15yr Projection Breakdown of 3 Key Strategies

[Rafael Ro]

Hello all,

I'll start by saying that I tend to overanalyze things, but after a ton of analysis I've come up with 3 strategies and they all look interesting for different reasons, and I broke them down in detail. 

I believe and hope this will help everyone that's starting out, especially if some more experienced people pitch in and correct any assumptions I made that appear inaccurate.

I'm including the complete breakdown below, but for those scanning through it goes like this. All strategies start with buying 1 property and adding $10k cash every year. 

Strategy 1 - Buying tenanted turnkey properties. By Year 15 we'll have 4 properties valued at $690k, with a loan balance at $391k, and constant slight negative cashflow. 

Strategy 2 - Buying vacant properties through a broker and getting them tenanted. By Year 15 we'll have 5 properties valued at $847k, with a loan balance at $470k, and constant slight positive cashflow.

Strategy 3 - Buying fixer properties through a broker, fixing them, tenanting them, and refi - BRRR. By Year 15 we'll have 6 properties valued at $1mil, with a loan balance at $555k, and constant positive cashflow.

Going by numbers alone, there is a very clear winner, but I would really appreciate your input in vetting those strategies - long term. 

These calculations were done with the help of ChatGPT so take them with a grain of salt, but they should be fairly accurate.  

We can start with the following facts --- I have $50k to invest, I have more cash on the side to use "temporarily" (ie. rehab and pull back out through refi), I run a biz with a healthy income, and I can get credit. 

For the purposes of simplifying this, let's assume that everything below would happen in Memphis and it would be about C+ class properties.  

With that in mind, I'm making the following assumptions (which could be wrong - please lmk) -- I'm trying to use mainly % for everything, so that it's easy to calculate numbers for the different strategies. 

One time costs:

25% of purchase price downpayment 

$4k loan closing costs 

Ongoing costs: 

10% of rent property mgmt

10% of rent maintenance

5% of rent vacancy

5.9% of purchase price per year for mortgage

0.85% of purchase price per year for property taxes

0.55% of purchase price per year for homeowners insurance 

Variable costs:

Half a rent + $2k repairs for every tenant change. 

I'm assuming tenant turnover every 2 years. 

Final assumptions:

To keep things simple and given the Class and location of these properties, let's assume a 1% increase in rent per year, and a 1% appreciation. I understand that these numbers are low, but I'm trying to be conservative. The idea with all this is to focus mainly on the cash flow. 

Finally, for simplicity, we'll assume that in every strategy the price (or ARV) of the property is $150k, that we're starting with $45k, that we can invest an additional $10k every year, and that we can use any remaining cash reserves to continue purchasing more properties. 

Strategy 1) 

Buy tenanted properties through a reliable turnkey provider/property manager. These properties will be completely remodeled and will come with a new roof, new floors/carpets, appliances, etc -- all the big stuff. This means that we would likely see much less maintenance costs during the first couple of years. But it also means that we're overpaying for the property upfront. 

This property would cost $150k and would rent for $1200/month. It would cost us $42,500 for downpayment and loan costs (+ home insurance/property taxes) upfront. 

Based on the above assumptions, this will give us a negative cash flow for most years, but because of our cash injections we'll be able to purchase another property by Year 6. 

By Year 15 we will have acquired 4 properties. We would have put in $192.5k cash (42.5k to buy the first property + 10k/year). The total property value of our 4 properties will be $690k. Our loan balance will be $391k. Our cash reserves down to barely anything.

Strategy 2)

Buy properties through a broker and work with a property management to run them. These properties would not be completely remodeled, but will be ready to rent, possibly with $2500 in repairs. For that reason, I also included $0 rent for the first month. Some properties may need 1 week others may need 6 weeks, so I believe 1 month is a decent average.

This property would cost $150k (147.5k + 2.5k repairs) and would rent for $1400/month. It would cost us $44,375 (+ home insurance/property taxes) upfront.

Based on the above assumptions, this will give us a positive cash flow for most years, and because of our cash injections we'll be able to purchase another property by Year 5.

By Year 15 we will have acquired 5 properties. We would have put in $195k cash (44.5k to buy the first property + 10k/year). The total property value of our 5 properties will be $847k. Our loan balance will be $470k. Our cash reserves will be $35k.

IMPORTANT -- This strategy really flourishes in the years that follow. At this stage we would have gotten to a point where we're cashflowing nicely and can add 1 property almost every year that follows!

Strategy 3) 

Buy properties through a broker, work with a contractor to remodel, and work with a property management to run them, and refinance - BRRR. These properties will require work. We will assume that we would buy them at 100k and put in 35k in remodeling, with the goal to ARV at 150k. At that point we would refinance to pull our capital back out. For that reason we will include $0 rent for the first 3 months.

NOTE: I'm in contact with a reputable broker and the numbers they're claiming for repairs and ARV are SO MUCH better than what I'm using here, but I thought it's fair to pad the suggested numbers as I have done with the above also.  

This property would cost $135k (100k + 35k repairs) and would rent for $1400/month. It would cost us $67.5k (downpayment, repairs, loan costs, refi costs + home insurance/property taxes) upfront BUT we would then pull money out.  

Our first loan balance would be $75k. Let's assume we refi 70% of 150k value ($105k), so that would give us 30k back, bringing our cost down to $37.5k.  

The way I calculated the projections here was that I set it up to only acquire new properties when we have $37.5k PLUS a $25k minimum cash reserves, meaning that we cannot buy a property until we have a cash balance of $62.5k. I also included an additional $7,500 starting balance at Year 1, since we would have money leftover from our first property, compared to the original investment of the previous strategies. Between skipping rent for 3 months, new loan amounts, cash reserves, etc -- these are very complicated calculations for ChatGPT, so there is a margin of error here. I tried to dig in and uncover any errors I could and this is what I came up with. 

Based on the above assumptions, this will give us a positive cash flow for most years (better than #2), and because of our cash injections we'll be able to purchase another property by Year 6.

By Year 15 we will have acquired 6 properties. We would have put in $187.5k cash (37.5k to buy the first property + 10k/year). The total property value of our 6 properties will be $1.04mil. Our loan balance will be $555k. Our cash reserves will be $62k.

IMPORTANT -- This strategy flourishes BIG TIME in the years that follow. At this stage we would have gotten to a point where we're cashflowing great and can add 1 or 2 or even more properties, almost every year that follows!

-----------------------------

Based on the above, it appears that this BRRR strategy far exceeds anything else. Then again, it's also the strategy with the biggest unknowns by far.

It's clear that the more risk - the more returns. 

Assuming that every vendor involved is experienced and legitimate, then the turnkey house seems to have the least "risk" but also the lowest returns. 

Then the broker route has a little more risk, and better returns. 

And the BRRR has a bunch of risk (repairs could be more expensive or take longer, ARV may not come in where we need it, etc) and it pays so much better.

I know that this is a long read, but I would be very appreciative to anyone that can pitch in, especially to challenge the assumptions I've made here. I tried to be realistic, based on what I've read in these forums, and to use lower tenancy periods, higher maintenance costs, etc.. Obviously no model will be perfect, but do you see anything that just looks way off? 

If not, then assuming that someone is in a financial situation that can afford a potential mishap, then would you say that BRRR is hands down the way to go, or am I missing something? It appears that even if remodeling costs a little more, or takes longer and you miss even more rent, there is enough room to cover that and still be the winning strategy.

Thank you in advance and hopefully this is a helpful post to more people too.   

[Joe Villeneuve]

I got about 1/4 of the way down and realized you were just putting in guesses for numbers based on percentages of things with no identification of how you arrived at those numbers. You appeared to be using arbitrary percentages. How you came up with those percentages, you really didn't say. In other words the basis for any analysis you did here ultimately was just guessing. REI is nothing like that.

RE analysis is based on actual numbers using dollar signs, not percentages.  The specific market you find properties in defines those numbers, and they are NOT specific to a general size.  They are specific to a specific market, actually micro-market.  Properties don't define the market, the market defines the properties.  Properties a pieces of the market they are in.

The strategy you use should be based on the market.  Never decide on a strategy ahead of time.  Let the market decide what strategy works in that market.  This means you need to learn how to analyze markets.