Relationship between BRRRR and the 50% Rule?

Question

As a new investor, I am leaning toward the BRRRR strategy. However,  I'm having trouble rectifying the third R with cash flow goals as part of this strategy. If I purchase a property that appears it will offer me a cash flow of, $200-$300 at the outset, then, it seems unlikely I would see that cash flow if I pull equity out of the property for the next purchase. Unless, the idea is that the calculations up front should be geared toward that after-refinance cash flow. I will have a tough time finding that property in Denver, I believe. Currently considering condo/townhouse fix-and-hold in the burbs (north and west of the city), house-hacking during the "fix."

Bill S. · Answer

@Patricia Miller you will be hard pressed to find 50% deals even from wholesalers in Denver. Why because with expensive properties it's not a very good metric. It's a rule of thumb but it's not a rule to throw in the towel if you can't meet it. Investors for years have done far worse and are still in the game. You have to ask yourself, what is better having a property that covers the 50% rule and is worth about 5% more in 5 years or one that covers it's costs for five years and is worth 50% more in 5 years. The market is telling you the answer. If you have to have those kind of returns you will probably need to look outside of the Denver metro. If you go out East or especially into the lower Arkansa River valley. La Junta, Rock Ford. Lamar then you can definitely meet those numbers. At the same time you are buying the properties for what they sold for 30 years ago. The county population is shrinking steadily at about 3% per year for the last 40 years. Sure you meet the 50% rule and you may not have anyone to be your tenant in 15 years. Decide what is most important to you and then find the best place to execute that plan.

Jeff Bridges · Answer

I would be careful about using the 50% rule to create theoretical examples about investment condo purchases as a test case for whether you want to proceed in a market. Condo fees are a different beast, and since they vary so greatly from complex to complex, you really need to do real calculations on actual expenses on every property you look at to understand what a cashflow scenario would look like. Find a couple on MLS at the price point you mentioned, and practice calculations using actual expenses (tax, condo fee, management fee, vacancy, interior maintenance, cap-ex). In some cases, you'll find negative cashflow even after you account for condo fee.

FYI, 1700 rent on a 165k investment seems iffy on a SFH, but even less desirable on a condo with guaranteed higher expenses through condo fees. Lastly, I'd add 3-5k onto your investment example above since you forgot to add loan origination fees and closing costs. Also, your example, you would breakeven or lose money on an immediate sale (if you had to) since you would be selling for cost. It's nice to have the flexibility of several exit strategies for a buy and hold and that doesn't leave room for you to exit without coming out of pocket.

Patricia Miller · Answer

Thanks for the pep talk @Joseph Graeve. I am very determined to a) succeed and b) not succumb to bad deals. At times these 2 things seem impossible. But I am still early in the learning process and will press on.

Joseph Graeve · Answer

Hey @Patricia Miller

Don't give up hope! it is hard that is why not many succeed but push through the noise anyways. Deals are not easy to come by anywhere but that doesn't mean they don't exist. You just have to keep working hard. I invest heavily in Colorado Springs and Denver and would be happy to share some tips with you. Keep hustling :)

Roy N. · Answer

Patricia:

When we purchase a distressed property which we plan to rehab as a rental (which is typically how we go about things), we incorporate the purchase and make-ready (retrofit/rehab) costs together as our initial cash expenditure/outlay.

We also want to be certain that the ARV is sufficiently greater than our initial cash outlay that refinancing at the ARV will allow us to pull most of our initial capital back out of the property.

So, in short, "yes", conduct your analysis based upon the total costs required to put the property into production (this includes holding costs).

Edward B. · Answer

@Patricia Miller, yes you should run the numbers up front for the after refinanced cash flow. And yes you will have a hard time finding that in one of the hottest markets in the US. The key is absolutely to get the best deal up front. You will not find that on the MLS and even the foreclosure market in places like Denver will be exceedingly difficult. Unless you know a good wholesaler or are willing to market for motivated sellers yourself, I believe it will be difficult to make the numbers work there.

Richard Bradshaw · Answer

Cash flow should be after refi, I'm guessing you are using a HML or private money. If you buy it right you should have enough equity to have a cash flowing property. If it does not cash flow, it's not a deal and you most likely won't be able to refi.

Patricia Miller · Answer

Yes, indeed! And, thank you for the guidance @Jeff Bridges!

Jeff Bridges · Answer

If you run enough analysis in the area, you start to understand that they start to get predictable, so you'll know you need to be under $XXX  condo fee and under $XXXXXX purchase price to make it work for you. From then on, you screen for properties that are under $XXX and hit around the condo fee price point, and you have a much narrower set of properties to look through daily and have to do more in depth analysis on. good luck with your search and don't sacrifice your goals for cashflow just because you want to get started with ownership. Your area looks super tough and we're also in the spring market where you compete with regular irrational OO buyers/ families in addition to investors so its even more competitive.

Patricia Miller · Answer

@Jeff Bridges - There was a property in a complex in Lakewood, CO - but now it has an offer so I can't find the HOA but I believe it was under $200.

441 Wright St APT 126, Lakewood, CO 80228  This was not a property we would have considered as the projected rent was far less than 1% of the asking price but I thought I noticed a low HOA.

Then there are some in Thornton, Arvada - very small condos (1/1), one with an HOA of $212.

Still, I hear you about doing a thorough analysis before any purchase. At this stage of the game, I'm just trying to screen a lot of stuff to see if any are worthy of a more complete analysis. Then there is also the question of - what kind of property is this going to be in 5 years? So, anyway, I was using the 50% rule as a preliminary - maybe not a useful idea. As you suggested, we should set up a more comprehensive spreadsheet as a screening tool.

Relationship between BRRRR and the 50% Rule?

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