Should I BRRRR or keep the property debt free??

Question

David Walkotten · Answer

Take Kenneth's numbers above and compare.

Scenario 1: Let's say you get 82k cash-out if it appraised a touch under 120k. Your cash flow would be around $185/mo assuming his numbers. $185/mo + $150/mo in principal pay down average over first 10 years = $335/mo on $0 investment.

$4020/year at infinite COC

Scenario 2: Keep all your 82k cash in the property. Your cash flow would increase to the $185/mo + $485/mo (the debt service not utilized). In that scenario you are making $650/mo on $82000 investment.

$7800/year at 9.5% COC

Now if you can go buy 3 more properties with that $82k, assuming you keep your 20% down and have the same numbers as this property, you would then make $16,080/year with the same amount of money.

Paul Leason · Answer

I’m not going to read the rest of the answers so as not to skew my opinion though I think my answer will the same as many others: BRRRR

WHY?  Because in this instance if you refi at 75% you can pull out $90k and you only have $82k invested. Sure you’ll pay mortgage fees but you’ll still be zero cash into this deal and will be able to do the same again and have appreciation over the years in 2 properties.

Question: If I gave you a property with 25% equity, with a reasonable cash flow and the potential for appreciation, would you turn it down?!  Doubt it.

Leverage wisely and multiply.  Real estate is a long term strategy and one where you want to build your portfolio.

Thomas S. · Answer

The equity you have in the property is not creating cash flow it is buying the cash flow. If a property can not produce acceptable cash flow ( $100+ /door /month) with a hypothetical 100% financing it is not a good investment.

If a investor values their money they will place a minimum return on their cash of at east 10%. If your property has 120 K in equity the return on that money should therefor be 10% of 120 K or 1000/month.

When you subtract the necessary return needed on your dead equity from your rental income you are left with only $100/month to cover all the expenses on that property...repairs, vacancies, taxes, legal, cap expense's, regular maintenance etc. Obviously no where near enough to carry the property.

What this means is you are buying income, the property by itself is earning next to no income. If you can pull the equity and spread it around to several additional income properties you will not only increase your cash flow from the properties themselves overall you will also be gaining additional appreciation form having several as opposed to only one property appreciating.

Investors with debt free properties are the most highly conservative investors of all and as a result earn the lowest possible returns on their cash.

Christopher Neeson · Answer

My first question would be is it in the historical district? I'm currently battling renovating in the historical district and it can be a pain to say the least.

Also I would say look around before jumping the gun either direction. Have you been to the court house yet to check out the foreclosures? We went last time we were down just to get an idea of what properties were available,  definitely a good place to start.

Also maybe get with Haily at https://www.jmcmichigan.com to get some better local insight she would know before and after market rebtal rates.  Also if you need KZoo management so far ahead has been doing really well.  Avoid Icon property management completely you'll thank me.

We operate our properties remotely from Alaska, I can say this sometimes a renovation isjt worth it in Kalamazoo. We have some units that fetch great rents that haven't been remodeled. A triplex that rents for 750 a unit we picked up for under 80k. A duplex and house on the same lot non conforming that was 127k and we get 1500 for the house and 950 on each side of the duplex.

We have others we have renovated and others we are renovating but dont expect much higher rents as much as it will allow us to be very selective for tenants.

Good luck, definitely dont go crazy on renovating unless you know it will be able to recoup.

Andrew Syrios · Answer

It really just depends on what your goals are. Do you want to grow more quickly or be more conservative and guarantee higher cash flow. If you want to grow your portfolio more quickly, then it would be best to refinance.

Kenneth Garrett · Answer

@Shayne Whittington

Shane you are able to BRRRR this project and return all of your money back and go find another investment.  Here is my monthly breakdown. I had to make a few assumptions.

ARV 120K.                                          Buy  47K                                         Rehab 35K

Total investment 82K

Refi @ 90K    75% of ARV                                        P&I.      483.     (6% @30 year). Property Taxes 200 (estimated) insurance 50.                              Property Management 50 Maintenance 50                                     Vacancy 100

Total expenses 933

Cash Flow 1100-933 = 167

In this scenario you would be able to cash out 90,000

If you self manage and complete a high quality rehab you can remove pm fee and will most likely have little maintenance.

Good Luck.

Ben Nelson · Answer

I think it really comes down to your goals as an investor. If you want to grow your portfolio faster, leveraging performing assets is a great way to do that. If your goal is to hit a monthly cash flow number, more leverage of course lowers that net to you. However, if you can use the cash to buy more and the net cash flow is better, or even the same, as not doing anything - in my opinion - it makes more sense to buy more. Increasing your overall assets will build your overall wealth, and wouldn’t you want 4 or 5 properties being paid off by tenants vs just one?

Again, everyone has different goals. Make sure you know what you’re really trying to accomplish and align your strategy and next steps with that.

Christopher Neeson · Answer

We currently use mostly Zillow, but that being said we also found two properties while looking at another property through one of the sellers we were buying from.

Most listing are currently pretty high and I would say 30% to 40% over priced. You really have to stick to your guns on price point and at minimum $100 to $200 cashflow per unit after all expenses including mortgage and managment. The price points have to be beneficial to the investor. As you know rental rates in the area are extremely low and cant be raised much without eliminating most all potential tenants.

A basis I use to compare is a 4 unit for $70,000 to $80,000 should have unit rents at $800 to $900. After expenses you should be looking at $400 to $800 a month cashflow to your savings.

If you can get lower price, higher cashflow even better but that's my minimum for an investment.

Ryan Kuja · Answer

@Christopher Neeson Great to hear things are going well for you in Kalamazoo. I have one SFR student rental in Vine area that is going well. It was my first rental property and I ended up buying several more in Grand Rapids. Im now focusing back on Kalamazoo. How have you found the deals you bought? On the MLS or off-market deals?

Should I BRRRR or keep the property debt free??

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