How should I be looking at a BRRRR deal?

Question

Bryan O. · Answer

@Nate Pummel You still didn't identify how you calculate your "cash flow". If you mean you have $20/month after paying the loan, you are cash flow negative because you haven't calculated any other costs of ownership.

If you have $4k in the deal with $120 of real cash flow, that's a 36% Cash on Cash return. Good, yes? Of course, you have $4k locked into the deal. How many of those can you do? If you have a good job, maybe that's better for you because you can have less doors to manage and get the same income. If you have plenty of time or low money you can get all your cash back and continue to infinity number of properties with the $20/month setup.

Where are you at in life and what is your end goal? Mathematically, $20/month cash flow with $0 in the deal is infinite returns, but what is your time worth? The math is simple. Learn it, love it, and use it. It's the same for everyone. The goal and path is dependent on you. That's where you have to answer it for yourself.

John Leavelle · Answer

@Nate Pummel

For a moment forget BRRRR strategy.  You should first find you a refi bank and get prequalified.  Find out what are your loan limits, terms, and seasoning requirements will be.  This way you know what your price range, mortgage payments, and holding period might be.  Evaluate properties using conservative income and expense analysis to get target Cash Flow goals.  In my case they must have a minimum of $100 per unit after refi.  They also, must be able to increase $200 after property is stabilized.

You did not indicate how you were financing the acquisition and Rehab part of the process.  Hard Money/Private Money Lender?  I understand you are using a HELOC for your cash input.  But, like @Bryan Otteson indicated you have not shown us how you are calculating your Cash Flow analysis.  It is difficult to provide adequate feedback without seeing your data.

Let me repeat my approach to BRRRR:

1.  Find Lender for refi and prequalification.

2.  Find distressed properties that can be purchased at significant discounts.

3.  Analysis property for potential rental cash flow income and forced equity.

4.  Ensure acquisition, rehab, closing and holding costs total no more than 70% of ARV/Projected Market price.

5.  Buy, Rehab, and Rent property.  Hold for seasoning period.

6.  Refinance and start process again.

Questions?

John Leavelle · Answer

Howdy @Nate Pummel

Yes, BRRRR goal is to get all your cash back to repeat the process.  As Brandon says "Rinse and Repeat".  You need to shoot for 70% (or lower) of your ARV.  Purchase price, Rehab, Closing and Holding Costs need to add up to 70% or less .

Why are you concerned with Cap Rate?  Are you looking at a Commercial property?  1 - 4 unit do not use Cap Rate.  The two things you need to be ensuring is the 70% rule to get your cash back.  And will the property meet your minimum Cash Flow requirements after the refi.  Those are the basis for the BRRRR strategy.

Oleg Shalumov · Answer

You should be getting 100% of you cash back if you have another property to invest in (or at least looking for it). Otherwise I would keep the cash in the existing property to have a better cash flow.

Nate Pummel · Answer

Thank you @John Leavelle!  I appreciate the feedback.  To fill in some of the details, I am pre-qualified by multiple lenders.  I'm using the HELOC for the purchase and rehab.  I guess I was more interested in what criteria constitutes a good deal...should I be more concerned with getting 100% of my cash back or in the after refi cash flow number?  (I'm considering my cash flow number to be all in, mortgage, capex, everything).  Is your 70% number based on the bank?  The banks I have are at 75% and one is at 80%.  I think the rule I am going to set for myself is 100% of my capital back with $100/mnth all in cash flow.  If my cash flow is higher than that I might consider a sliding scale of my refi capital back...so $150/mnth maybe I'm okay with 97% of my capital back (I'll calculate that later).  I appreciate everyone's input!

Nate Pummel · Answer

Thank you @Bryan Otteson and @John Leavelle!  I was using CAP rate just as a basis for comparison so I could do an apples to apples.

So I guess I'm really wondering, after the refi, how do I balance the cash flow and any cash balance I didn't get back?  If I get all my cash back and make $20/month in CF is that better then having $4,000 cash in the deal but I'm making $120/month in CF.  What is your CF requirement if you get 100% of your cash back?

Bryan O. · Answer

@Nate Pummel you don't need to get all of your cash back. That is the target since having $0 left in the deal means you have infinite returns and you can continue to purchase as fast as you can refinance them.

CAP is basically worthless for 1-4 unit properties. What is your CoC return? Is you cash flow actually calculating in your maintenance, management, capex, PITI, and vacancy?

In any strategy, not just BRRRR, you want to stay cash flow positive. That is smart investing.

How should I be looking at a BRRRR deal?

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