All Forum Posts by: Jake Thornton

@Trent Chance Yes I know it's probably best case scenario. So I also ran the numbers to indicate $250 cash flow. The cash flow with those numbers comes to $112,500. All other numbers (appreciation, equity) remain the same. 

In that case the total at the end of year five equals $599,912. Still pretty pleased with that. :) 

"In the RED CORNER, Apple stock. In the BLUE CORNER, the BRRRR Strategy. Two investment ideas go into the ring, one comes out. LET'S GET READY TO BRRRRUMBLE!"

So I'm a new investor. I have a couple of Airbnb's in Souther California, but next year I plan to launch full scale into a BRRRR strategy after reading the book by @David Greene, and joining the wonderful community here on BP. I've been gobbling up as much as I can, and attended the great free webinar by @J Scott and @Tarl Yarber yesterday, which was awesome! Thanks guys!

So I as I prepare to take massive action on this strategy next year, I was talking with a friend of mine the other day about it, and he grimaced, and said it sounded dangerous. I talked to him about the idea, whereby you could buy a house say for $50,000 cash, and put $25,000 into it, rent it out, refinance it at the new forced equity value of $100,000 at 25% down, and pull out all your cash and do it again. And again. And again.

To which he replied that he’d bought $50,000 of Apple stock in 2014, and that had now doubled in value, so how was this better than that? I tried to convince him that it was, but I couldn’t quickly punch the numbers to show him.

But today I sat down and did just that. And this is what I found.

All these calculations show an identical BRRRR, bought for $50,000 cash, with $25,000 rehab costs, and refi'd for $100,000. I guestimate that after everything is paid every month (Rent, Management, CapEx and Maintenance) that the property cash flows $500. Of course in real world scenarios any of these numbers could be up or down in either direction, but I'm just using this is a rough base for this equation. I buy three of these houses per year using this technique.

So in year one I buy a property in the first month, and have it rehabbed and rented to a tenant by the start of the third, and refinance it by the end of the fourth.

The cash flow on this first house is $5000 for that first year. (10 months at $500).

The second cash flows $3000 that first year (6 months at $500)

And the third brings me $1000 (2 months at $500)

I keep these for the following four years and combined they cash flow (including this first year) $81,000.

I then repeat this every year for the next four years. Three properties each year, same numbers.

House 4 by year 5 has cash flowed $23,000

House 5 by year 5 has cash flowed $21,000

House 6 by year 5 has cash flowed $19,000

House 7 by year 5 has cash flowed $17,000

House 8 by year 5 has cash flowed $15,000

House 9 by year 5 has cash flowed $13,000

House 10 by year 5 has cash flowed $11,000

House 11 by year 5 has cash flowed $9,000

House 12 by year 5 has cash flowed $7,000

House 13 by year 5 has cash flowed $5,000

House 14 by year 5 has cash flowed $3,000

House 15 by year 5 has cash flowed $1,000

The total cash flow by the end of year five is $225,000.

We’ve already outperformed my friend’s Apple stock. Whoopeee. Math is fun!

"BRRRR has one-two punched Apple, and he's out cold!"

BUT WAIT! THERE’S MORE!

Because the balance on the mortgages on all of these properties has been paid down.

At a 4.5% 30 year loan (again actual numbers may be different, but for the sake of example) of $75,000.

House 1 balance by end of year 5 = $68,368.44

House 2 balance by end of year 5 = $68,858.37

House 3 balance by end of year 5 = $69,341.01

House 4 balance by end of year 5 = $69,816.49

House 5 balance by end of year 5 = $70,284.9

House 6 balance by end of year 5 = 70,746.34

House 7 balance by end of year 5 = $71,200.94

House 8 balance by end of year 5 = $71,648.77

House 9 balance by end of year 5 = $72,089.95

House 10 balance by end of year 5 = $72,524.58

House 11 balance by end of year 5 = $72,952.74

House 12 balance by end of year 5 = $73,374.55

House 13 balance by end of year 5 = $73,790.08

House 14 balance by end of year 5 = $74,199.44

House 15 balance by end of year 5 = $74,602.72

AND the house has gone up in value! At an estimated 2% increase the new home values look like this:

Home 1 value by end of year 5 = $108,243

Home 2 value by end of year 5 = $108,243

Home 3 value by end of year 5 = $108,243

Home 4 value by end of year 5 = $106,120

Home 5 value by end of year 5 = $106,120

Home 6 value by end of year 5 = $106,120

Home 7 value by end of year 5 = $104,040

Home 8 value by end of year 5 = $104,040

Home 9 value by end of year 5 = $104,040

Home 10 value by end of year 5 = $102,000

Home 11 value by end of year 5 = $102,000

Home 12 value by end of year 5 = $102,000

Home 13 value by end of year 5 = $100,000 (No appreciation yet)

Home 14 value by end of year 5 = $100,000

Home 15 value by end of year 5 = $100,000

So the total equity we have now in these houses equals TOTAL HOME VALUE FOR ALL 15 HOUSES ($1,561,212) minus the TOTAL BALANCE ON MORTGAGES ($1,073,799)

$1,561,212 minus $1,073,799 = $487,412

That’s how much we’d make if we sold all those properties at the end of year 5.

Plus we cash flowed $225,000.

So the total at the end of year five is:

$225,000 cash flow + $487,412 equity = $712,412.

Oh and we still have our $75,000 investment nut. And my how that nut has grown.

So $50,000 of Apple stock doubled in that time to $100,000.

But our $75,000 became $787,412. In five years...

Can’t wait to get started with this strategy next year!!

@Elliot Shoener Thanks. But as @Jaysen Medhurst points out above, being a newbie, and woefully ignorant, I forgot a few important factors in my calculation including CapEx costs and management fees. So take my post with a grain of "newbie salt".

@Jaysen Medhurst thanks for the advice. Taking it on board.

@Rob Bowness I did not factor any of those considerations in, but you can play with those numbers as appropriate and make your decision to flip or BRRR based on that. Let us know what you decide to do and how you get on!

@Rob Bowness

OK, so I've been number crunching. Forgive me if you've done this already (I'm sure you have) but it's also partly for myself as I venture into my first BRRRR next year.

I'm going to assume you get the property rehabbed by the end of the first holding month, and have a tenant in there for one month, before refi-ing at the end of month three.

So you purchased with HELOC cash for $220,000. I'm going to say that you put $25,000 into rehab costs. Your monthly tax to hold the property is $833, for a total of $2500 for three months. Your cost for your total HELOC payment for three months is $3,062.

So your total cost to buy, rehab, and hold this property is:

$220,000 purchase plus

$25,000 rehab plus

$3,062 HELOC payments plus

$2500 property taxes

TOTAL 250,562. 

After three months you refi for an ARV of $330,000, leaving 25% in the home. You leave $82,500 in, and pull out $247,500.

So your HELOC cash in was $250,562, and your cash out is $247,500. A difference of $3062. That $3062 pulled from your HELOC at a 5% interest rate, and payable over 30 years is a monthly payment of $16.44.

BUT WAIT you made a pure cash flow month on the third month of $2500. So that $3062 is now only $562. So now to pay that HELOC rate is only costing you $3.02 a month.

If you get a rate of 5% on the refi'd mortgage your principal and interest payments will b $1329 a month. Property taxes of $833. I'm going to assume you aren't covering any other utilities. 

Your payment then is $2,228 per month. Plus your HELOC repayment of $3.02

Your rent is $2500. 

Your cash flow then is $268.56 per month. 

Yes, you still have money in the deal that you have to pay for, but it's such a low amount and is easily covered by the monthly cash flow. 

The numbers change of course if your mortgage rate is higher, the rehab costs more, you have to hold the property for longer before rented etc. But from this deal I can see that I think you're gonna be ok. 

And what’s the estimated rent?

@Rob Bowness what is the estimated After Rehab Value? (ARV).

I agree with above. Leaving a little money as your basis still involved isn't the worst thing imaginable. But yes, need to look at the numbers to really evaluate. Put 'em up so we can see :)

Super awesome. So inspiring.