BRRRR after refinance leave minimal to no cash flow

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BRRRR after refinance leave minimal to no cash flow

William S.
Rental Property Investor · Overland Park, KS · Member since 2015 · 492 posts · 234 votes

I have been running numbers on potential SFH BRRRR properties. It seems best case scenarios have been that your total out of pocket cost in the end is little to no money for the exchange of time. However, after the refinance your cash flow is near $0. Basically in the end you spent no money, and after the refinance you cash flow nothing, but end up with a house without paying anything. I have been calculating my cash flow over the long term (30 years/length of mortgage), which means a higher CapEx budget due to the length of the hold. Does BRRRR only make sense if you hold short term (5-10 years) then sell and repeat the process? I am seeking long term cash flow/holds so I am not sure if it makes sense. Am I missing something?

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JD MartinBusiness Member
Moderator
Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
9y

OK, I will give you a quick one off the top of my head from our portfolio from a couple of years ago:

Purchase & rehab costs: $48k

ARV: $65k

BRRR cash out = $48.5

PITI: $280

Vac/Cap/Maint/Mgmt: $250

Rent: $800

Cash flow after BRRR: $270

Moral of the story: if there's only cash flow without a mortgage it's probably not a very profitable investment. 

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  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    SFH rentals rarely produce much positive cash flow in the real world. It is primarily a equity move.

    Short term hold does make more scenes but does not eliminate the reasoning that investing in multi unit properties is a far smarter BRRRR plan for cash flow.

    3Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    9y
    Originally posted by @William S.:

    I have been running numbers on potential SFH BRRRR properties. It seems best case scenarios have been that your total out of pocket cost in the end is little to no money for the exchange of time. However, after the refinance your cash flow is near $0. Basically in the end you spent no money, and after the refinance you cash flow nothing, but end up with a house without paying anything. I have been calculating my cash flow over the long term (30 years/length of mortgage), which means a higher CapEx budget due to the length of the hold. Does BRRRR only make sense if you hold short term (5-10 years) then sell and repeat the process? I am seeking long term cash flow/holds so I am not sure if it makes sense. Am I missing something?

    I know a lot of very wealthy SFH holders and we have done extremely well without MFH. Either the houses you are looking at don't make sense for this strategy at time of purchase or your numbers are off. Not every market is suited for SFH purchases. Provide an example of what you're looking at and your numbers and you'll get more comments.

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  • William S.
    OP
    Rental Property Investor · Overland Park, KS · Member since 2015 · 492 posts · 234 votes
    9y

    @JD Martin

    I'll provide an example below (skipping to the refinance period):

    Rent: $1,450/m

    Expenses: $1,388/m

    Cash Flow: $62/m

    I wanted to keep this very simple. After you refinance there is little left from a monthly cash flow perspective. Mainly due to the fact of the new mortgage you put on it.

    0Reply
  • Natalie Schanne
    Real Estate Agent · Princeton, NJ · Member since 2016 · 1k+ posts · 1k+ votes
    9y
    William S. - when there's NO cash flow, the deal can be pretty tight. Sometimes it's just not worth it. You're paying yourself $x towards your mortgage monthly, so you're getting like $200-400 in principal paydown monthly. You can't spend this created value / money unless you sell or REFI. Whereas cash flow builds up your bank account monthly and gives you a cushion towards lumpy expenses.
    0Reply
  • Scott HawleyPro Member
    Investor · Bellevue, WA · Member since 2016 · 65 posts · 36 votes
    9y
    Please add all the numbers like purchase price, repairs, ARV, refi amount, and cost breakdown like vacancy, mortgage, ins, repairs, etc. Scott
    0Reply
  • William S.
    OP
    Rental Property Investor · Overland Park, KS · Member since 2015 · 492 posts · 234 votes
    9y

    Instead of using this deal as an example can someone share numbers where this does work?

    0Reply
  • Scott HawleyPro Member
    Investor · Bellevue, WA · Member since 2016 · 65 posts · 36 votes
    9y

    People post BRRR examples all the time. Just do a quick search.

    0Reply
  • Jeff B.
    Buy & Hold Owner · Redlands, CA · Member since 2015 · 5k+ posts · 2k+ votes
    9y

    The refi will usually put the property in this position.  IMO, the refi is a precursor to the sale of the property as it drives down the gain on the Closing Statement.

    1Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    9y

    OK, I will give you a quick one off the top of my head from our portfolio from a couple of years ago:

    Purchase & rehab costs: $48k

    ARV: $65k

    BRRR cash out = $48.5

    PITI: $280

    Vac/Cap/Maint/Mgmt: $250

    Rent: $800

    Cash flow after BRRR: $270

    Moral of the story: if there's only cash flow without a mortgage it's probably not a very profitable investment. 

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  • William S.
    OP
    Rental Property Investor · Overland Park, KS · Member since 2015 · 492 posts · 234 votes
    9y

    @JD Martin

    I think I know where I am getting hung up. I calculate my expenses very high. 

    $50/m - Maintenance

    $150-$200/m - CapEx

    8-10% - PM

    1 months rent for vacancy

    1 months rent for lease fee (this is the highest I've seen)

    0Reply
  • William S.
    OP
    Rental Property Investor · Overland Park, KS · Member since 2015 · 492 posts · 234 votes
    9y

    I have been told I estimate too high on expenses but I like to be very careful in this regard. Perhaps SFH is the wrong vehicle for my goals? Equity is nice, but I really want immediate cash flow.

    0Reply
  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    9y

    You can't blanket expenses, they will depend on the unit. If you have a new unit you should have reasonably low cap/maint that will expand as years go by. If you have a house from 1900 that's never been touched you are going to have high cap & maint. Vacancy & management looks right. But it still always comes back to your original all-in. If you pay market price for a house and then have to rehab it, it is unlikely you're going to make any money with or without a mortgage. Example: I recently bought a home for $48k for a home that should have gone under for $60k. It has a quirky second br that is easily mitigated but spooky to non-experienced remodelers/investors. I have it for almost a 25% discount. The current ARV of the house is ~90k and the rehab will be ~12k. That puts me all in at ~61, which is about 67% ARV. If we cash out at these numbers it will be about a $64k cash out @75% after closing. The house is in a high appreciation neighborhood and our prediction is a value of ~120 within 5 years. It will be another hold for us.

    Because it is a cash hold, there's no PI in PITI so numbers would be as such:

    TI: 100; cap/vac/mgmt/maint: 225; rent: $800, cash flow = 475. If we cash it out and add PI to that cash flow will end up at ~200. 

    PS: It's not a super-spectacular pick up, but reasonable in what has suddenly become a rapidly rising market. It doesn't match the deals we were doing a few years back but that's what the market is. Your strategy always has to match the market. We won't expand much this year as prices are getting too stupid to make any money right now. 

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  • Chad HalePro Member
    Property Manager / Investor · San Jose, CA · Member since 2013 · 779 posts · 301 votes
    9y

    BRRRR Works best when buying a property under value or in an appreciating market (both value and rent rates). Preferably both.

    1Reply
  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    9y

    Whether using BRRR or any other strategy, one of the keys to success is bargain purchase price. Here are some examples of my purchases:

    Purchase Price          Last Previous Sale Price     Rent

    $32,000                     $56,000                               $950

    $34,000                     $95,000                               $1,250

    $36,000                     $108,000                             $895

    1Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    9y
    Originally posted by @William S.:

    @JD Martin

    I'll provide an example below (skipping to the refinance period):

    Rent: $1,450/m

    Expenses: $1,388/m

    Cash Flow: $62/m

    I wanted to keep this very simple. After you refinance there is little left from a monthly cash flow perspective. Mainly due to the fact of the new mortgage you put on it.

    William - this may not be the most popular post in the thread, but injection of a bit of intellectual honesty into your thinking should illuminate the fact that there are cycles in the marketplace, and what worked 3 years ago does not necessarily work today.

    There are one ofs, of course, but this may be an obsolete strategy in your marketplace in 2017. If so - do you have a plan for what to do next...? 

    1Reply
  • Account Closed
    Investor · Denver, CO · Member since 2016 · 736 posts · 582 votes
    9y
    Originally posted by @William S.:

    Instead of using this deal as an example can someone share numbers where this does work?

    Purchase Price - $22,500 (blog post of prior to rehab)

    Cost of Repairs - $29,332.34

    Holding Costs during repair - 

    Insurance - $243.58

    Utilities - $918.21

    Total Project Cost out of pocket - $52,994.13

    Total Value per Zillow (with post rehab pics) $90,725 (as of this morning).

    Monthly Rent - $725 per month

    The bank I work with wants 1 year seasoning in order to loan based on the value of the property (as opposed to a loan based on my property cost).  Monthly rent is what the tenant currently pays.  I think Zillow is WAY overblown on the monthly rent figure for this house.

    Estimated realistic value - $85,000

    Estimated LTV (at 75% - rounded to account for refi closing costs) - $60,000

    Loan estimate @5% interest for 30 years = payment of $322/month

    Capex Reserve - $36.25

    Repair Reserve - $36.25

    Mgmt Fee - $72.50

    Property Tax - $45.34

    Insurance - $56.00

    Net Cash flow - $156.66

    (capex and repair reserve at 5% - I took care of repairs during rehab.  This will increase over time).

    It would cash flow more if I managed it myself - I'm not a people person....

    6Reply
  • David Krulac
    Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
    9y

    Have another one to add:

    purchase price $20,000

    last previous sale price $105,050

    rent $895

    @Ben Leybovich  you are absolutely right, time and location make all the difference.  I say you need to be flexible and adapt to the market and what the market gives you.  To only use one technique to buy real estate is like having a tool box with one tool.  To a man with a hammer everything looks like a nail.

    2Reply
  • William S.
    OP
    Rental Property Investor · Overland Park, KS · Member since 2015 · 492 posts · 234 votes
    9y

    Thanks everyone. I think I know where I am getting hung up...

    1. I typically use $150/m for CapEx budget (even if I just completed a rehab)

    2. Refinancing at too high of an amount

    Example below:

    $50k house bought via cash

    $30k in rehab needed

    All in at $80k plus 3 months of holding costs

    ARV = $138k

    Refinance 4.5% 30 year fixed @ 70% of $138k = $96,600

    $96,600 - $80,000 = $16,600 (ignoring holding + closing costs for now)

    So I'm up roughly $16,000 and get a house, however after refinancing, this is what I'm left with:

    Rent = $1,100

    Mortgage = $489

    Insurance = $50

    Taxes = $111

    Repairs = $50

    CapEx = $150

    Vacancy = $92

    PM = $88

    Lease fee (1 year) = $91

    Cash flow = -$21/m

    So basically with BRRRR you need to refinance the amount which would give you the monthly cash flow you are seeking? Is this correct?

    0Reply
  • John Leavelle
    Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
    9y

    @William S.

    Yes your Refinance loan amount has a direct impact on Cash Flow.  So the lower you can get the Refi loan amount the better your Cash Flow will be.  However, there are two other key elements affecting your Cash Flow.  You already mentioned one,  "Expenses ".  The other is Rental income.  Buying properties that have rates that are below the Market allows you to increase rates after the Rehab.

    Another way to reduce your mortgage payment is to use a Rate and Term refinance loan. It is based on your costs verses ARV and LTV. In your example that would mean a loan for $80K . That drops your payment down to $408 (@4.5%/30yr). No seasoning required in most cases. Of course if you paid all cash on your deal that would be a problem.

    0Reply
  • William S.
    OP
    Rental Property Investor · Overland Park, KS · Member since 2015 · 492 posts · 234 votes
    9y

    @John Leavelle

    Do you mean wrapping the rehab costs into the loan? I'm not sure I follow...

    Anyways a lot of the potential brrrr properties I see tend to be in rougher areas C-class. I typically invest in B areas.

    0Reply
  • Kenneth GarrettPro Member
    Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
    9y

    @William S.

    It is important to run your numbers accurately. Here is one SFH I did last year:

    Purchase 95K

    Rehab 30K

    Refi 130K (80% LTV)

    ARV 163K

    Cash Flow $400

    I used Private Money. None of my money stuck in. I would do these all day long. I understand the concept of scale. Its tough to scale with SFH. I'm working on multi-family these days but if I find a SFH I would still do it. Keep running numbers. Experience is the key. Run your numbers with someone you trust and who is successful. This will help you. A mentor is critical to your success.

    Good Luck.     

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    True cash flow has no bering on refinance amount since you must also deduct a return on your equity from your rental income.

    At the very least cash flow should always be calculated based on 100% financing. If this is not done your cash flow estimates mean absolutely nothing. Investors that do not understand the value of equity have no idea what their real cash flow numbers are. They are over inflated and defiantly not accurate.

    0Reply
  • John Leavelle
    Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
    9y

    @William S.

    This is my understanding (I am not a Lender or expert). 

     A Rate Term Refinance loan will payoff your original Hard/Private Money loan. If the loan is for purchase price only ($50K), then that is what would be paid.  If it included the $30K Rehab, then, the loan would pay $80K off.  No seasoning required (as long as there is no lien against it).  If you have no or little cash in the deal then you don't need to do a cash out Refi.

    However, I think you indicated a Cash purchase.  And I assume a Cash Rehab.  A third option might be Delayed Financing.  But that would only get you Cash back for the purchase price.  Again, no seasoning required.  Your Rehab costs would remain in the property.

    The Rate/ Term Refi and Delayed Finance options allow for a faster turnaround on deals and lower loan amounts/mortgage payments.  But, will not necessarily get all your Cash out.

    Hope that clarifies what Iwas referring to.

    0Reply
  • Jack B.
    Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes
    9y
    Originally posted by @Jeff B.:

    The refi will usually put the property in this position.  IMO, the refi is a precursor to the sale of the property as it drives down the gain on the Closing Statement.

    I agree with this. I think refinancing prior to sale can be a very good strategy. I also think as the OP started to ask in his post, most SFH, MFH, etc. need to be flipped every few years to avoid major capex. Take it from me, I learned this on a video and REALLY learned it months later when the house it applied to the most had been held so long (6+ years) that it needed all the plumbing pipes redone because they failed. If you buy any property, especially older ones, you need to look at flipping them every 3-7 years otherwise you're going to build up major capex.

    0Reply
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