Apple Vs BRRRR - The Showdown

[Jake Thornton]

"In the RED CORNER, Apple stock. In the BLUE CORNER, the BRRRR Strategy. Two investment ideas go into the ring, one comes out. LET'S GET READY TO BRRRRUMBLE!"

So I'm a new investor. I have a couple of Airbnb's in Souther California, but next year I plan to launch full scale into a BRRRR strategy after reading the book by @David Greene, and joining the wonderful community here on BP. I've been gobbling up as much as I can, and attended the great free webinar by @J Scott and @Tarl Yarber yesterday, which was awesome! Thanks guys!

So I as I prepare to take massive action on this strategy next year, I was talking with a friend of mine the other day about it, and he grimaced, and said it sounded dangerous. I talked to him about the idea, whereby you could buy a house say for $50,000 cash, and put $25,000 into it, rent it out, refinance it at the new forced equity value of $100,000 at 25% down, and pull out all your cash and do it again. And again. And again.

To which he replied that he’d bought $50,000 of Apple stock in 2014, and that had now doubled in value, so how was this better than that? I tried to convince him that it was, but I couldn’t quickly punch the numbers to show him.

But today I sat down and did just that. And this is what I found.

All these calculations show an identical BRRRR, bought for $50,000 cash, with $25,000 rehab costs, and refi'd for $100,000. I guestimate that after everything is paid every month (Rent, Management, CapEx and Maintenance) that the property cash flows $500. Of course in real world scenarios any of these numbers could be up or down in either direction, but I'm just using this is a rough base for this equation. I buy three of these houses per year using this technique.

So in year one I buy a property in the first month, and have it rehabbed and rented to a tenant by the start of the third, and refinance it by the end of the fourth.

The cash flow on this first house is $5000 for that first year. (10 months at $500).

The second cash flows $3000 that first year (6 months at $500)

And the third brings me $1000 (2 months at $500)

I keep these for the following four years and combined they cash flow (including this first year) $81,000.

I then repeat this every year for the next four years. Three properties each year, same numbers.

House 4 by year 5 has cash flowed $23,000

House 5 by year 5 has cash flowed $21,000

House 6 by year 5 has cash flowed $19,000

House 7 by year 5 has cash flowed $17,000

House 8 by year 5 has cash flowed $15,000

House 9 by year 5 has cash flowed $13,000

House 10 by year 5 has cash flowed $11,000

House 11 by year 5 has cash flowed $9,000

House 12 by year 5 has cash flowed $7,000

House 13 by year 5 has cash flowed $5,000

House 14 by year 5 has cash flowed $3,000

House 15 by year 5 has cash flowed $1,000

The total cash flow by the end of year five is $225,000.

We’ve already outperformed my friend’s Apple stock. Whoopeee. Math is fun!

"BRRRR has one-two punched Apple, and he's out cold!"

BUT WAIT! THERE’S MORE!

Because the balance on the mortgages on all of these properties has been paid down.

At a 4.5% 30 year loan (again actual numbers may be different, but for the sake of example) of $75,000.

House 1 balance by end of year 5 = $68,368.44

House 2 balance by end of year 5 = $68,858.37

House 3 balance by end of year 5 = $69,341.01

House 4 balance by end of year 5 = $69,816.49

House 5 balance by end of year 5 = $70,284.9

House 6 balance by end of year 5 = 70,746.34

House 7 balance by end of year 5 = $71,200.94

House 8 balance by end of year 5 = $71,648.77

House 9 balance by end of year 5 = $72,089.95

House 10 balance by end of year 5 = $72,524.58

House 11 balance by end of year 5 = $72,952.74

House 12 balance by end of year 5 = $73,374.55

House 13 balance by end of year 5 = $73,790.08

House 14 balance by end of year 5 = $74,199.44

House 15 balance by end of year 5 = $74,602.72

AND the house has gone up in value! At an estimated 2% increase the new home values look like this:

Home 1 value by end of year 5 = $108,243

Home 2 value by end of year 5 = $108,243

Home 3 value by end of year 5 = $108,243

Home 4 value by end of year 5 = $106,120

Home 5 value by end of year 5 = $106,120

Home 6 value by end of year 5 = $106,120

Home 7 value by end of year 5 = $104,040

Home 8 value by end of year 5 = $104,040

Home 9 value by end of year 5 = $104,040

Home 10 value by end of year 5 = $102,000

Home 11 value by end of year 5 = $102,000

Home 12 value by end of year 5 = $102,000

Home 13 value by end of year 5 = $100,000 (No appreciation yet)

Home 14 value by end of year 5 = $100,000

Home 15 value by end of year 5 = $100,000

So the total equity we have now in these houses equals TOTAL HOME VALUE FOR ALL 15 HOUSES ($1,561,212) minus the TOTAL BALANCE ON MORTGAGES ($1,073,799)

$1,561,212 minus $1,073,799 = $487,412

That’s how much we’d make if we sold all those properties at the end of year 5.

Plus we cash flowed $225,000.

So the total at the end of year five is:

$225,000 cash flow + $487,412 equity = $712,412.

Oh and we still have our $75,000 investment nut. And my how that nut has grown.

So $50,000 of Apple stock doubled in that time to $100,000.

But our $75,000 became $787,412. In five years...

Can’t wait to get started with this strategy next year!!