BRRRR Analysis Question

[Mark J.]

@Mark 

I'm typically a buy-and-hold investor and purchase foreclosure properties, renovate, and rent (BRRRR strategy). Generally, there's a significant initial renovation (capital improvement) which on my analysis spreadsheet I've essentially been calculating / rolling into the total acquisition cost of the property. I've seen other analysis spreadsheets that account for the purchase price and the reno/capital improvement separately (perhaps for tax/accounting purposes??).

However, if I separate the purchase price and reno/capital improvement, the cash flow analysis is negative for the first few years (since capital improvements are charged against annual cash flow). But if I combine the initial acquisition cost (property + closing costs) plus the initial reno/capital improvement into one number (purchase price), the cash flow analysis is positive, seems clearer to me, and that's what I've been basing my purchasing decisions on.

Which way is the best method for getting most accurate picture when analyzing a property that's likely a hold for at least five years?

Many thanks in advance!

[Brent Coombs]

@Mark J., I don't immediately see why it should make THAT much difference. As a strategy, so long as the total spend (purchase + rehab) results in positive cash flow even when ALL of those dollars are (able to be) re-borrowed at the Refi stage, then it's a suitable BRRRR candidate.

Maybe you don't have to think of it as "capital improvement", but just: rehabbing it back to ARV standard? The secret-sauce part of the strategy is that you're buying it at a discount from what it should ALREADY be worth, which means that the amount you spend on the rehab does NOT have to increase its value by more than the rehab cost. Sensible? My 2c.