BRRRR - How do you guys eat?

[Erik W.]

This question is for the folks who Buy cheap, Rehab fully, Rent, Refi, and Repeat (BRRRR strategy). I want to know how you make it work. Here's an example of what I'm talking about:

Purchase price: $10,000

Rehab (everything new): $40,000

Total "all in": $50,000 (fully financed, 15 year note, 5%)

Rent: $650/month.

If I apply my normal formulas to it....

10% maintenance (-$65)

10% management (-$65)

Taxes and Insurance (-$70)

5% CapEx (-$35)

NOI: $415

Less debt service (-$395)

Profit: $20/month.

We haven't factored in vacancy.

These are real numbers I'm getting from some investors in my market. Their rent to "all in" ratio is much lower than what I want, but somehow they use this strategy to get up to 100 houses. Interesting strategy, and in spite of my debt-averse nature I am simply curious about how they make it work.

No cash flow, or very little.

Let's say no maintenance at first and self-managers get to keep the management fee, leaving $150/month ($1,800/year) profit on a $50,000 asset. That's 3.6% return on capital and leaves no room for error. One vacancy every 2-3 years would devour most, if not all, of the profits.

If a person owned 20 of these houses, yearly income ($36,000) is about as as much as the manager of the local Video Rental store, but it comes with $1,000,000 in debt.

15 years is long time to carry around a deal that is essentially all equity and bare minimum cash flow. How do these folks eat?

Are my numbers wrong? Investors who follow a similar path to this example, what's missing in this picture? What am I not understanding about this model?

I am genuinely curious to understand this model. I've asked some of the local investors who claim they do this, but answers are vague.

[Steve Vaughan]

Originally posted by @Erik W.:

This question is for the folks who Buy cheap, Rehab fully, Rent, Refi, and Repeat (BRRRR strategy). I want to know how you make it work. Here's an example of what I'm talking about:

Purchase price: $10,000

Rehab (everything new): $40,000

Total "all in": $50,000 (fully financed, 15 year note, 5%)

Rent: $650/month.

If I apply my normal formulas to it....

10% maintenance (-$65)

10% management (-$65)

Taxes and Insurance (-$70)

5% CapEx (-$35)

NOI: $415

Less debt service (-$395)

Profit: $20/month.

We haven't factored in vacancy.

These are real numbers I'm getting from some investors in my market. Their rent to "all in" ratio is much lower than what I want, but somehow they use this strategy to get up to 100 houses. Interesting strategy, and in spite of my debt-averse nature I am simply curious about how they make it work.

No cash flow, or very little.

Let's say no maintenance at first and self-managers get to keep the management fee, leaving $150/month ($1,800/year) profit on a $50,000 asset. That's 3.6% return on capital and leaves no room for error. One vacancy every 2-3 years would devour most, if not all, of the profits.

If a person owned 20 of these houses, yearly income ($36,000) is about as as much as the manager of the local Video Rental store, but it comes with $1,000,000 in debt.

15 years is long time to carry around a deal that is essentially all equity and bare minimum cash flow. How do these folks eat?

Are my numbers wrong? Investors who follow a similar path to this example, what's missing in this picture? What am I not understanding about this model?

I am genuinely curious to understand this model. I've asked some of the local investors who claim they do this, but answers are vague.

I think what you're describing is a massive wealth building plan vs a eat well on cash flow as you go plan. You described my plan although I don't brrrr much because I hate the fees and PITA of it. Been doing this 15 yrs and the loans are just falling off. Dropping like flies.

If you are getting back every dollar invested (which I have over time, too) and the tenants are paying off your houses every 15 years, then work a w2 to eat if you need to. In my case my wife has a w2 for the basics. In the end you'll have 15, 30 or however many paid off houses in your 40s, right? That's me, too. 

Don't let the how do I live richly while I go thought get in your way of building multi generational wealth. That is my why but your interests and mileage may vary.