Amateur that wants to ask a few questions about BRRRR

[Yosef Ajami]

I'm a young professional saving up money for my first rental property investment. I've stumbled upon the BRRRR method and it really fascinated me, but I was still left with a few unanswered questions after reading all about it and wanted to see if someone can help me out. (Keep in mind that I'm a super amateur, and really trying to learn)

1) from my understanding, you have to make sure that the rental income from the property will cover not the original loan, but even the bigger “refinanced” loan is that correct ? Cause other wise you’d be spending money out of your own pocket.

2) in terms of calculating the risk of you having to look for tenants for some time every now and than (at first and between leases), how do you guys make sure that you’re not taking a huge hit financially?

3) finding Fixer uppers that are a good deal....how realistic is that for me to find 2/3 of them a year?

4) last but not least, 15 or 30 year mortgage ?

[Evan Polaski]

@Yosef Ajami

1) yes, you will want to be cashflow positive once the deal is "complete".  So you need to look at gross rent, less operating expenses (taxes, insurance,repairs, management, leasing commissions, etc) and also your loan principle and interest payments.  I would also recommend making sure you are accounting for vacancy and capex reserves in your projected cashflow.

2) This is the vacancy reserve.  5% of gross monthly rent is typical and equates to turning the unit about every 2 years with 1 month down between tenants.  More conservative would be 8.33% which is one month down every year.

3) This depends on your market.  My wife and I do 2-4 flips per year, which is essentially the same product.  There are areas of Cincinnati (where I live) that you can find fixer uppers all day every day, and can probably make some good cash on cash returns from rents, but it will be challenging to cash out all of your investment in the refi because the values are not as strong in these neighborhoods.  

4) this really depends on your goals and the property.  If margins are thin, you may not be able to afford getting a 15 yr (the monthly payments will cause you to have negative cashflow).  If you have the margin in the deal, I personally would go 15 year, because that would mean I have them paid off when my kids are nearing college, I am getting sort of closer to retirement, etc.  You being young, going 30 years means you have more cash in your pocket today to hopefully save and reinvest into the next deal.