Review my BRRRR situation...Please

[Jared McCullough]

Hi,

I am new to BP and generally new to real estate investing although I have some family members to lean off of who have a handful of SFR. My original investment strategy was built off of buying county tax sale properties at very low prices in cash. While I am still continuing down this path as I think cash purchases make the most sense from a profit margin perspective the growth plan is also slow. Thus this brings me to what I have come up with as a modified BRRRR strategy.

This being said as I am new to this I am wondering if there are things that I am missing and looking for guidance on how the largest short term profit can be recognized. The one major struggle I have right now is how to balance the Cash Out Refinance Loan Term versus the profit margin to determine what the best answer is (i.e. The earnings per unit after debts/taxes/insurance come off to me that you need a substantial portfolio to make any decent money per annum). 

This is meant to be a 10-15 year portfolio in which I plan to make no gains but reinvest the money into additional property purchases. Currently I have $30K working capital and I am working about a (3) county spread in which rentable SFR are easily obtainable on a decent frequency for between $20-40K. Depending on location rent can be expected from $600-800.

My current investment plan is as followed:

House 1: Purchase Price $25,000 (listed for $29,000 and bank owned so assuming this is manageable)

Taxes/Insurance: $2200/$500 (would plan to have taxes reassessed)

Rehab: $5,000 (grossly overestimated as I have been in the house)

Estimated Appraisal: $55-60,000 (i.e. maybe more but being conservative)

Cash Out: $30,000 on 10 year = $333/month @ 6%

Estimated Rent: $650 * 12 = $7800

Estimated Net Profit (not including repairs/vacancy) = $7800 - $500 - $2200 - (333*12) = $1104 or $92/month

The plan would then be to take the $30K cash and redo the same process. My problem is the net profit almost does not seem worth the hassle except that in 10 years when the loans are paid of you now have assets turning full profit. What am I missing?

The alternative is buy first property but don't refinance. Then you would be making an estimated yearly net profit of $5100. This is essentially the equivalent of managing 4 to 5 properties under the BRRRR model to make the same yearly profit which then means your taking on the extra hassle of 3/4 houses from vacany/tenants/maintenance to make the same money I don't see the benefit other than once you hit that 10 year mark then you will be making some good money because at that point you will have bought 5 houses in 2019 instead of 1 (i.e. larger portfolio).

Hopefully the length of this post does not scare anyone away and I greatly look forward and appreciate any responses I get. 

Jared

[Jared McCullough]

Originally posted by @Jeremy Z.:

When I posted earlier I overlooked the fact that your numbers are for a 10-year financing term. Your principle pay down will be substantial and if your numbers are accurate you will have considerable equity from the start. Seems like a viable strategy, but make sure you account for all the expenses so you aren't bleeding too much cash while holding. That price point can have considerable vacancy rates and repair costs according to many of the investors on this forum who specialize in that market.

Jeremy ,

Thanks for the response and I greatly appreciate adding the comments regarding calculating the variable cost side as well. Do you think I am off base using a 10 year loan term versus something larger (i.e. what is typical I guess I would ask). As noted in my post to the other individual I personally would struggle in seeing the benefit of doing a 30 year in that for most you would never really see the benefits (i.e. larger profit margin). 

As far as vacancy rates and repairs at the moment that is problem my main barrier that I am approaching in that I am trying to be very selective in the location and specific property I purchase. Although I am sure it will affect me at some point I am trying to find locations that I have personal knowledge of the market saturation, overall market, and we do a evaluation of the property before purchase forecasting things that are more common maintenance issues. The current property we own was a cash purchase at a tax sale and we literally replaced everything except the foundation so we have a general forecast from there.

Jared