BRRR Poll Question: With break even cash flow, Yay or Nay?
Investor · Boston, MA · Member since 2015 · 95 posts · 32 votes
Hey all!
Hypothetical but very a real question:
With little to no money to start your REI career.
If you could perform the BRRR strategy, factoring in ALL EXPENSES. Cap Ex., Vacancies, Etc...
And broke dead even to begin a deal, in a price point of 500K with (historical likelihood) for 4-5% yearly appreciation.
Do you do the deal?
Thanks in advance, have a great day all!
No. The fact you have very little money to start is even more of a reason not to waste it
Really need more information. I personally prefer cash flow, however if you are buying a $650k property for $500k at break even cashflow, that is local. It could be worthwhile.
However if you are buying a $500k property for $500k with no cashflow, you are gambling. You may win big, but you may not.
No. Cash is KING. If something goes sideways, as it always does, you are then losing money. I have always been told breaking even is not different losing money.
If you have a cash flow you are able to fix problems without spending your own money.
RE like politics is local. some of you have cashflow markets that I couldn't dream of, but Zillow tells me a couple of my properties have doubled in the last 3 years. I take that with a grain of salt of course, but the reality is there do exist growth markets as opposed to cashflow markets. All over my city people are buying rental condos with neg cashflow, something I personally would not do.
To me the strategy for Ryan in his hood is the multifamily househack, not the BRRR. He could pull it off with minimal initial cash, and be able to learn a lot along the way. But I don't know whether the properties there would all be too Jumbo for a low down FHA.
I think the question comes down to if you can sustain the property or not. Do you have enough w2 income to weather the storms, do you need/want extra cash every month or is it a long term play?
If the rents are huge and you are paying down large chunks of mortgage every year on top of appreciation you will be a happy camper in 5-10 years... but you gotta sustain.
Isn't part of the BRRR Strategy to create instant equity? I'm finishing up a BRRR as we speak. House bought, Rehab done, Hopefully Rented this weekend. Refinance soon (need to season the property for 6 months). Once refinanced I should have almost all my money back on a 75% LTV and still see a couple hundred dollars per month positive cash flow. Between the 25% instant equity and cash flow this falls into the type of BRRR that I like to do.
How much equity will you have after its completed? You'll probably only be able to get 75% LTV financing..
The initial post has just enough hypothetical information to make it interesting, but not enough to answer the question with any decisiveness. Hence the large number of responses, including some from BP veterans. As usual the devil, and the answer, is in the details, and not enough are provided here.
@Ryan rogers, it depends on location, what city in mass? if it is in good location, more demand, 0% vacany, I can buy it with negative cash flow.
Tommy
Hey all!
Hypothetical but very a real question:
With little to no money to start your REI career.
If you could perform the BRRR strategy, factoring in ALL EXPENSES. Cap Ex., Vacancies, Etc...
And broke dead even to begin a deal, in a price point of 500K with (historical likelihood) for 4-5% yearly appreciation.
Do you do the deal?
Thanks in advance, have a great day all!
Ryan, you have to define your financial capacity, if you are in a position that you need this event to occur and it makes sense as part of your wealth building, go for it. If you truly feel you have defined an adequate contingency plan, that results in $0 cash flow but also limited risk, risk always exists, this deal will bring you $500k in (30yrs?) - with a series of creative financing and holding your 4-5% appreciation schedule, you will have equity sooner than later, with limited cost of entry. Do not forget to account for the depreciation schedule, certainly have a defined dialogue with your tax advisor. I like the concept of creative forward thinking as it pertains to financing, however, I think cash flow is a critical piece of the equation. Finally, best case scenario if you truly believe in the home and that you placed adequate cushion into it, the upside maybe that you do not incur the worst case scenario play resulting in cash flow. Fun and complex scenario, I feel like I was taking a final exam with this question :)
I have done this a couple times. But I wouldn't do it if I didn't already have adequate capital.
I've got 2 properties where I paid cash for them at auction, did reno, and raised the value enough that when I refinanced them, even at 75% LTV, I was basically left owning the house with no cash outlay. Rents on those properties were basically break-even or very small cash flow, but that's figuring in all real expenses, including a repair reserve.
I don't mind a non-cash-flow property if a tenant is paying my mortgage and building my equity in the place, and if I have it for free. But I have plenty of cash reserve that if the AC, roof & water heater all took a **** the same month, I could cover it.
I really wouldn't recommend doing this on a first property or with low cash on hand.
Hey all!
Hypothetical but very a real question:
With little to no money to start your REI career.
If you could perform the BRRR strategy, factoring in ALL EXPENSES. Cap Ex., Vacancies, Etc...
And broke dead even to begin a deal, in a price point of 500K with (historical likelihood) for 4-5% yearly appreciation.
Do you do the deal?
Thanks in advance, have a great day all!
Uhmmm, what is the BRRR strategy?
Maybe it stands for BRRROKE...because you're working for free with too high a chance of zero return?
No, I would never do it, unless it was a deal I could add value and cash-flow within first 3-6 months. If it's a large multifamily deal, maybe within 12-18 months, but it would have to generate a decent IRR (and atleast 10% from cash flow) over the entire planned hold period.
I would suggest ONLY buying property you can improve/add value to and increase rents. Investors that do not add value through creative negotiations, rehab, financial restructuring, or/and good management, etc...will never generate the best returns. This is so, because most owners sell an investment for what they believe it is worth, so to generate the best returns you must improve its value in some way. Find properties with problems you can successfully solve.
Assume worst case scenario. You get zero appreciation. Is $150 a month worth your time, effort, and investment. Whatever your answer to this question is...is the answer to your question.
With every investment, always develop a best case, worst case and most likely case and throughly evaluate EVERY potential risk.
One thing you did not mention in your scenario was if you got any cash with the refi.
You implied you are starting with no money. Without some cash reserves, I would not do this deal.
Owning a rental property is owning a business. Cash is king. Sure, you said rent covers expenses, but that is a little income spread out over time. What happens if a big ticket item occurs during the first year? What happens if you do not have rent coming in for a couple of months? This is a house of cards if you do not have some cash reserves.
One thing you did not mention in your scenario was if you got any cash with the refi.
You implied you are starting with no money. Without some cash reserves, I would not do this deal.
Owning a rental property is owning a business. Cash is king. Sure, you said rent covers expenses, but that is a little income spread out over time. What happens if a big ticket item occurs during the first year? What happens if you do not have rent coming in for a couple of months? This is a house of cards if you do not have some cash reserves.
I appreciate the response Hugh!
I wouldn't touch any property on a BRRR unless the end result is 100% of my invested cash back on the refi and a cash flow of $500 month minimum. Your time is worth something I would assume, and betting on appreciation is a gamble. Do the math, if no cash flow, I wouldn't do the deal.
Good luck
I wouldn't touch any property on a BRRR unless the end result is 100% of my invested cash back on the refi and a cash flow of $500 month minimum. Your time is worth something I would assume, and betting on appreciation is a gamble. Do the math, if no cash flow, I wouldn't do the deal.
Good luck
What button do I push to vote more than once for this comment?
The traditional investors here advise against negative or 0 cash flow. There are scenarios where this does make sense, however.
I purchased a SFR for $340k in 1999. I got married and rented it out in 2000. I was breaking even at that point. I had a couple of children and refi'd it to a 15 year loan in 2004. At that point, I was in negative cash flow. But my goal at that point was to be able to save for my kids' college expenses without being locked into a 529 plan.
Fast forward to 2016, I'm two years away from paying it off (extra principle payments) and my oldest child graduates high school in 3 years. I have over $650k in equity- far more than if I had socked money away in a 529 plan- and I have options on funding the kids' college: from rental cash flow to borrowing against equity.
Questions:
1 - Are you saying you bought the property for $340k, and it is worth $1M today...tripling in value in 17 years? My assumption is the property is going to be worth 650k, and the equity you speak of is based on lack of debt...as in paying off the property.
2 - What were your negative cash flow numbers per month/year when you were losing money after your 15 yr ammort refi? Being conservative here, I'm assuming an original loan of 34k @ 5% for 30yrs, converted to a 5% loan for 15 yrs. Doing the math, that's a difference of over $850/month = over $10k/year. Since the original buy was at break even, the $10k+ was negative CF.
3 - What was the added costs associated with your ref? At 3%, that would be $20k.
Let me take a look at the numbers here:
ARV in year 2018 (payoff) $650,000
Original Buy in year 1999 $340,000
Negative CF of $10.4k/year x 15 yrs $156,000
Cost of first refi $ 20,000
Total cost of equity(?) $516,000
REFI amount of 75% (refi for school) $487,500
Loss at time of school refi - ($ 28,500)
Own cash spent (lost) during negative cash flow period = $516,000. My question is this:
What else could you have done with that negative cash flow, that would have made you money?
If my assumptions are accurate, I don't see anything possitive here.
I never see any good reason for negative cash flow.
@Joe Villeneuve
Your numbers are off.
I purchased the home for $340k in1999. The home is worth about $700k now and I owe $50k.
When I refi'd the difference in payments was $400/ month. When I refi'd it was because I'd save $90k in payments over the life of the loan. I'm not sure where you are coming up with $20k in cost.
It is probably fair to say that at first it cost me $10k a year to own a property in California prior to raising rent. (Taxes, insurance, extra payments, etc.) Currently, it is costing more like $5k per year. But in two years, it will bring close to $30k/year after expenses.
And I know it is a lot more than sticking that money in a IRA over the years. And when the kids are out of school, instead of having a depleted account, I'll have house in Silicon Valley earning me a decent supplement to my income. I'm not complaining.
My mistake. Here is what I see:
700k ARV No
340k Buy
525k 75% REFI
10k Cost of REFI (your number)
515k Cash at REFI
340k Reimburse cost to buy
175k Cash out
122k Cost/lost cash during negative cash flow period (4800/yr)
53k Net gain over 17 years
Alternative use of neg cash flow
4800 NCF available funds/year to invest
10% Annual return % on alternative investment *
$168,940 Return on one alternative use of available funds *
* Using the BRRR method, those funds reinvested over and over, would lead to an exponential return...not straight line as shown here.
If you have negative cash flow, the cash is dead during that time period. Positive cash flow, and refinanceable equity, can lead to exponential returns...something you can't do without it.
It isn't just the "one to one" relationship you are losing on...more importantly, is the exponential potential you are losing by not have those funds available to reinvest multiple times during the year(s).
The traditional investors here advise against negative or 0 cash flow. There are scenarios where this does make sense, however.
Let me take a look at the numbers here:
ARV in year 2018 (payoff) $650,000
Original Buy in year 1999 $340,000
Negative CF of $10.4k/year x 15 yrs $156,000
If my assumptions are accurate, I don't see anything possitive here.
I never see any good reason for negative cash flow.
Joe, you will not have negative cash flow over the holding period of a property in CA.
Here at the initial $340,000 purchase price and assuming a common price-to-rent ratio of .7% then her rents would be in the ballpark of $2380 a month. As the property appreciated to $700,000 ( a $360,000 windfall!!!) then assuming the same price-to-rent ratio 0f .7% then the rent has increased to $4,900 a month or an increase of $2,520 a MONTH!
So the lesson here is that price-to-rent ratio is pretty meaningless unless you have appreciation. Cash flow is only icing on the cake. That same Indy $50,000 place with it's 2% PTR ratio means the place is hopefully still only collecting $1,000 rent. Inflation and CapEx is eating your cash faux.
The traditional investors here advise against negative or 0 cash flow. There are scenarios where this does make sense, however.
Let me take a look at the numbers here:
ARV in year 2018 (payoff) $650,000
Original Buy in year 1999 $340,000
Negative CF of $10.4k/year x 15 yrs $156,000
If my assumptions are accurate, I don't see anything possitive here.
I never see any good reason for negative cash flow.
Joe, you will not have negative cash flow over the holding period of a property in CA.
Here at the initial $340,000 purchase price and assuming a common price-to-rent ratio of .7% then her rents would be in the ballpark of $2380 a month. As the property appreciated to $700,000 ( a $360,000 windfall!!!) then assuming the same price-to-rent ratio 0f .7% then the rent has increased to $4,900 a month or an increase of $2,520 a MONTH!
So the lesson here is that price-to-rent ratio is pretty meaningless unless you have appreciation. Cash flow is only icing on the cake. That same Indy $50,000 place with it's 2% PTR ratio means the place is hopefully still only collecting $1,000 rent. Inflation and CapEx is eating your cash faux.
Her numbers...not mine.
The traditional investors here advise against negative or 0 cash flow. There are scenarios where this does make sense, however.
Let me take a look at the numbers here:
ARV in year 2018 (payoff) $650,000
Original Buy in year 1999 $340,000
Negative CF of $10.4k/year x 15 yrs $156,000
If my assumptions are accurate, I don't see anything possitive here.
I never see any good reason for negative cash flow.
Joe, you will not have negative cash flow over the holding period of a property in CA.
Here at the initial $340,000 purchase price and assuming a common price-to-rent ratio of .7% then her rents would be in the ballpark of $2380 a month. As the property appreciated to $700,000 ( a $360,000 windfall!!!) then assuming the same price-to-rent ratio 0f .7% then the rent has increased to $4,900 a month or an increase of $2,520 a MONTH!
So the lesson here is that price-to-rent ratio is pretty meaningless unless you have appreciation. Cash flow is only icing on the cake. That same Indy $50,000 place with it's 2% PTR ratio means the place is hopefully still only collecting $1,000 rent. Inflation and CapEx is eating your cash faux.
Her numbers...not mine.
I don't see where she detailed her cash flow over the years, It seems you assumed a figure. Of course she is turning a corner in her cash flow where she will be netting over $30,000 which she can turn into $540,000 in CASH and still have almost $40,000 a year in appreciation and the incremental rent increases.
Emphatic NAY! When there are vacancies, evictions, and major expenses (Roof, HVAC, etc.), you will lose money. Don't do it.