Help me undertand the profits with the BRRRR method

[Nathan P Tanner]

Please let me know if I’m seeing clearly Here? (This is for the Bay Area in California)

-Home is 330,000$ (paying cash)

-Closing cost : Buyer and seller agent fee, Property, title, escrow, misc @7.5 % =24,750$

-rehab cost = 50,000$

-refinance cost: appraisal, closing cost, loan officer fee @ 2.5% = 8,250$

- if I was to get 75% LTV on 580,000$ = 435,000$

- with 25% equity still In the property= 145,000$

So tell me if this is correct. I add up the total cost above, I come up with 413,000$. Now I have 25% equity in the house. I’ve made my original investment back and pulled profit from the deal. Do I also include the monthly rent and my equity in the home for total profit or do I keep those two separate. I am going to continue buying more properties so I was thinking to keep them separate so I know what I can invest towards the next location. Please let me know what you think any advice or criticism is welcome.

-monthly rent income= 2,800$

-property management fees @ 10% of monthly rent = 280$ a month

[Matthew McKee]

If you want a holistic view of your returns you need to factor in appreciation which typically beats cashflow, amortization, and the ninja perk; tax advantages. There are so many more perks that are unlocked when you BRRRR instead of flip. Instant gratification v. delayed gratification.

[Bruce Woodruff]

I would keep the rent out as income, not a part of the original deal (to me)

It popped out to me that you have only $50k for rehab costs? In the Bay Area? You sure about those numbers? Because that is where most deals go south real fast when doing Flips or Brrrs....

[Jay G.]

Quote from @Matthew McKee:

If you want a holistic view of your returns you need to factor in appreciation which typically beats cashflow, amortization, and the ninja perk; tax advantages. There are so many more perks that are unlocked when you BRRRR instead of flip. Instant gratification v. delayed gratification.

Timing is usually important?

What is the risk of starting/holding BRRRR's into a potential correction and increasing interest rates? Lose everything?

I guess rents would have to correct, too?  

How did pandemic eviction moratorium affect BRRRR investors who had little cushion?

I know someone in PA who had one tenant 12k+ behind in rent - basically 8 months. Couldn't evict. 

In CA a friend of mine had all his rentals behind in payments / non-payments (Natomas area).

This is a similar issue I had last year with unexpected >2M capital gains to deal with very late in year. I was looking for opportunity zone deals but everything was so overpriced and the risk of "correction" in 2022 + (essentially) being locked in for years until 2026 to pay the tax + investing into what could be a "correcting" value of the OZ property was too much of a concern -- due to the timing of things -- and just paid the tax. Painful.

[Eliott Elias]

BRRRR's profits are seen 5-10 years down the line. Where you have a paid off property and you have unlocked equity

[Chris Seveney]

@Nathan P Tanner

Goal with BRRR is to try and limit the amount of money in the deal to enhance the returns.

With interest rates where they are at today and current state of home prices and renovation costs I would argue BRRR is dead.

An example of one we did was bought a home for $100k, put $40k into it, it was work 180k and we refinanced $144k so basically got all our money out of deal. The asset cash flowed $200/mo so our return was infinite since we had no money in the deal.

[Simon Ashbaugh]

Quote from @Nathan P Tanner:

Please let me know if I’m seeing clearly Here? (This is for the Bay Area in California)

-Home is 330,000$ (paying cash)

-Closing cost : Buyer and seller agent fee, Property, title, escrow, misc @7.5 % =24,750$

-rehab cost = 50,000$

-refinance cost: appraisal, closing cost, loan officer fee @ 2.5% = 8,250$

- if I was to get 75% LTV on 580,000$ = 435,000$

- with 25% equity still In the property= 145,000$

So tell me if this is correct. I add up the total cost above, I come up with 413,000$. Now I have 25% equity in the house. I’ve made my original investment back and pulled profit from the deal. Do I also include the monthly rent and my equity in the home for total profit or do I keep those two separate. I am going to continue buying more properties so I was thinking to keep them separate so I know what I can invest towards the next location. Please let me know what you think any advice or criticism is welcome.

-monthly rent income= 2,800$

-property management fees @ 10% of monthly rent = 280$ a month

I would keep them separate to measure the success of the BRRRR itself.

[Tom Fidrych]

Quote from @Bruce Woodruff:

I would keep the rent out as income, not a part of the original deal (to me)

It popped out to me that you have only $50k for rehab costs? In the Bay Area? You sure about those numbers? Because that is where most deals go south real fast when doing Flips or Brrrs....

Yeah, $330K is a really cheap home for the SF bay area. I'm in the Santa Cruz mountains and homes in that price range typically need over $100K unless your doing all the work yourself and your not dealing with geotechnical issues. What kind of deal is this? Your paying the buyer and seller agent fee? Typically, the seller pays those costs.

[Matthew McKee]

Quote from @Jay G.:

Quote from @Matthew McKee:

If you want a holistic view of your returns you need to factor in appreciation which typically beats cashflow, amortization, and the ninja perk; tax advantages. There are so many more perks that are unlocked when you BRRRR instead of flip. Instant gratification v. delayed gratification.

Timing is usually important?

What is the risk of starting/holding BRRRR's into a potential correction and increasing interest rates? Lose everything?

I guess rents would have to correct, too?  

How did pandemic eviction moratorium affect BRRRR investors who had little cushion?

I know someone in PA who had one tenant 12k+ behind in rent - basically 8 months. Couldn't evict. 

In CA a friend of mine had all his rentals behind in payments / non-payments (Natomas area).

This is a similar issue I had last year with unexpected >2M capital gains to deal with very late in year. I was looking for opportunity zone deals but everything was so overpriced and the risk of "correction" in 2022 + (essentially) being locked in for years until 2026 to pay the tax + investing into what could be a "correcting" value of the OZ property was too much of a concern -- due to the timing of things -- and just paid the tax. Painful.

Seems like my sentiment was funneled through what I think a wise market to be in is, I meant a hold will (typically) weather better than a flip in a correction because you have an additional exit strategy but intended to cashflow until the market comes back up. Personally I follow the tax code and consider a flip as a job and disregard as an investment all together. I wouldn’t personally invest in a market where the tenant laws are such that you can go unpaid for a prolonged period without the ability to evict which is the lens I wrote my reply through. There is never going to be a strategy the works seamlessly for every market.