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.