BRRRR Property refinance dilemma and critique

[Jim Haney]

I have a dilemma with a BRRRR strategy property that I was hoping to get some input on. We are not total newbies but are definitely in a learning phase. We have 6 doors near where we live – over the last 18 years we have lived in them, and then turned them into rentals when we have moved on. This has worked pretty well for us so we decided to do it more intentionally and found BiggerPockets. We have listened to a ton of podcasts and read a million forum posts and replies. We have just started buying out of state and have read David Greene’s book Long Distance Real Estate Investing. So we bought our first out-of-state property this year in the Cleveland Ohio area. We settled on a smaller turnkey provider and purchased a $70,000 home that rents for $975 per month. We did the standard 25% down and financed the rest. It isn't a home run, but cash flows nicely after all set-asides that are recommended in the BiggerPockets property analyzer spreadsheet. We had just gotten to a point where we were in “analysis paralysis” and decided to just go for it, choose the best one that felt comfortable at the time, and learn as we go.

We closed on that one in May and one of the first lessons was “wow, that is going well, but we got no equity” which is probably obvious for you veterans because we bought close to retail. Lesson learned, and we were right back at it - we closed on our second Cleveland property in June. We found a real estate agent through a nationally named real estate company who was willing to find properties for us (this one through a wholesaler), had connections with contractors to perform rehab work, AND had a property management arm within their office. After many hours on the phone we trusted that he could come through for us.

The property in question:

We settled on a property in Euclid Ohio that we could purchase for $50,000. We would put $25,000 into a rehab, and the realtor put the ARV around $90,000 (my wife remembers 90 to 100 and I remember 80 to 90 so we'll just use 90). The realtor also estimated that he would be able to place a tenant at $950 to $975 per month. We ended up going above the rehab amount for a few add ons, but we are into the property for about $79,000, and we got more out of the lease as it was signed for $1050 per month. We had to wait for the seasoning period and are just now refinancing the property and that's where the questions come in.

The property appraised at $122,000 – some people say that is a nice problem to have, right? Our original plan was HOPING that it would appraise high enough that we could cash-out our full investment – we were assuming that it would be close, but it was obviously much higher. So now we have a wide spectrum of options and we know the right decision will be somewhere in the middle.

One end of the spectrum is to not refinance at all

• This option would obviously create the most monthly cash flow, but we have financed this project using a HELOC on our personal home so we would prefer moving that debt to the subject property. That keeps our home off the hook a little bit, but also provides the capital we will need to expand our rental empire (smirk)

The other end of the spectrum would be to max out the loan

• This means we could take a great vacation (another smirk)
• This would result in no cash flow, but one could say that we are taking the calculated cash flow in advance in a lump sum
• Explanation: If we were able to take out $12,000 from the loan you could say that amount would be equivalent to $200 per month for the next five years, and since it is not income, it would not be subject to taxes
• This would provide the most risk since our approach is that any cash flow that we have, could in essence be used as a reduction in rent if the economy tanks again
• This option would also restrict our future financing efforts as the property would show no positive cash flow (except for the short-term vacancy, repairs, and capex allowances used in our calculations that don’t really go out in cash each month)

My feeling is that we continue on the course we planned and only get the loan for the amount of our cash into the project. This leaves us with an infinite Cash-On-Cash return, and an additional $43k towards our net worth, even if it is only on paper. Our real estate agent said there is no way that he could list and sell it for that appraised amount. As for our investable capital, it leaves us right where we started, but with a new property. Any critique or insights would be welcomed.

One last thought – I appears that what I thought of as a "good-deal" wasn't quite there. To fine tune my process, I think I need to be all-in at a lower total (with the same or greater ARV), and/or have a higher rental rate. Any insights in that arena would also be greatly appreciated.