it, because the reality is you had the choice to sell 100% of the flipped house and use that money towards another investment instead of taking out 30% and renting it. I view your mortgage as no different than you finding another rental to buy for 440k and putting 30% down to make that investment happen. You can think about it however it makes sense to you. If it makes sense to say you only have 3k left in the deal and because you're making 15k pre-tax then it's 500% COC, that's fine. My point is that I think it may do a disservice to you when evaluating other investment opportunities. Regardless, it's a great investment!

  • Flipper/Rehabber · Portland, OR · Member since 2014 · 119 posts · 121 votes
    8y

    @Alex T.

    Alex, you are forgetting that if you flip it then the 30% equity I currently have in the deal would be much smaller due to income taxes I'd have to pay on the profits. That's a critical piece of information. You are right in the way you are viewing it but when evaluating what you could do with the proceeds if you sold the property then you'll need to deduct the taxes that will be owed. When you do this you'll realize you don't have 30% of 440k to play with because you're paying nearly 40% just in taxes. I did consider this when making the decision to sell vs hold. 

  • Philadelphia, PA · Member since 2018 · 81 posts · 27 votes
    8y
    Originally posted by @Omid A.:

    @Alex T.

    Alex, you are forgetting that if you flip it then the 30% equity I currently have in the deal would be much smaller due to income taxes I'd have to pay on the profits. That's a critical piece of information. You are right in the way you are viewing it but when evaluating what you could do with the proceeds if you sold the property then you'll need to deduct the taxes that will be owed. When you do this you'll realize you don't have 30% of 440k to play with because you're paying nearly 40% just in taxes. I did consider this when making the decision to sell vs hold. 

    Absolutely, you're right. From a cash flow perspective, those income taxes on the flip are going to further boost your case for holding and renting...but it's only a delay since you'll obviously have to realize the gains at some point! But sure, better to leverage your taxable assets now to make money today versus tomorrow.

  • Mid Cites DFW · Member since 2018 · 2 posts · 0 votes
    8y

    Of course you could also 1031 exchange it to avoid any taxes as well.  

  • Investor · Los Angeles, CA · Member since 2017 · 523 posts · 476 votes
    8y
    Originally posted by @Omid A.:

    Hi BP,

    Wanted to share a successful BRRR deal I finished recently, it was actually my first time using the BRRR strategy instead of just flipping the house and I must say I am hooked. Also, the title of this post can be a little confusing or unrealistic to those who don't know what the BRRR strategy entails, those who are versed in it likely immediately realized the reason the cash-on-cash was so high was that such a small amount of my capital was left in the deal after the refinance.

    If you scroll below you can see photos of the finished product.

    Here are the details:

    I bought a property that had on it 2 detached single family homes on 1 tax lot, the city and the bank recognized it as a duplex even though it technically isn't a duplex. I paid $200k using private money to fund the entire purchase price. I spent about $75-80k renovating the front and back unit completely with new everything. My all-in cost after all of the renovation cost, financing cost, utilities, refinance fees and closing costs was about $305,000. After renovation was complete, I rented out one unit for $1,650 and the other for $1,500 for a combined $3,150 per month on a 12-month lease. Total cash flow after accounting for PITI expenses ONLY is $1,282 per month. The yield would obviously be a little lower after accounting for vacancy, capex, PM but 1) for the time being I am self-managing and 2) the property is fully renovated and turnkey so capex should be very minimal for the first few years at least.

    The bank appraised the property at $440,000 and allowed me to do a cash-out-refinance at 70% loan-to-value. I took out the full 70% which came out to $308,000, leaving roughly $3,000 of my own cash into the deal.

    When you look at this deal through a cash-on-cash analysis the yield looks insanely high but what that analysis fails to account for is the amount of equity I left in the deal. That equity could have been cashed out and put to use if I flipped the property but instead is parked in this rental property so there is some opportunity cost there that brings my true yield down further if you factor it in to calculate the return on equity. However, if I had cashed out I would have to pay the capital gains tax on the earnings. It was a hard decision trying to decide which way to take this deal and ultimately decided to make a long-term play on it and keep it, I think I will thank myself for it in the future. 

    Omid, I love this. Looks great, and what a well put together deal. I'm often floored by how amazing BRRR is as a strategy - and yours is a case in point. Awesome. On a side note, the previous tenant at my SFR rental here in LA is named Omid, great guy :-)

  • Real Estate Investor · Sacramento, CA · Member since 2010 · 298 posts · 103 votes
    8y

    Nice job, Omid! And very smart move to keep it for a long term rental.  I'm curious why you used white cabinets in one house, and wood grain in the other.  I like them both equally well, though. I like that curved light on the kitchen ceiling, too. Adds a nice bit of flair you don't get from can lights (also a very good choice).

  • Rental Property Investor · Woodbridge, VA · Member since 2017 · 12 posts · 37 votes
    8y

    Omid,

    Way to go BRRRR (Buy/Renovate/Rent/Refinance/Repeat) brother. I'm a true believer in BRRRR. Over past 10 years has been a great long term strategy. Net worth will reflect it in long term. Congrats!

    Bob

  • Kenneth HynesPro Member
    Rental Property Investor · Easton, PA · Member since 2013 · 359 posts · 92 votes
    8y

    @Omid A.  

    Great job on the renovation and the complete BRRR deal. Curious , after you rented it out , do you have any other expenses besides the PITI listed ? understand about the self manage and low CAPEX/ Repairs , but what about utilities ? Are the units separate meters for everything and the tenants cover all,or do you have to bill back some (example water and garbage) since you are still the owner and responsible for paying them ?

  • Mills River, NC · Member since 2018 · 2 posts · 0 votes
    8y

    Awesome @Omid A. -- some commenters are correct in pointing out that you had $305 in the deal and cashed out $308 from the refi, so you actually have no cash left in the deal, giving you an unlimited return (cannot divide by zero) =) Even better!

  • Property Manager · Long Beach, CA · Member since 2015 · 31 posts · 12 votes
    8y
    @Omid A. Nice job. If you can get $1200/month and pull all of your cash out, I say you hit it out of the park. Congratulations!
  • Pleasant Hill Ca · Member since 2018 · 5 posts · 0 votes
    8y

    Thinking outside the box!!! I am fairly new to investing and that is exciting!!!

  • San Diego · Member since 2018 · 44 posts · 22 votes
    8y

    @Omid A.Wow great job and congrats.  Lots of good info in your description as well as in these comments.  Learning a lot from just the simple discussions in this thread.  

    Did you ever consider Delayed Financing to avoid 6 month seasoning?  

    Good luck on next one!

  • Pleasant Hill Ca · Member since 2018 · 5 posts · 0 votes
    8y

    Omid, did you use you own money on this one or OPM and how was that structured. I love this story and it is exciting to see a success like this, Amazing!

  • Pleasant Hill Ca · Member since 2018 · 5 posts · 0 votes
    8y

    Another question for you, what is the taxes you pay on cash out you received??

    I am assuming it is different in every state...

    Thank you

  • Flipper/Rehabber · Portland, OR · Member since 2014 · 119 posts · 121 votes
    8y

    @Gary Rust

    I used private lenders to fund the purchase price and my own cash to fund the rest. Also, you don't pay any taxes on cash that you pull out on a refi because technically it is a loan and not income ;) 

  • Pleasant Hill Ca · Member since 2018 · 5 posts · 0 votes
    8y

    I like that....comming from the restaurant industry every dollar you earn you are lucky to put 2 to 4 cents in your pocket after all of the books are settled at the end of the tax year.....thank you for sharing.....get me pumped up!

    G Rust

  • Rental Property Investor · Baytown, TX · Member since 2008 · 94 posts · 21 votes
    8y
    Originally posted by @Samuel Garrett:

    @Jeff V. you mentioned a great finance strategy by using remaining equity to obtain a HELOC. curious to understand your experience with HELOC and what investor friendly lenders you have worked with? So far, i have only inquired with big banks and all have turned me down when they found out i was trying to obtain a HELOC on an investment property.

     Samuel,

    Forget the big banks.  They won't do it.  Find a small local bank or credit union.  Try to talk to local investors.  They can point you to specific people at specific banks

  • Investor · Cincinnati, OH · Member since 2018 · 136 posts · 87 votes
    8y

    Awesome deal. Thanks for sharing. 

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