Positive Cash Flow in Hot Market

[Nick Coons]

I'm working on BRRRR, in the Phoenix area, which is appreciating like crazy. Rents are going up too, but not nearly to the same degree (which is what we'd expect). So the issue I'm having is something that I'm sure others have had too. Even when I find deals that are well below market, they still have negative cash flow because rents don't keep up with expenses.

I'm not concerned much with cash flow initially other than that I don't want it to be negative, because I don't want to come out of pocket every month to cover operating costs (that makes the Repeat part of BRRRR more difficult). So something like $100/month after all expenses would be fine. I've set my management expenses at 8%, CapEx and 10%, vacancy at 5%, and repairs at 5%. I'm thinking of eliminating the CapEx expenditure altogether (or for the first few years at least) since anything major is being taken care of during the Rehab phase (i.e. I shouldn't have to worry about something like a roof or HVAC unit for awhile after Rehab).

Even then, the numbers don't look great. If I buy a place for $245k, put $50k into it (rehab plus holding costs) for an ARV of $400k, I can get about $2k/month for it, I'm at -$405/month, so negative cash flow. The numbers work out for the refinance this way so that I end up (after paying off everything and getting my original down payment back) that I'm just over break even (+$300), so I can "repeat" in that sense. If I want to bring the cash flow to $100/month (that's a $505 swing), then I need to reduce the cash-out refinance from $300k to $210k, which leaves $90k in the deal, making the "Repeat" part of the process impossible for me.

I haven't been doing this for long (recently), but here's what I've discovered so far. Because properties are appreciating so fast, even "distressed" sellers are able to list their properties and get above market value for them. Something that needed a complete gut and rebuild was listed for $270k (a decent deal) and sold over asking in a couple of days at $290k. It almost feels like 2005 all over again in that sense (that was the last time I was actively doing this).

Regarding the "deal" above.. $400k is the limit of the ARV based on the neighborhood in question, and $260k is a realistic "deal" value because anyone asking for less is going to end up selling for over asking anyway. And because appreciation is so fast, foreclosures (or owners in preforeclosure that have very little recourse but to sell cheaply) are more rare. There was a foreclosure with massive fire damage listed for $97k and needed at least $100k of work, ended up selling for $218k.

Generally, I can see a lot of these properties being decent flip candidates (which I'm not interested in doing, though this puts me in competition with someone that can pay more for a property because they aren't looking to hold and cash flow), but not great as rentals unless I have tons of cash to either cover the negative cash flow or leave in the property.

So here are my questions:

- Do I just need to be more patient in looking for deals? I have no problem with that if that's the answer. Or are there unique methods in a market like this I should be employing?
- Is BRRRR an effective strategy when the market has this much of a gap between expenses and rental income?
- Is positive cash flow realistic in a market like this, or do I just need to find a way to make it work with negative cash flow for the initial stages until rent eventually catches up?