Would you BRRRR for $78/mo cash flow?

[Nicholas Morgan]

Hello everyone!

I have an opportunity to potentially do a BRRRR deal where the current owner of the property funds the whole rehab (refresh 2 bathrooms and a kitchen) and I pay him back when I do a cash out refi.

After I pay back the current owner/lender, I'll be left with potentially $5,500 cash in my pocket and the monthly cash flow will be $78/month. Would you do this deal?

This would be my first rental property and a great learning opportunity. I wouldn't have to pay anything out of pocket during the process.

The $78/month takes into consideration a 30yr mortgage at 5% interest rate, 18% of rent set aside for vacancy, maintenance, and CapEx, property taxes, and $65/month in insurance.

I haven't fully assessed this, but I feel rent may be able to be raised. Hasn't been raised in over 6 years. But at a conservative estimate, $78 isn't a whole lot.....but it would get a deal under my belt as a learning opportunity.

What do yo think?

[Lucas Duce]

Hey Nicholas,

How did you arrive at 18% for all those expenses? The standard is usually 7% for repairs and maintenance, 7% for CapEx (usually you can get away with 5% on a BRRRR if you're doing many big ticket items like roof, water heater, etc, but since you only mentioned bathroom and kitchen, I'd keep it at 7% to be conservative), vacancy from 8-10%. Property taxes aren't usually estimated as a percent. You can have your realtor calculate your likely property taxes after the final assessed value of the property. In my area (Wisconsin) if you purchase a $100K house, you're looking at around $1.5K a year in property taxes, $3.5K per year for a $200K property and so forth. You'll want to get a solid grasp on this number since it will be a big expense.

You'll also need to consider what utilities the landlord (you) will be paying for. In some areas, its common for the landlord will be stuck paying for water and sewer, and garbage. So you need to factor that into your analysis if that's the case for your area. In some areas, you might be able to get away with sticking the tenant with all those utilities, just depends on the market.

A good common rule of thumb is that 50% of your rental income will go to expenses, NOT including mortgage expenses. So if you're only at 18%, you might be significantly low balling your estimated expenses.

But when you verify all your numbers and are still looking at $78/month of cash flow, for a first deal that's pretty good, if it's a reasonable mortgage. I wouldn't be accepting $78/month of cash flow on a property with a mortgage of $300K, but around $100K is good. Hope this helped and good luck!

- Lucas Duce