Beginner Help: BRRRR, Niche, and Strategies

[Steven L.]

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.

[Jaysen Medhurst]

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.