BRRRR Method or Sell?

Question

I have recently acquired a property for $80,000 that was a great deal. My realtor think it has the potential to sell for around $180,000. Assuming this is correct, what would y’all do? It’s currently on a 20 year mortgage. Would y’all BRRRR the property and find a tenant or just sell it for the quick cash to reinvest in other properties? Any input is welcome!

Nathan Hathorn · Answer

Ben, what’s the address? I could be interested in purchasing or might know of someone that would be interested depending on where it is

Chris Vanderloo · Answer

@Ben Hudman What’s the market like? Holding onto it and renting it (assuming you can afford to have someone manage it) could net you more in the long run. I’m brand new to this, but if it seems that it will hold its value for the foreseeable future (market-dependent) I say BRRR and hold. Your refinance could get you a lot of equity out of it regardless.

Judy C. · Answer

Wow Ben!  I agree that you made a great buy on that one!  I would estimate a higher cap rate for that area but there is still great potential.  To figure value based on cap rate, you basically just look at the estimated property income less operating expenses (taxes, insurance maintenance, management, and any others) to determine the estimated net operating income. Then you assign a capitilization rate.  This is basically is the % of Net Operating Income that an investor would expect as an annual return for that property and would entice them to purchase it.  On older properties with deferred maintenance, they would want a higher return.  On a nicer, newer property they would be willing to buy with a lower expected return.  You learn the going cap rates from comparing similar sales in the market.  You could estimate $1700 x 12 less 10% vacancy  so $18,360 projected income.  Expenses of Taxes-$3431, Insurance $1,800, Estimated maintenance $3,000 Mgmt 5% $918 for a total of $9,149.  That would make your NOI $9,211.  If you assign an 8% cap rate it would indicate a value of $115,138.  7% would be $164,482.  The amount you rent it for is very important if you plan to refinance or sell because it is an indication of value to lenders or other investors.  I would always figure in management fee even if you plan to self-manage because there is a cost to it to hire someone else or to invest your own time that could be spent elsewhere.

Guy Gimenez · Answer

Your post leaves so much information out that it's difficult to answer your question because no one has the needed info. Do you have plenty of cash reserves? Do you have the time money and personnel to flip? Do you have the heart to be a Landlord? I would also double check the numbers. VERY few non-investing Realtors know what a solid investment looks like and I've dealt with tons of investors who thought they were sitting on a gold mine only to lose money because they trusted a realtor who has never purchased an investment property. I'm not bashing realtors...I'm still a licensed broker in Texas but no longer represent buyers/sellers, I only sell my investment properties.

Ben Hudman · Answer

@Judy H. Thank you! I’m trying to get those compounding returns by starting as young as possible haha. The address is 118 North Pioneer if you would like to take a look. Any information is much appreciated. No hard feelings on ANY critiques. I’m here to learn. Abilene really needs a real estate meetup!

Jason D. · Answer

@Ben Hudman without know the CAP, there is now way to know the value. Comps do not dictate value for commercial, value is determined by income and CAP.

Using your numbers, and assuming the 50% rule, put it at a 5.6 CAP. I can assume that is very low for that area unless it's an "A" property in an "A" neighborhood.

Without knowing the area, it's more likely an 8ish CAP property, putting its value in the $130ish range.

If you can rent it for $1700, I would keep it. I could be very wrong but I dont think it's worth what your realtor thinks worth.

Ronald Starusnak · Answer

Dude, at your numbers if you got a 75% LTV, you're sticking $50,000 in your pocket and still adding another $400-$600 a month in passive cash flow. Or you can sell it for $180,000. It depends on your market. You'll have $50,000 in equity in the deal or so still after the refi. If you sold for $180k you lose 7% to realtors so you put $167k in your pocket, then you have to pay capital gains taxes on that.

If you want to sell it to put an extra $20k-30k in your pocket instead of adding $4,800-$7,200 of passive income then sell it. I'd hold it though.

Jeff Kehl · Answer

@ben hudman I wouldn't use the 50% rule for commercial property. Your expenses will vary wildly based on the use. If you paid $80k and can rent it for $1700 you likely have a cash cow on your hands. Especially with a warehouse you won't have a lot of expenses. There aren't as many bathrooms, drywall, appliances, etc in a commercial property generally and if you're able, you put the maintenance on the tenant in the lease.

The downside with commercial though is that it is harder to find tenants if your not in a hot area. Sounds like you are so if it were we I would brrrr it.

If you go 6 months without a tenant you can always list it both for rent and sale whichever comes first. That has worked pretty well for me.

Judy C. · Answer

Congrats Ben!  It is really impressive to see someone still in college getting started with investing!  I wish I had started when I was your age!  If you want, I will take a look and just give you my thoughts.  If you want me to, just send me the address and I will take a quick look. In Abilene, Texas commercial investing, usually the most challenging part is to keep it leased.  The market is good, but there are still a lot of vacant commercial buildings available.  Sounds like a good buy though!

Ben Hudman · Answer

@Chris Vanderloo Thanks for that input!

BRRRR Method or Sell?

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