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
I've been faced with the same situation...............with no cash reserves in case something goes wrong, I would stay away. You don't want to get yourself out of the game before you get into it. If you want to do this for the long term, I wouldn't make a decision that could wipe you out before you seriously get started. Tempting, but don't do it.
I've been faced with the same situation...............with no cash reserves in case something goes wrong, I would stay away. You don't want to get yourself out of the game before you get into it. If you want to do this for the long term, I wouldn't make a decision that could wipe you out before you seriously get started. Tempting, but don't do it.
Thanks for the advice David!
@Account Closedwho wouldn't want to have an excuse to go to Hawaii to check up on rental properties on a regular basis...
One thing I'm curious about is your rent to value ratios. From my experience in San Diego, it seemed as if the rent to value ratio went down as the price went up. I even went so far as to sell one property in Old Town San Diego because the value went up much faster than the rents, which made me feel as if my equity was not working as hard as it should have. What are you finding in sunny Hawaii? How much rent to you receive from a $500K or $1M property?
Erik
Ryan Rogers
I would require a property without a cash flow unless I have enough money to support it and wait only for the appreciation which is again speculation only.
I understand the appreciation part of it unless you have other source of income to support it ,what will happen if something wrong goes and the appreciation you will only receive when you sell the property and also no vacancy means ,you are going to rent it and forget it for ever and never rent it again which is not true ,you might have to do some renovations ,clean it after somebody leaves and the tenants do not always tell you that they are moving out. There are a lot of variables that sometimes you do not even imagine and I would again say that you must have some cash flow to support the property and may be you are not making a living out it.
@Ryan Rogers
if that is not enough please check out this article
https://www.biggerpockets.com/renewsblog/2016/02/0...
Good Luck Ryan !!!!
@Account Closedwho wouldn't want to have an excuse to go to Hawaii to check up on rental properties on a regular basis...
One thing I'm curious about is your rent to value ratios. From my experience in San Diego, it seemed as if the rent to value ratio went down as the price went up. I even went so far as to sell one property in Old Town San Diego because the value went up much faster than the rents, which made me feel as if my equity was not working as hard as it should have. What are you finding in sunny Hawaii? How much rent to you receive from a $500K or $1M property?
Erik
Curious as well, in downtown Boston 500k can fetch you from $2200 to $3300 max. Pretty much the .5% rule. :(
@Ryan Rogers
if that is not enough please check out this article
https://www.biggerpockets.com/renewsblog/2016/02/0...
Good Luck Ryan !!!!
Thank you Kay Kay! Have a good day! :)
Hi Erik,
We recently rented a 4 bedroom property valued at a little over $1m for $4200/mo.
We recently rented a 3 bedroom townhouse valued in the $500K range for $2,600/mo.
Aloha,
Kawika Burgess
Hi Erik,
We recently rented a 4 bedroom property valued at a little over $1m for $4200/mo.
We recently rented a 3 bedroom townhouse valued in the $500K range for $2,600/mo.
Aloha,
Kawika Burgess
I feel VERY sorry for the Investor(?) who bought the plus million dollar one with say, just $250k down.
(They won't even come CLOSE to break even)!
The second one might not fare much better?...
Hi Brent,
Yes, neither were purchased by investors as cash flow properties. Million dollar home purchased by an executive and needed to relocate. Instead of sell at a loss decided to allow the equity to build for a few years. Second owner purchased their second home and had built enough equity in the townhouse for the property to cash flow in an area with high appreciation. Many of our owners are in this category of "investor".
Hows the Ohio real estate market and how much do million dollar homes rent for in Ohio?
Sincerely,
Kawika
@Kawika Burgess, oh, to be that well off that I could afford to negatively cash-flow tens of thousands of dollars until appreciation meant that at a break even point had arrived - IF I sold right then!
(I still don't believe I would trust that strategy anyway)!
I will leave it for others to answer the high-end Ohio rent situation, as I have no personal knowledge of that. Cheers...
Hi @Kawika Burgessand thank you very much for sharing the numbers at the high end of the spectrum. There are many ways to make money in real estate. We tend to get very focused on our own niche (which is good), but it is always educational to see how other people are investing. What you are describing seems very risky to me and what I'm doing probably seems very risky to your investors.
I am operating at the other end of the spectrum, I rehab and rent class C apartments in Memphis, TN. My numbers are VERY different from yours... One apartment complex was purchased mostly rented (85% occupancy) for $15K per apartment, renting for $500/month. The other complex is mostly vacant and waiting for me to rehab and rent out the units as I finish them, purchased for $7K per apartment, needing an average of $5K in rehab, renting for $400-$550 per month. Being apartments, i.e. commercial, I expect them to appreciate as I improve Net Operating Income (NOI) by bringing vacant apartments back online; but I do not expect any appreciation from a general market improvement. These two projects are my full time occupation, so I am not a passive investor in any way; again, probably the complete opposite of your situation.
Once I'm done with the rehab, perhaps I will stop by and enjoy a Mai Tai on the beach with you... :)
Happy Investing
Erik
@Account Closedwho wouldn't want to have an excuse to go to Hawaii to check up on rental properties on a regular basis...
One thing I'm curious about is your rent to value ratios. From my experience in San Diego, it seemed as if the rent to value ratio went down as the price went up. I even went so far as to sell one property in Old Town San Diego because the value went up much faster than the rents, which made me feel as if my equity was not working as hard as it should have. What are you finding in sunny Hawaii? How much rent to you receive from a $500K or $1M property?
Erik
Curious as well, in downtown Boston 500k can fetch you from $2200 to $3300 max. Pretty much the .5% rule. :(
Erik, rents will follow value. You need patience, you killed a Golden Goose! RTV (rent to value) is a good number to know just to tell you when prices are possibly getting out of whack. My 40 year experience is that the RTV hits about .8% in both Honolulu and the Bay Area. Now we have been experiencing pretty steep increases in prices so it will take some time for rents to increase.
THE PROBLEM is most people here don't understand this number and its correct use. The wheeler dealers and the Turnkey pushers tout 2% like it means the property is profitable. If rent is 2% on a $50,000 Indy house then it was probably the same rent cause that house was worth about $50,000 in 1990! When my properties increase $100,000 which is often I see a $800 increase in rents. That's how you are profitable.
Hi Brent,
Yes, neither were purchased by investors as cash flow properties. Million dollar home purchased by an executive and needed to relocate. Instead of sell at a loss decided to allow the equity to build for a few years. Second owner purchased their second home and had built enough equity in the townhouse for the property to cash flow in an area with high appreciation. Many of our owners are in this category of "investor".
Hows the Ohio real estate market and how much do million dollar homes rent for in Ohio?
Sincerely,
Kawika
I don't know if they have million dollar homes in Ohio :D
@Ryan Rogers:- http://www.cleveland.com/business/index.ssf/2012/1...
Oh, and that's zip 44108 - an F Neighborhood according to @James Wise.
Wait until you get to the A Neighborhoods!
@Ryan Rogers:- http://www.cleveland.com/business/index.ssf/2012/1...
Oh, and that's zip 44108 - an F Neighborhood according to @James Wise.
Wait until you get to the A Neighborhoods!
What a money pit! I'll spend my $4,000,0000 on something not so costly to maintain and will appreciate in value. Like
Bob,
If I move to Honolulu will you teach me your ways? :O
As far as rents chasing value I think they can pull each other up.. Here in Minneapolis the last couple years the demand has been huge with 2-3% vacancy causing rising rents, which seem to have caused values to skyrocket. I wanted to house hack in a certain part of town but it was to far to drive for the other half... Would be enjoying some nice appreciation right now.
@Ryan Rogers:- http://www.cleveland.com/business/index.ssf/2012/1...
Oh, and that's zip 44108 - an F Neighborhood according to @James Wise.
Wait until you get to the A Neighborhoods!
Jokes Obviously :)
Bob,
If I move to Honolulu will you teach me your ways? :O
Now that I'm retired I spend most of my day at my buddies beachside bar chillin with my Nam buddies and helping lady tourists. But stop by and we can talk story and I'll set you on the proper path. ;-)
@Account Closed if I use @Kawika Burgess numbers, I have a $1M property renting for $4,200 per month. How do the numbers work out? I don't operate in that space, so I'm trying to make sense of the economics, so please correct me where I'm off.
Purchase Price: $1M
Down payment: $200K
Mortgage: $800K
Monthly payment (30 year fixed at 4%): $3,820
Taxes: $3,500/year
Insurance: $1,000/year
Vacancies: 3% (tight market, but there will always be a vacancy at some time) $1,512
Maintenance: $1,000/year
Total Income: $4,200*12=$50,400
Expenses: $52,852
Are you saying that I should put $200K down, feed the negative $2,400 each month and wait for appreciation to make up the difference over time? There are too many factors outside of my control in that model to make me feel any comfort level.
My Old Town San Diego fourplex was worth $800K in 2006, I acquired it in 2010 for $380K and sold it in 2015 for $700K. I would rather get out than ride it back down to $350K, before it goes to a million in 2025...
I don't know the Hawaii marketplace at all, so I don't know if you saw a similar dip in prices between 2006 and 2010. It's a rare market that can outpace inflation over a long term, much less outpace the formula of income and borrowing rates. Hawaii may be different as it seems to attract foreign capital from Asia, making it less dependent on US economic cycles, but I don't know enough about the factors driving that market.
My personal preference is to force equity by making improvements, which lead to increased cash flow, which improves the NOI, which increases the value (assuming the prevailing cap rates remain stable).
Erik (here to learn)
@Account Closed One more thing, I just re-read your posting (repetition is the mother of learning) and noted your comment about the average .8% RTV ratio in Hawaii and San Francisco.
Based on the rents posted by @Kawika Burgess, the $1M property renting for $4,200/month should either see rent increases to $8K per month, a value decrease to $500K, or some combination of rent increases and decrease in value.
Are you expecting rents in Hawaii to double? You seem fairly confident that values are not going down, at least not by much. Or are the numbers I'm working with not representative of the market as a whole (realizing it's a very small sample...)?
Erik
@Account Closed One more thing, I just re-read your posting (repetition is the mother of learning) and noted your comment about the average .8% RTV ratio in Hawaii and San Francisco.
Based on the rents posted by @Kawika Burgess, the $1M property renting for $4,200/month should either see rent increases to $8K per month, a value decrease to $500K, or some combination of rent increases and decrease in value.
Are you expecting rents in Hawaii to double? You seem fairly confident that values are not going down, at least not by much. Or are the numbers I'm working with not representative of the market as a whole (realizing it's a very small sample...)?
Erik
Prices have made a pretty major jump recently. Rents are going up but have not reached normalized levels.
@Account Closed if I use @Kawika Burgess numbers, I have a $1M property renting for $4,200 per month. How do the numbers work out? I don't operate in that space, so I'm trying to make sense of the economics, so please correct me where I'm off.
Purchase Price: $1M
Down payment: $200K
Mortgage: $800K
Monthly payment (30 year fixed at 4%): $3,820
Taxes: $3,500/year
Insurance: $1,000/year
Vacancies: 3% (tight market, but there will always be a vacancy at some time) $1,512
Maintenance: $1,000/year
Total Income: $4,200*12=$50,400
Expenses: $52,852
Are you saying that I should put $200K down, feed the negative $2,400 each month and wait for appreciation to make up the difference over time? There are too many factors outside of my control in that model to make me feel any comfort level.
My Old Town San Diego fourplex was worth $800K in 2006, I acquired it in 2010 for $380K and sold it in 2015 for $700K. I would rather get out than ride it back down to $350K, before it goes to a million in 2025...
I don't know the Hawaii marketplace at all, so I don't know if you saw a similar dip in prices between 2006 and 2010. It's a rare market that can outpace inflation over a long term, much less outpace the formula of income and borrowing rates. Hawaii may be different as it seems to attract foreign capital from Asia, making it less dependent on US economic cycles, but I don't know enough about the factors driving that market.
My personal preference is to force equity by making improvements, which lead to increased cash flow, which improves the NOI, which increases the value (assuming the prevailing cap rates remain stable).
Erik (here to learn)
Aloha Erik I think your monthly negative is actually the yearly figure. So a couple hundred a month negative the first year. So over 40 years I have experienced 6% annual rent growth so next year I have an extra $252 a month in rent. Did you look up Honolulu taxes? Pretty much right on for a million dollar property. Insurance too high but maintenance too low but all in all another $1,000 to 2,000 in expenses. So a couple of years to cash flow. But look how most of your rent is going to mortgage vs taxes or maintenance. And my maintenance expenses is including ALL capex.
So in 10 years I'm collecting $7100 rent and have $1,170,000 in appreciation if the market performs the same as it has for the last 40+ years.
Or I can bail just like I've witnessed EVERY decade for the last 5 only to piss away the rent growth and appreciation. Psst, I'm not bailing.
Now if you truly believe that your market is going to hell then get out.
My first purchase in 1978 Honolulu for $35,000 with $2,000 down has generated over $500,000 in net rents and almost $500,000 in appreciation.
How would I accomplish the same in your market?
@Account Closed if I use @Kawika Burgess numbers, I have a $1M property renting for $4,200 per month. How do the numbers work out? I don't operate in that space, so I'm trying to make sense of the economics, so please correct me where I'm off.
My personal preference is to force equity by making improvements, which lead to increased cash flow, which improves the NOI, which increases the value (assuming the prevailing cap rates remain stable).
Bingo! Your "personal preference" just hit the nail on the head! This works especially for appreciation markets (with lower cap rates) ... Earn the forced appreciation, which also buys you some cash flow, and allows you to hold for long term market appreciation from a position of strength and multiple exit strategies. Have cake, eat it too ...
@Account Closed if I use @Kawika Burgess numbers, I have a $1M property renting for $4,200 per month. How do the numbers work out? I don't operate in that space, so I'm trying to make sense of the economics, so please correct me where I'm off.
My personal preference is to force equity by making improvements, which lead to increased cash flow, which improves the NOI, which increases the value (assuming the prevailing cap rates remain stable).
Bingo! Your "personal preference" just hit the nail on the head! This works especially for appreciation markets (with lower cap rates) ... Earn the forced appreciation, which also buys you some cash flow, and allows you to hold for long term market appreciation from a position of strength and multiple exit strategies. Have cake, eat it too ...
"This works especially for appreciation markets (with lower cap rates) ..."
@David Faulkner, we need to get @Erik Nowacki in the high appreciation so he can maximize his expertise.