BRRRR vs. Flip (the numbers)

[Andrew Savage]

I got my first multi-unit rental last year, cash flowing well, looking to BRRRR on my next. I know the rules (1%, 70%, etc) are just guidelines, but I'm looking for clarity on how to apply them. I'm getting hung up on how to decide whether, after rehab, to sell or hold. Look at the below example:

PURCHASE PRICE: 40k

REHAB: 55k

HOLDING COSTS: 5k

TOTAL INVESTMENT: 100k

ARV: 150k

RENT: 1100

After the rehab is complete, before refinancing, should I look at it like I'm purchasing the property for the ARV? The purchase, rehab, and holding are all sunk costs. 1100/mo doesn't look bad on a 100k investment, but that's all cash or a high interest loan (hard money). With the refinance, I'm essentially "purchasing" a 145k property that only rents for 1200, and that's not a stellar deal. Thus, I shouldn't "purchase" it, but rather sell for a 50k profit (less selling/closing costs). Again, I know all the rules are just guidelines, I'm just looking for some feedback on how I'm thinking it through. Thanks for the help!!

[Jeremy Lahners]

For simple math on the BRRR, you'd be looking at maybe $850-900 / month for your mortgage and escrow, plus management fees, vacancy, maintenance and capex hold-backs, which would add another $350. So your monthly costs might be close to $1200, thus your BRRR would not be making a profit. You'd initially get a $12.5k bump for the refinance of the BRRR (75% of ARV) but wouldn't make any profit from that point forward unless you raised the rent accordingly.

The answer probably depends on your ultimate goals but with this not really being a cash-positive investment, I'd consider selling it, again unless you can raise the rent.  Best guidance I've heard so far is you really want each unit of a multi-unit to be making $100-150 of profit.  Otherwise, dump it.