BRRRRing in Los Angeles even possible?

[Alvin Uy]

Hiya! New to this BP forum and podcasts.... but have been an investor for quite some time now with 6 SFR and a 4-plex under my belt in Eagle Rock, Glassel Park area. Heard about BRRRR strategy but i cant seem to find any deals in Los Angeles to make this work... without going negative on rental cashflow. Its like winning the lottery it seems unless you put downpayment on the loan amount to offset the rent.

I know this is question has been covered a million times...  Anyone here have any success with BRRRRing in Los Angeles?   If so, what strategy are you using?

[Dan H.]

I have a slightly different perspective than @Cody L. but not really saying he is incorrect. I think to make a BRRRR work in San Diego for a SFR you have to get it below retail which typically means off market (or getting real lucky). If you pay retail you are not likely to be positive after the refinance. Basically I am saying SFR at retail price do not have positive cash flow at 75% LTV (standard refinance, max LTV conventional loan).

However you can get duplex to quad that have a little positive cash flow.   What I find is two things: 1) due to low refi appraisals it is very difficult to extract all of the value 2) After the refinance after the value add, the cash flow is virtually the same as it was at purchase.  Another way to say this is the rent ratio stays about the same, the cheaper, thrashed RE rents for about the same ratio as the nicer rehabbed RE.

I will use numbers from one of my RE (my last completed value add - I had two concurrent at this time the other one did a bit better but has a lot of similarities but got a slightly better appraisal and is a triplex that helps with the cash flow): purchase $390K (thrashed duplex) with total rent of $2.1K (I have no idea how to set market rent on something as thrashed as this place was but most non rehabbed were going for $1.3K but all were in better shape than these). The ratio is a pathetic 0.54% at purchase. We spent ~$60K on the rehab re-doing everything except roof and heater (inside and out). We refinanced it with a low (which is typical for San Diego) refi appraisal at $544K (my value had it ~$580K). The value add was why we purchased this RE over other possibilities. Note at 75% LTV we are not very close to extracting all our investment (basically we still have ~$50K into it). The rent after rehab was $3.1K (ratio: 0.56% - virtually the same as prior to rehab) which is still likely negative (my projections had it neutral because self managed but it would be negative otherwise).

So at the end of the refi I have $136K equity (using a low refi appraisal) for $50K invested.  I have neutral cash flow but negative 10% with PM fees of 10% (negative $310 if paying a PM 10%).

Today: my rents are $400 higher so I have virtually $400 cash flow or $50 with a 10% PM fee; so still not significant cash flow.  The RE has $52K of market appreciation since the refinance.  So today I have $188K equity for $50K invested and a small amount of cash flow.

Does it work?  Not if by work you think at the end you are going to be able to extract all of your investment (challenging to do so).  Also not if you think the value add is going to substantially improve your cash flow after the refinance (probably is not going to happen).  But if you get $188K of equity for $50K invested that is something.  It now has ~$400 cash flow and ~$600 principle pay down each month.  I would do it again.  So I think it does work just not as good as when @Brandon Turner covers it for his market (or maybe we are not as good at it as Brandon - probably some of both).

I have no illusions that it being easy but unlike some people I think this is true everywhere including in the low appreciation markets that have not changed much (I think they were challenging when San Diego market was cannot miss).

Good luck