Equity Capture at the Buy

[Jeremy Horton]

Do you have any criteria on the equity capture when you buy?

Let's say you have a house scenario: Sale price 155k, with 15k rehab. ARV is 195k. Cashflow 1k/year. Would you do it?

Quick math:

All in 170k

ARV 195k

Buying at 87% ARV. Gain 13% equity (25k) but have low cashflow - to the point your money is essentially sunk in the deal. Doesn't make sense to do a BRRRR for several reasons - so the rehab cost is sunk in the deal.

Let's up it a little and say it's in a great area of town - new construction, revitalization, 2-3 blocks from a major university. Let's say the CapEx expenses are generally good - new windows, roof has 15 years left, everything is in decent enough shape. The immediate area still seems a bit "run down" - where you have a 2/1 renting for $650/mo and next door have a new 2/1 renting for 1100/mo. You'll have a rusty shack next to a brand new granite countertop, stainless steel appliance unit.

I'm running into these lately where there is a small cosmetic rehab that gets left in the deal. A mediocre/decent equity capture when buying ~15% give or take, and a good area of town. 

I know we all hear about buying super low, refinancing and getting all your money back. Definitely possible but I'd say also very rare - at least it seems to be where I'm at. And I may be missing something - a strategy or something. 

What are your thoughts on trading cash flow for equity? The residual cashflow is not enough to "retire" me unless I change my lifestyle which I'm not willing to do. I more use the "profit" to invest again or pay for other expenses.