Equity Capture at the Buy

[Jeremy H.]

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. 

[Anthony Dooley]

Equity looks nice on paper, but it doesn't pay the bills. Cash flow is the most important number in the equation for me. You said $1000/year, but I hope you meant $10,000 per year. You will not retire on one property. You need at least 10 cash flowing units. BRRRR isn't really applicable in the scenarios that you give here because there isn't much equity and interest rates on investment property is about 8%. You have to find off market deals that cash flow after repairs.