Beginner Help: BRRRR, Niche, and Strategies

BRRRR - Buy, Rehab, Rent, Refinance, Repeat
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Beginner Help: BRRRR, Niche, and Strategies

Steven L.
Member since 2020 · 8 posts · 2 votes

Hi BP Community,

I am an absolute beginner to real estate investing (never made a deal). I read Brandon Turner's Ultimate Beginners Guide and want to overcome analysis inertia. My goal is to make a deal within the next 3 months. I hope this is a good forum to ask this.

Niche

I would like to start with a multi family (duplex or even small apartment), but don't know if I'm being too ambitious. If I start with single family homes, I would like to start with 2 of them (to still be somewhat multi family). I can make down payments for both properties.

What are your thoughts on niche (single vs. multi family) for a novice?

Strategy

BRRRR sounds appealing, but certain aspects seem too similar to house flipping, which I'm not comfortable doing. But I also want to become a well rounded real estate investor, which BRRRR seems to quickly make you. I like the buy and hold aspect built into BRRRR.

Is it best to pay off mortgages with other people's money (OPM) or making mortgage payments from your own job income? How you can get cash flow using OPM confuses me.

For (a realistic) example, a single family home costs 250K and I make a 40K down payment. The objective is to use OPM for the mortgage. Let's say I can get $2500/month rent tops in my area. Using the 50% rule, I should set aside $1250/month for repairs/expenses. This leaves me with $1250/month to pay off the mortgage. Taking a 30 year mortgage, it should be possible to owe no more than $1250 monthly for the mortgage. At this rate, it will take 210000/1250 = 168 months = 14 years to pay off the mortgage.

So 14 years with no cash flow? Does this seem right? If this is the case, it seems impossible to win with buying and holding single family homes.

Conclusion

Buy and hold for small apartments or multi family homes sounds most appealing to me. I am open to commercial loans. But given my short timeline, single family is fine: I just still don't understand the single family profit mechanism. (Without expecting appreciation in property value, is it pretty much no cash flow as in my above example?)

Finally, I'm soliciting your suggestions for a reading list that has worked for you on these topics.

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Jaysen Medhurst
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
6y

Hi, @Steven L., welcome to BP. 

Whether you start SFR or MFR is highly dependent on your market. In many markets SFR simply won't cash flow. I think MFR (esp. 3- or 4-unit) is the way to go. Less risk, better cash flow, efficiencies of scale. That said some investors do really well with SFR.

Your example is flawed for a number of reasons:

  • The 50% rule is a very rough guide. You must do a complete analysis of any property you're considering. You would never determine your reserves based on the 50% rule.
  • When investors refer to "OPM" they typically mean investors, partners, private-money lenders, etc. not the tenants who are paying rent (and therefore your expenses and mortgage).
  • You'll never get $2500/month on a SFR with a FMV of $250k. Why? Anyone who can afford $2500/month in rent can easily afford to buy a $250k house. The tipping line for this is $125-150k depending on the market.
  • Lenders require at least 20% down on an investment property. So that's a DP of $50k in your example.
  • This is not how mortgages work. You don't take an arbitrary monthly payment and divide it by the loan amount to determine how may years it will take to pay off the property. You're completely forgetting our old friend interest. Mortgages have amortization periods (the length of time it takes to pay off the loan) and term (how long the mortgage actually lasts). With a residential mortgage they will be the same. With a commercial mortgage, maybe - maybe not. Use an on-line mortgage calculator to figure out the details, see amortization tables, and understand how turning one knob changes another.

A better SFR example is one that costs $95k and rents for $950/month (hits the 1% rule).

$950:  GSR
$48:    Vacancy (5%)
$143: Repairs and CapEx (15% combined)
$95:    Management (10%)
$50:    Insurance
$50:    Property Taxes
$374:  Debt Service (20% down, 4.25%, 30-year)
=$191/month cash flow (12% CoC ROI on DP)

Now imagine this is a quadplex with lower per-unit costs and some efficiencies of scale (a few more expenses, too). The numbers can really start to look good.

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  • Ted Beringer
    New to Real Estate · Richfield WI · Member since 2020 · 6 posts · 0 votes
    6y

    Hey Steven, im in the same boat kinda. i should find out today if i have an accepted offer on a SF. so the way my deal looks and im sure im off a little on my numbers and am forgetting something. this will be my second single family. i offered 85k on a place i estimate no more than 40k in repairs so after closing and inspections etc.etc i hope to have no more than 130 into the place. the way i see it with crunching numbers 130k plus 20% down closing etc. repairs and insurance, tax, monthly expenses. i should be able to pay the place off and cash flow over 500 a month at 1200 a month in rent. im going to try and rent for 1500 a month and get over 800 cash flow. so im not sure why you dont think SFH wont make money? I am very new at this and by no means an expert at all. I want to learn as much as possible and want to follow this post to get others feedback. thanks everyone

    0Reply
  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    6y

    Hi, @Steven L., welcome to BP. 

    Whether you start SFR or MFR is highly dependent on your market. In many markets SFR simply won't cash flow. I think MFR (esp. 3- or 4-unit) is the way to go. Less risk, better cash flow, efficiencies of scale. That said some investors do really well with SFR.

    Your example is flawed for a number of reasons:

    • The 50% rule is a very rough guide. You must do a complete analysis of any property you're considering. You would never determine your reserves based on the 50% rule.
    • When investors refer to "OPM" they typically mean investors, partners, private-money lenders, etc. not the tenants who are paying rent (and therefore your expenses and mortgage).
    • You'll never get $2500/month on a SFR with a FMV of $250k. Why? Anyone who can afford $2500/month in rent can easily afford to buy a $250k house. The tipping line for this is $125-150k depending on the market.
    • Lenders require at least 20% down on an investment property. So that's a DP of $50k in your example.
    • This is not how mortgages work. You don't take an arbitrary monthly payment and divide it by the loan amount to determine how may years it will take to pay off the property. You're completely forgetting our old friend interest. Mortgages have amortization periods (the length of time it takes to pay off the loan) and term (how long the mortgage actually lasts). With a residential mortgage they will be the same. With a commercial mortgage, maybe - maybe not. Use an on-line mortgage calculator to figure out the details, see amortization tables, and understand how turning one knob changes another.

    A better SFR example is one that costs $95k and rents for $950/month (hits the 1% rule).

    $950:  GSR
    $48:    Vacancy (5%)
    $143: Repairs and CapEx (15% combined)
    $95:    Management (10%)
    $50:    Insurance
    $50:    Property Taxes
    $374:  Debt Service (20% down, 4.25%, 30-year)
    =$191/month cash flow (12% CoC ROI on DP)

    Now imagine this is a quadplex with lower per-unit costs and some efficiencies of scale (a few more expenses, too). The numbers can really start to look good.

    1Reply
  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    6y

    I think our numbers are very optimistic, @Ted Beringer. What are your insurance and taxes? What are you figuring for vacancy, repairs, CapEx, and management? My math puts you ~$300/month cash flow before taxes and insurance.

    0Reply
  • Ted Beringer
    New to Real Estate · Richfield WI · Member since 2020 · 6 posts · 0 votes
    6y
    Originally posted by @Jaysen Medhurst:

    I think our numbers are very optimistic, @Ted Beringer. What are your insurance and taxes? What are you figuring for vacancy, repairs, CapEx, and management? My math puts you ~$300/month cash flow before taxes and insurance.

    Jaysen,   thanks for reaching out.   so this home will need some love, im thinking for the rehab i will do the floors 1500sq refinish 3500 bucks.  new kitchen and both bathrooms 10k maybe depending on finishes. new windows,  electrical and plumbing will need some work nothing major. i will do a new garage tear down and replace.   so real numbers.  taxes are 1250 bucks a year, insurace is looking like 600-800 a year.  repairs will be minimal for awhile it has a new roof and new boiler plus everything else will be new, or gone over.  i did budget 1200 a year (way under than i should maybe)  so im sure im missing stuff do to the fact im new to this.  maybe help me crunch this quick?  130k into total investment 1500 month in rent.  you know the other numbers.  also i have the idea of funding the project out of pocket 100%  after rehab and renting it out i will do a refi.  thank you for any help

    0Reply
  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    6y

    Hey @Ted Beringer, here's how I'd analyze it:

    $1500:   GSR
    ($75):    Vacancy (5%)
    ($150):   Management (10%); always include, even if you self-manage at first
    ($150): Repairs and CapEx (10%); I'd bump this up to 15% after a few years
    ($104):   Taxes
    ($67):     Insurance
    ($512):   Debt Service; 20% DP, 4.25%, 30-year

    =$517/month cash flow; this is great, especially if you BRRRR and pull all or most of your capital out. It's also a best case scenario where you're getting top rent and underestimating Repairs/CapEx.

    0Reply
  • Ted Beringer
    New to Real Estate · Richfield WI · Member since 2020 · 6 posts · 0 votes
    6y
    Originally posted by @Jaysen Medhurst:

    Hey @Ted Beringer, here's how I'd analyze it:

    $1500:   GSR
    ($75):    Vacancy (5%)
    ($150):   Management (10%); always include, even if you self-manage at first
    ($150): Repairs and CapEx (10%); I'd bump this up to 15% after a few years
    ($104):   Taxes
    ($67):     Insurance
    ($512):   Debt Service; 20% DP, 4.25%, 30-year

    =$517/month cash flow; this is great, especially if you BRRRR and pull all or most of your capital out. It's also a best case scenario where you're getting top rent and underestimating Repairs/CapEx.

    0Reply
  • Ted Beringer
    New to Real Estate · Richfield WI · Member since 2020 · 6 posts · 0 votes
    6y

    thank you Jayson for getting back to me, i do feel like i could keep it well under 130k all in with rehab.  when finished i believe the place would be valued close to 200k.   its a 3 bedroom 1 1/2 bath the particular area is a little depressed but in any direction from that home you cant touch a house for under 200k  its a weird area, lots of older original homes in the area, i have another SF down the road from there and found tenants very quickly.  there are no multi families or duplexes in this area which i feel helps.  the new subdivisions down the road you wont find a home under 750k.   I live 12 minutes away and am very comfortable with the area and project.   thank you again for your help and reaching out. 

    0Reply
  • Steven L.
    OP
    Member since 2020 · 8 posts · 2 votes
    6y

    @Jaysen Medhurst Thanks for that clear explanation! I was almost losing hope in SFR being a profitable enterprise. Obviously I've got to fill in many knowledge gaps.

    How did you break down the monthly expenses so nicely? I've watched Brandon Turner's 4 square analysis video. Is there an in-depth expensing technique, or is it based off your personal experiences?

    Finally, do you think starting off with a 4-plex or small apartment is too much to handle for a real estate newbie?  (Maybe not the right forum for this question).

    @Ted Beringer, thank you for sharing your example here as well.

    -Steve

    0Reply
  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    6y

    @Steven L., there are a ton of articles and webinars her on BP about analyzing properties. After analyzing a few hundred properties, it kind of gets in your bones. Here's my baseline, which I will adjust based on the market, location, property:

    • Vacancy: 5-8%; SFR I use 5%, MFR 8%
    • Repairs: 7.5%
    • CapEx: 7.5%
    • Management: 8-12%; the more units the lower the percentage
    • Property Taxes: Confirm with municipality, never estimate
    • Insurance: $50-75/month/$100k of value; can vary widely by location. Talk with a local insurance agent.
    • Debt Service: Use a mortgage calculator

    Additionally for MFR you have to consider:

    • Water/sewer: $30-40/unit/month. Confirm with local water authority
    • Lawn care/snow removal: $50-150/month depending on location and property specifics
    • Other shared utilities: Property dependent
    • Trash removal: Property dependent
    • Pest control: Property dependent
    • Professional/Admin fees: $25+/month depending on the size of the property to cover tax filings, advertising, etc.
    1Reply
  • Steven L.
    OP
    Member since 2020 · 8 posts · 2 votes
    6y

    Hey thanks again @Jaysen Medhurst!

    0Reply
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