All Forum Posts by: Account Closed

@Lee S. I think you need to reread all of my prior posts before personally attacking me. 

I HAVE NEVER STATED ONE METHOD IS BETTER THAN THE OTHER and HAVE NEVER SAID BRRRR IS IMPOSSIBLE. In fact I have now stated three separate times good BRRR investments make significantly more than rental investments and good BRRR investors make significantly more than rental investors.

SO LETS BE CLEAR I AM NOT BASHING BRRR AS AN INVESTMENT STRATEGY. I am simply stating that BRRR comes with more risk than a passive rental strategy and has the potential for more unexpected capital contributions. AGAIN THAT DOES NOT MEAN BRRR IS A BAD METHOD AND MANY INVESTORS HAVE PROVEN THE RISK CAN BE WELL WORTH THE RETURN.

Your refusal to acknowledge the fact that both investment philosophies can be very profitable is extremely odd. One investment does not fit all and risk tolerance, time, experience, capital, etc. all shape each investors philosophy. Your insistence that there is no downside to BRRR and it is superior to a rental in every way and for every person is also confusing.

These are two separate investment strategies so the scenario where each investor buys the same property and puts in the same renovations is not a valid one. The two investment strategies have a different goal and different investment criteria. This different criteria values properties differently. For example, in the area I am investing there is no scenario in which spending $50,000 to renovate a $100,000 property would increase my CoC as a buy and hold. i am 100% sure using my criteria I could find a rental that generates a greater CoC return than the 100k property that had 50k in renovations. AGAIN THIS DOES NOT MEAN THAT RENOVATION IS A BAD IDEA FOR BRRR INVESTORS OR THAT THE BRRR METHOD WILL NOT GENERATE MORE CASH FLOW OVERALL. Rental income is just one part of the revenue stream in a BRRR and is 100% of the revenue in a rental. So while the ideal rental property can generate a higher return from rental income than the ideal BRRR the ideal BRRR will generate significantly more overall income.

It is no different than comparing stocks and bonds. An bond portfolio provides a more conservative stable cash flow while a stock portfolio provides the potential for much higher returns but is more aggressive. One is not better than the other. It is simply a matter of preference and each choice involves trade offs. Your argument is the equivalent of saying you can buy a stock that offers the potential for equity growth and provides a dividend that is equal to a bond without taking on any more risk. That is just not how the world works. 

I will reiterate one last time to make sure you don't misunderstand my point. BRRR INVESTING IS A GREAT STRATEGY WITH THE HIGHEST POTENTIAL FOR RETURNS. HOWEVER IT COMES WITH A DIFFERENT SET OF RISKS THAN OTHER INVESTMENT STRATEGIES AND AN INVESTOR NEEDS TO BE AWARE OF THE RISKS AND REWARDS OF EACH STRATEGY.

In my original post I shared a strategy that has worked for me and discussed the risks and REWARDS of the BRRR method. In no way did I infer that the BRRR method or the people following it are inferior to me and my strategy. I have not attacked you personally or questions your investment acumen. You need to realize that discussing the pros and cons of your strategy and sharing a personal preference that differs from you is not an attack on you or your philosophy.

Lee S. The main profit driver in a BRRR investment comes from the increased value generated by the renovation that allows you to pull money out through a refinance and invest in another property and do the same thing. The rental portion of the BRRR is really only done because it is a requirement to refinance and the only real requirement is the rental be cash flow positive until it can be sold. Under the BRRR mindset you would never want to sit on the rental property when you could sell the property pay off the loan and put the rest of the property value to work. Let's look at a BRRR example 100k property 20% down or 80k loan + 25k improvements over six months to post construction value of 178k. Carrying costs for six months (1k annual insurance, 1k annual taxes, 2.5k annual interest, 2k exterior maintenance, 1.5k utilities & security) = 8k /2 or 4K. So you already have $49k equity invested. Great investment: construction goes as planned property appraisers at 200 and you pull out 140 - 80 = 60 or a quick 33% return $ to invest. A year later you sell for 200 pulling out another 60k for a total increase in equity of 75k. Minor Problems: contractor cost overruns and construction schedule delays). To pay for either of these items you need to cough up more cash say 10% cost increase 2.5k and 1 month delay 650. 53.15k. With minor problems the BRRR investor needs 53.15k in capital. Obviously financing is another pitfall here. I don't not accept that if you can get a turn key loan you can get a BRRR refinance loan. Banks change their appetite for investment real estate loans all the time. You may have great credit and $ in the bank but if the policy is purchase price + improvements it is what it is. Major Problems: Local housing market tanks and your contractor walks off the job after his other clients stop paying leaving him bankrupt. Your property is a construction zone that can't be rented and your loan is already underwater and no one wants to buy a half finished property. The BRRR investor needs significant capital to finish this project. Two Cash flow investments 100k 20k down x 2. 40k down compared w 49 in BRRR. Same 650 a month carrying costs and 200 principal payment. Every month the property isn't rented you pay $850. The property is always in sellable/rentable condition, no fronting construction costs. Worst case scenario you rent at a few hundred a month loss best case you pull out 8k in cash flow a year all tax free while paying down principal. If you have the BRRR process down more power to you and I'm sure you'll beat my returns.

@Lee S. 

Before a start my diatribe on why cash flow properties are better than BRRR in my opinion I need to clarify that my post did not advocate buying just renovated pure turnkey investments at market value. My strategy is to buy quality but modest properties with a below market price to rents ratio.

Back to your comments. You are correct thatboth properties will be hit in value. However, as long as your rental is cash flow positive short term variations in the value of the home is irrelevant. With a BRRRR your return is completely reliant on short term fluctuations in the real estate market since your profit is based on the ability to sell for a profit.

Real estate values fluctuate significantly more than rental rates. The Price to rent ratio in Chart 1 Below shows a fluctuate that is exactly correlated to the value of real estate proving prices tend to fluctuate long term while rents remain relatively constant.  Chart 2 shows the SF inflation adjusted home prices swung over 40% in both directions 4 times since 1980.  On top of home prices a BRRRR is also subject to the financial stability of your contractor.  

It is not the amount of money you put down that makes the BRRR more risky to finance but the type of loan. With a BRRR you are generally using some type of short term loan with a balloon payment and must complete construction, get the appraisal you expected and find a bank willing to give you a loan based on that appraisal. This is inherently more risky than a traditional fixed rate loan.

There is no doubt that the best performing BRRRR investments outperform the best performing cash flow properties. As I stated in my original post higher risk comes with higher return.

That being said, a good cash flow investment returns a practically tax free 15% annually and can be reinvested in another revenue generating asset. A 15% CoC return rental with proceeds reinvested will exceed the initial down payment in six years. The example below shows the exponential growth effect rentals can generate.

Year 0: 

5 Properties valued at $100,000 each $500,000 total 

Down payment $100,000 total

Year 6: $100,000 in cash flow purchases 5 properties (10 total)

Year 12: $200,000 in cash flow purchases 10 properties (20 total)

Year 18: $400,000 in cash flow purchases  20 properties (40 total)

Year 24: $800,000 in cash flow purchases 40 properties (80) total 

           Yr 24 you are generating cash flow of $240,000 annually and have built up almost             over $3 million in equity (assuming no appreciation or $4.8 million assuming 2% growth)

In this example 24 years from now (when I am 53) I would be cash flowing $240,000 a year with $ 3 million in the bank all generated from a passive investment.

Chart 1                                               Chart 2

@Andres Blandon These types of suits are the worst. I have no legal background but wish you luck. 

In the future the first thing you should do upon receiving a lawsuit from a tenant is submit the information to your insurance company. They will very quickly accept or deny the claim and if it is accepted they will hire an attorney, pay all the legal fees, pay for your lost wages from having to take off to go to court etc. The insurance policy also has stipulations requiring you to report claims as soon as possible and stipulations preventing you from hiring your own attorney. Depending on your policy you may have already broken these conditions. 

Generally speaking liability insurance will cover you if the tenant is alleging your negligent land-lording caused bodily injury or property damage.  Some policies consider mental anguish to be bodily injury and others do not.  If the tenant is not alleging bodily injury or property damage you are likely not going to be covered. I would send this suit off to your agent asap and probably ask your pm why this wasn't already done. 

@Mike Shemp The mostly an insurance company will ever pay under the three main valuations (Replacement Cost, actual cash value and agreed value) is the limit on the policy declarations. 

Jen most you you will get is the lesser of the cost to rebuild and the property limit. So if limit is 100,000 and cost to rebuild is 110,000 you will only get 100,000. Of the cost to replacement is 90,000 and the limit is 100,000 you will get 90,000. For this reason it is important the limit is correct. 

Most losses will no be a total loss like when thto building burns down but will be a partial loss (roof after storm or kitchen after cooking 

With replacement cost you will get the cost to replace the damaged property with a new version of that property. For example if a 20 year old roof that is almost worthless is destroyed you still get the cost of replacing it with a brand new roof.

Actual cash value gives you the current value of the property relaxes. Example: If that same 20 year old roof is damaged with actual cash value you will get only the value of the old roof in its current state regardless of the cost to replace new. 

Does that make sense?

@David Faulkner

$100,000 Property (Paid In Full) $833.33 a month in cash flow= $10,000 

With no leverage the cash flow is $10,000 / $100,000 = 10%

$100,000 Property (20% or $20,000 Down) $833.33 a month cash flow or $10,000 annually. 

With 5 to 1 Leverage the cash flow is $10,000/$20,000 = 50% or 5x paid in full return. 

Note: You technically have a loan payment under scenario 2 of $4,626.41(assuming 4% rate)  + tax shield from interest expense of $499 ($interest payment of $1,436.41*.35 =$499) which knocks return to $5,126/$20,000 or 26% which is only 2.6x paid in full return However, you would have that same mortgage payment and interest deduction in the appreciation strategy so it should effect our two outcomes the same. 

@David Faulkner The same goes for 10% cash flow leveraged 5 to 1 except you get a 100% return instead of 20%. That being said I think we are both on the same page that neither cash flow or appreciation should be considered in a vacuum to make decisions but the whole investment should be looked at as comprehensive investment. The only reason I used your comment was that it spurred my flexibility topic. 

@Peter MacKercher Thanks for the advice. I am leaning toward taking out the cabinets to do the full paint job. I will be doing it myself. I painted the the outside of the cabinets in my last property but will do my research as to the proper techniques.  Even if I mess up it will be a learning experience and fixing a paint job is relatively inexpensive compared to a mistake in other more structural type work. 

Fortunately, the kitchen is already very open. I have included a full view below. The property has been fully painted (grey), baseboards have been stained, the storage shelf between the kitchen and living room has been removed to allow for bar stools to be placed under the overhanging bar  and a new carpet has been installed since this picture was taken. (Not to mention the stuffy furniture has since been removed). My budget includes lower end stainless steal appliances. I agree with you on the back-spalsh. Not to mention that adds some considerable cost depending on the type of back-splash. 

Do you have any preference between actual granite counter tops and the faux granite linoleum?

@Jeremy Chaser In my opinion there is nothing wrong with the potential for appreciation to be a factor in your selection of an investment property assuming that property will be cash flow positive and make money in the long-term without appreciation. An investor can find cash flow positive properties in both high and low performing markets. That being said, the data shows that cash flow investing is a historically superior investment over the long run for a number of reasons incluidng: 

1. SFH Appreciation is Historically Lower Than S&P 500: Real return on the S&P 500 since 1/1/1980 is 560%. Real Return on single family housing since 1980 in the best performing market (San Francisco) is 162.3%. The chart below shows real return on 9 cities ranging from slow growth midwest citites, to current hot markets like Denver to historically hot markets like NYC ans San Fran since 1980. Only San Fransisco has an average rate of return over 4%, NYC and LA both have rates of return around 3% and the remainder are all well below 2% (in some cases negative). Real estate is an inherently risky investment and if you are going to tie all your cash in one or a handful of properties you need to get returns greater than a diverse stock portfolio. The charts below show over the long term this does not happen without cash flow. Even @Jeff B.'s example which is by all accounts a great appreciation story generated an average annual rate of return of just over 10%. This same 10% return on a rental property is very common. 

2. Cash Flow Brings Flexibility: A positive cash flow investment inherently generates cash every month. This cash can be used to invest in other revenue generating assets, can be put into a rainy day account as a buffer, can be used to pay unexpected expenses or can be used to fund a frivolous purchase.  The positive cash flow made over 5 years can drawn on during a time of negative cash flow to keep the investment afloat. On the other hand appreciation generated over 5 years is washed away during economic down turns and any unexpected expenses during this time can require sale at a loss. @David Faulkner is correct that many Midwestern cities have seen depreciation over the long term. However, this does not effect an investment that is generating positive cash flow. A cash flow investor is not forced to sell a property during a downturn since the rental income is exceeding the carrying costs and expenses and has the flexibility to wait out the market and sell when the market is offering positive returns. An appreciation based investor on the other hand does not have the same luxury. I know that David is not advocating strictly appreciation based investments but the comment was a great way to illustrate flexibility. 

3. Cash Flow Investing is More Predictable: The chart below shows the price to rent ratio for the same 9 cities since 1980. The fact that the ratio greatly increases during economic booms (when appreciation is high) and decreases during down times shows that while prices fluctuate greatly overtime rental rates remain relatively consistent. @David Dachtera is right on with his comment that various market factors influence the price of a property in both the long and short term. While these same forces impact rental rates the effect is significantly less. 

@Ryan Cruz I used to provide my personal opinion on this matter and share how many of my clients have or have not utilized LLCs. However, as time has gone on I have learned that the only correct answer is @Logan Allec's response that the only valid answer will come from your attorney.  We can give anecdotal stories and talk in hypotheticals all day but without knowing your specific situation it is impossible to know what is best for you.