Selling my hypothetical house hack? How feasible is BRRRR?

Question

Is it not difficult to have a positive cash flow from a house hack? What the heck do I need equity for? So that thirty years later I can have a significant cash flow? That's useful, but what if I want to retire way sooner than thirty years from when I buy a property? What good does a home appreciating do if I'm not going to sell it? Can a house hack without significant forced appreciation---within reason---be worthwhile if I sell ten or fewer years after the purchase?

How feasible is BRRRR with a full-time job and with no experience in real estate if I'm a hard-working, number-crunching person? Should I rent my hypothetical BRRRR property until I I can and want to retire to get the most out of the appreciation and rent going towards equity?

How feasible is BRRRR with a full-time job and with no experience in real estate if I'm a hard-working, number-crunching person? Should I rent my hypothetical BRRRR property until I I can and want to retire to get the most out of the appreciation and rent going towards equity?

Nicholas L. · Answer

@Joseph Griffith I am not sure why you are so focused on equity; that's only one point of a house hack. Think about it this way. You buy a duplex using an FHA loan and live in one side, which lets you put way less down than if you used conventional financing. It may or may not cash flow. You build equity for a while. Then you move out. Now it's cash flowing (because both sides are rented out) and you have equity. You move on to the next one. Does that make sense? Equity is only one factor of real estate investing.

@Jimmy Lieu that's right. Except I wouldn't say that the property appreciated, you forced the equity via a rehab. And, as you might expect, it's very tough to find a property to buy for $100K that only needs a $10K rehab to take it to a $150K ARV.

@Jimmy Lieu that's right.  Except I wouldn't say that the property appreciated, you forced the equity via a rehab.  And, as you might expect, it's very tough to find a property to buy for $100K that only needs a $10K rehab to take it to a $150K ARV.

Nicholas L. · Answer

@Joseph Griffith yes, it's about those things and also a lower barrier to entry.  If you go to purchase any old investment property, you might be required to put 25% down.  If you house hack, you can typically put much less down.

Joseph Griffith · Answer

@Nicholas L. Yes, it makes sense. So it's about equity, cash flow and possibly tax benefits?

Jimmy Lieu · Answer

Hi Nicholas,

I just wanted to make sure I understand this completely correct.

In my example, for the 100k property, I put 20k down, had 10k closing/holding costs, and 10k rehab. The total cost is 40k.

However, because the property has appreciated to 150k and I can get 70% of the ARV on a refinance, I am able to pull 105k. 105K subtracted by the 80k initially owed is 25k.

So, the total cost of 40k - 25k is 15k. So basically, I would be able to have a property worth 150k that I bought for 15k. Is my math and everything correct in this manner?

Thank you so much in advance, I've had a bit of trouble understanding refis but I think I am very closing to getting it.

Joseph Griffith · Answer

@Nicholas L. I'm new to the forum and messed up @ing you and I couldn't change my post in an edit. Thanks for your help. Please see my attempt at @ing you.

Joseph Griffith · Answer

@Nicholas L. And what form does the return on the investment take? Equity, right? How useful is equity if you don't sell or borrow against it to finance something else? You can use a property to finance the next and so forth but unless those properties are bringing in some amount of cash, what good are they doing you? You just have untapped equity---unless you count the tapping used to get more equity---sitting in our collective imagination. Equity seems like unactualized potential to me.

Nicholas L. · Answer

@Jimmy Lieu you would not get $40K in cash in your example, because you don't get 100% of the ARV out when you refinance.  Say you got 70% out - that would be $105K.  You bought for $100K, spent $10K on the rehab, and also had holding and closing costs - let's call those $10K just for ease of example.  So you spent $120K and got $105K out.  That's still great - you now have a property worth $150K that you bought effectively for $15K.  But you did not get $40K in cash - you spent $15k.

And, why is cash better?  Because if you use conventional financing, you pay both (1) closing costs on the loan when you buy, and (2) interest on the initial mortgage while you rehab.  If the property is bought in cash, there is no up front loan (no points, no origination fees, etc.) and no interest to pay during the rehab.

Jimmy Lieu · Answer

Hi Nicholas. I see that you mention it's a lot tougher to do a BRRRR with conventional financing. May I ask why? I am still new to this as well.

Let's say I put 20% down with conventional financing on a 100k property. And then let's say I do 10k in rehabbing and the property appraises for 150k. If I do a refinance, won't that mean I get basically 40k in cash (after paying debts)? I am having trouble understanding why using conventional loan would be bad for BRRRR?

Nicholas L. · Answer

@Joseph Griffith one of the reasons to house hack is because it enables you to buy an investment property with financing only available to owner occupants, like an FHA loan.  Cash flow is one consideration, but not the only consideration.

BRRRR is most effective when you're purchasing with all-cash or something cash-like (like hard money.)  It is much tougher to do with conventional financing.

Selling my hypothetical house hack? How feasible is BRRRR?

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