How do I make monthly revenue with BRRR???

Question

I have done 3 flips in the past that have all made 80k - 100k per flip so I get the aspects of remodeling. I also grew up in construction which makes it nice since I can do about 80% of the work myself, thus the higher returns. I want to get into building lasting wealth though so was interested in BRRR. My questions though revolve around actually making money from them since it seems like the cash is always tied up as opposed to a flip when I make capital returns. So here they are:

How can do you make monthly revenue ?

I get how the actual process works. I see people outline with a house costs say 100k. You put 20k into it. So know you have 120k in. The house appraised for 180k so if you get 70% refi you can get your 120 back. Your renter is paying rent on that refi so I would imagine your monthly revenue is minimal, few hundred bucks. To replace a 60K-100k salary you would need a lot of places correct? Or do most people keep full time jobs.

How do you payback initial investor?

This touches on my first question. If I got a private loan for the situation above and promise a 10% return then all the extra rent is probably going to that. How do I pay off my initial investor so I am not in debt to someone?

How do you do 1% rent rule in the NW when every house is around 200k?

Again, touches on my first question. I used the price of 100k for a house. Where I live in the northwest I can only find 4 houses anywhere near me for under 230k. The average rent is 1500 - 1800. So no matter what I won’t be able to charge 1% rent. After appraisal the house would be close to 300k (which is average price) but at the figures people mention, the rent would be 3k. No one around here would pay that in rent. Do you just accept rent enough to cover the refi?

Any insight would be great since I am a novice on this and trying to wrap my head around actual revenue as opposed to just net worth.

Jaysen Medhurst · Answer

@Packy Tagliaferro, first thing to mention is that your market may not be (certainly is not) a good one for SFRs. When you start to get to price points North of $200k, the numbers don't pencil out. Reason being, if someone can afford $2k rent, they can likely afford a $200k house, no problem.

So, look to MFR. Your per-unit price will be lower and you'll start to see efficiencies of scale.

I like to see at least $150-200/unit/month after all expenses and debt service. At that rate you'll need 25-55 units to hit your income goal.

One other important point: because of the tax advantages of real estate, $1 of rental income replaces $1.25-$1.40 of earned income, depending on your tax bracket and a bunch of other factors.

You pay back the initial "investor" 1 of 2 ways. Either it was a loan and factor the borrowing costs into the BRRRR calculations or they get equity and a portion of the profit.

Hope this helps. Let us know if you have any other questions.

Aaron H. · Answer

@Kevin Diesel

I think it helps here to understand the difference between "Loan to Cost (LTC)" and "Loan to Value (LTV)". LTC is a loan given as a percentage of how much money you have invested in the property. LTV is given as a percentage of how much the asset appraises for (the "value"), regardless of how much you personally have invested in the property.

Before the 6-12 month seasoning period is up, a lender will only give you 75-80% of your cost, even if the value is higher (or 75% LTV if it appraises for less than you spent). The idea being that they don't really want you to get all your cash back quickly, because they want you to have "skin in the game."

After 6-12 months, they will then be willing to give you a 75% LTV loan based on the higher appraised value and they stop caring about your cost. If 75% LTV of the new value is more than your entire cost, you got a "100% cash out refi."

In your scenario (100K all-in, 150K ARV), if you went to the bank 1 month after purchase and tried to get a loan, they'd only give you 75K, even if the property was worth 150K (so the loan would be 75% LTC, which in this case happens to only be 50% LTV). After 12 months, you could instead get a 75% LTV loan (112.5K), which would give you "100% cash out" (plus a little extra). But note that  you're NOT getting a 100% LTV loan (they're not giving you 150K). They still always want you to have at least 25% equity left in the house.

So, to answer your question "is it smart to do a 100% cash out refi" - if you mean, "is it smart to get all your original cash back, and still have 25% equity in the property and a cash-flowing asset" then the answer is "yes." That's the basis of the BRRR strategy. You just want to make sure the property still cashflows at 75% LTV.

If you mean "is it smart to get a 100% LTV loan, assuming some bank would do so," the answer is "it depends, but usually no." 100% leverage means you have a much higher monthly payment (since you've financed a larger amount), which will make it harder to cash flow. And, you don't have any equity in the property, so if, say, the market declines and your property loses 10% of its value, you'll be under water (that is, you couldn't sell the property for enough to pay off the entire loan). There are plenty of circumstances where the numbers can still work out with a high LTV loan (e.g. some people use FHA loans with very high LTV's, or do 100% LTV seller financing, etc), but it's both riskier and makes it less likely to cash flow, so requires caution. Personally, I think smart investors have a cushion and plan for the worst, which means being careful with leverage.

Your basic math is correct - if you want to exclusively use the BRRR strategy to live off the passive income in the short term, you're probably looking at 50-100 doors in most markets. Or, wait 30 years until 10 doors are fully paid off and cash flowing 1000/m each.

Kenneth Garrett · Answer

@Kevin Diesel

You can refi at 75%-80%.  The property still needs to cash flow.  So 100% probably wouldn’t cash flow.  Remember you are taking advantage of leverage.  The idea is you have no money stuck in and your tenant is providing you cash flow/profit.  You are also getting to take advantage of tax deductions; mortgage interest, property taxes, mortgage pay down etc.  Its a slow methodical way to create generational wealth.  Once your properties are paid off you’ll probably cash flow $1000 a building (SFH) for the rest of your life and your families life.    I disagree with Brandon on the $100-$200 cash flow.  You need find better deals.  In your case you will probably need to invest out of state to make this work.  My daughter lives in Washington State and the cost of housing is ridiculous $300K for a starter home.

Kevin Diesel · Answer

@Aaron H.

Yep! Makes sense. I keep hearing that no lender does 100% cash out refi. But even  if the did, would it be smart to do a full 100% cash out refi instead of 80%? I would think 100% cash out refi would come with higher interest rate and monthly payment. And a higher monthly payment would mean that the rent you collect may be just enough to cover your mortgage or even worse, less than your mortgage amount.

So why would anyone go with 100% cash out refi if it’s available? Would they do this to use the extra cash to live of them, or put it towards a new investment property? Would that be smart to do?

Lastly, if it possible that one could make a living by following the BRRR strategy while not having a regular job? If majority of properties can bring $100-$200 per door then you would need 50+ units. Correct?

Thanks again!

Aaron H. · Answer

@Kevin Diesel Refi timeframes differ for different lenders, but yes, you're typically looking at a 6-12 month seasoning period for a 100% cash-out refi. There are a number of ways to get around that and get your money back quicker (mostly involving loaning money to yourself or using hard money), but your mileage may vary.

In your scenario, the ARV is 150K, so the maximum loan you're likely to get is 75% LTV for 112.5K. You're all-in for 100K (70K purchase, 30K rehab), so you'd get all your cash back plus an extra 12.5K (probably actually a bit less than 10K once you include loan closing costs). If you did 2, you'd make roughly 20K in cash, you'd have all your original cash back, and hopefully you'd still have 2 cash flowing assets, both of which you'd still have 25% equity in if you were to sell.

John Teachout · Answer

If you can flip properties in your area and make 80k plus, then why don't you keep doing that? Set aside some until you can fund your own rental properties.

Kevin Diesel · Answer

@Aaron H. I have a question for you Aaron. I was reading “the book on rental properties investment “ by B. Turner on how to make 100k a year with BRRR. But it seems that this only works after the 5th year.

The book for example says that you buy a house for 70k , add 30k in renovations, rent it out, refi it up to 70% and make you money back. But after refi the value should be more.

A lender refis up to 70%-80% when you hit the 6 month mark but they could refi 100% after a year, is that correct?

So if I bought two homes for the same amount mentioned above , and after rehab the value has gone up to 150k for each , wouldn’t I be able to refi both a year later and take out 100k in equity if I wanted to? What would be the pros and cons of such way of doing it ?

Thank you in advance!

Aaron H. · Answer

Monthly Revenue - yes, you seem to have the basic idea down. $100/m/door is a pretty common target for net cash flow for a lot of BRRR investors. Maybe $200 or higher in some markets, but post-refi, it's hard to buy cheap enough to make thousands/door. You're gonna need a lot of doors. Note that it's also possible to use the same strategy on larger properties - that obviously lets you buy more than 1 door at a time.

Initial Investor - usually, you'd be paying off that "acquisition loan" with the money from the refi. If the refi isn't enough, you'd need to leave some cash in the deal and come up with the difference to pay off the investor. In general, if you're planning to use private/hard money on the acquisition side and want to do a full BRRR, you're going to need to buy even cheaper to afford the financing costs. So in your example, you'd want to buy the house at, say, 80K.

1% rule - It's only a guideline, mileage may vary. Getting to 1% is very difficult in a lot of markets (including yours, it sounds like). If the average price/rent ratio in your area is only 0.5%, you're going to have a hard time cash flowing on anything. That's just the reality. But if you find something that's 0.8%, maybe you can just scrape by. Or, you have to decide to invest in a different market, because the numbers just don't work where you live. Personally, I wouldn't touch a house with an ARV of 300K that I could only rent for 1500. You're going to lose money every month, almost guaranteed (at least, assuming a standard downpayment/mortgage).

In the current real estate market in many places in the country, it's nearly impossible to find a 1% cash flowing deal you can BRRR straight off the MLS. If they were that easy to find, more people would do it. That's why many people that do this successfully have to find off-market deals.

How do I make monthly revenue with BRRR???

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