BRRRR with $1M homes?

Question

I've owned real estate investments for about 10 years, but just started listening to the BP podcasts and blog posts about a month ago, so apologies in advance if some of this question is naive.

I have a full time job that is my primary source of income. I also have young kids that, when combined with my job, take up a large amount of time. Plus, I like my little remaining time and aren't looking to get into a giant time-suck. However, I have a pretty decent chunk of change ($3M) sitting in one investment property that has no debt attached to it. I also have access to equity in another rental property, a condo in Boston that's worth about $1M and has only a $300k mortgage on it. I also feel most comfortable investing in markets that I know - mainly the East Bay area of the Bay Area and metro Boston.

I've heard of the BRRR method being used almost exclusively on houses that are around $90-$120k. First off - none of those kinds of properties exist in the areas I'm used to. Sure, you can find something for $300k-400k in a crappy area, but I don't want those kind of tenants. Second, with this kind of idle cash and a lack of time, I feel like I'd rather do a few big deals, even if they're not as profitable as if I did a bunch of small individual deals - I just don't have the time to dedicate to making $30k. At the same time, I'm not familiar with items like financing debt out of a multi million dollar property and I'd rather not taking on another $3M-$4M multi-family property as my next foray into real estate. Lastly, I live in a neighborhood with mainly homes worth about $1.5-2.5M, but there are a few houses that look like they could be on Hoarders, and for sure could be had for $950k-$1.1M.

So, after way too much preamble, my question: Is it worth doing a BRRRR deal where, you put down 100% cash (by pulling it out of other properties, assuming I can figure that out) on a house for about $950k, renovate for $250k or so, refinance on a property now worth $1.4M but then basically just are cash flow neutral after? The rents around here, in the Bay Area, wouldn't be enough for it to be cash flow positive. But my thought being that, it's minimal work, the appreciation alone is worth about $100k a year which, with only about $250k invested makes it pretty attractive. And would allow for pretty substantial appreciation ($ wise) on just a few units.

Or am I thinking about this completely wrong, and there are much more obvious ways to get better returns without a ton of work?

Thoughts appreciated!

Amit M. · Answer

@Alan Miegel since you don’t have much free time, BRRRR is not a good choice, it generally takes a lot of time! (Btw BRRRR works great on more expensive properties,) I’d look to using your equity to buy possibly NNN properties, as they require a lot less time to deal with. You could also consider DST’s. I’d research both heavily, on BP and the net in general, as they each have significant advantages as well as disadvantages. my2c

Carson Wilcox · Answer

well, BRRRR is usually a rental cash flow play... but if it is pretty much a wash monthly... then it works I guess for appreciation too... just a lot of risk for vacancy at that price point...

Jaysen Medhurst · Answer

@Alan Miegel, I wouldn't pursue the plan as you laid it out. Breaking even on cash flow and hoping for appreciation is a dangerous approach.Since you don't have the time to dedicate right now, why not look for a partner on a larger deal. Maybe a syndication.

Arlen Chou · Answer

@Alan Miegel it sounds like you want to be pretty much hands off and cash flow focused in a local market. IF that is the case, @Amit M. has a very good suggestion in getting into NNN properties. What you do have to understand is that you will need to be refinancing every few years as there are no 30 year fixed rate mortgages. There is much more of a business component in this type of investment. Understanding the building and the type of business that is going into that space is VERY important. Properties with little parking might be ok for certain types of business where as other will demand lots of parking. If you get a tenant that is automotive will have other issues like environmental impacts that can/will effect your property. With that being said, if you get a strong tenant that has a good customer base you will be able to just sit back and collect checks every month with little interaction. But also keep in mind that the exit is not always easy as the pool of potential buyers is much smaller than residential types of investments.

Alan M. · Answer

Sure, that's the easy part. But then what do I do with all the cash?

Chris Purcell · Answer

Can you refi

Jake C. · Answer

Alan, if I were you, and given the time constraints you laid out, I'd sit on that equity for now and wait to see what happens to the market in 2019. Having $3MM of dry powder during a potential downturn is EXACTLY where I'd want to be, not invested in a property that is simply treading water, especially in a more expensive market.I am of course assuming a downturn, but there is no denying that even very active money (i.e. more time available to spend on adding value) is having a difficult time finding quality deals today. Another thought that comes to mind is JV'ing with a hard money lender. Get lines of credit on your two properties and supply a hard money lender with capital. Done right, you can net high teen returns with fairly low risk and remain reasonably liquid.

Alan M. · Answer

Thanks, Matt - great insight. I really like how you framed (and bolded!) the idea that I'm only making money when I sell. An excellent point.What about putting down a good sized chunk of change, say 45%, such that the property DOES cash flow. I could then take a HELOC on the property to tap into the cash later, for other purchases. I guess the downside is, at some point, tapping into the HELOC will make the property not cash flow any longer. I think I may have just talked myself out of that one :)

Matt Lefebvre · Answer

@Alan Miegel While I'm not familiar with the rental market of the Bay Area, you have outlined what is considered a BRRRR strategy. The challenge with what you're describing though, is that there is a large risk factor in terms of your ability to make money. You're sacrificing cash flow (which actually produces a measurable return on your investment) for appreciation. Appreciation is an extremely important factor to consider for larger investments because it has a noticeable impact on your bottom line upon sale... but that's the key thing to remember. You're only making money if you sell. In the meantime, you have to deal with a breakeven or loss on the property (which you have to subsidize through your existing investment properties or your personal income) in the hopes that the appreciation will produce a substantial enough return for you to exit the investment profitably. This can be a profitable investment strategy, don't get me wrong... people buy properties in hopes they go up in value all the time. But there is a larger risk factor associated with solely relying upon your profits coming from appreciation rather than solely cash flow or a blend of cash flow & appreciation. Cash flow has a much higher degree of control compared to the SFH market. That can go up and can go down independent of what you've invested in a property and there's nothing you can do to change that. Also based on the numbers you outlined, your return on appreciation isn't that great when you analyze the number behind it... $100K/year appreciation on a $1.4M property = 7.14% property value growth in Year 1. If you assume the property value continues to climb at a consistent 7.14% and you remain cash flow neutral... then your return on investment is only 7.14% per year (assuming you can sell when you choose to). Is that a bad rate of return for a relatively easy investment to maintain? No. People acquire properties for 7.14% cap rates all the time. But the difference to note here is that people buy properties for 7.14% cap rates that produce that much annually in actual cash flow. You only make that money when you sell. You may want to look into more turnkey investments where you can invest $1M of equity in a more stable asset class and target a cap rate of 7%+ and simply hire someone to manage the investment for you. This could be a NNN leased industrial building, or a medium sized apartment building in a A/B class neighborhood with a property manager. If you really wanted to be as passive as possible and were comfortable with not maintaining control in your investment, you could invest in a private equity fund or a DST.

Alan M. · Answer

@Enis Shehu ahh ok. You had ARV of $2M, that’s why I wasn’t following