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Updated over 4 years ago,
BRRRR vs Conventional Loan: Feedback Appreciated
Hi Everyone -
I'm a new investor and my husband and I are looking at deals with a more seasoned investor in our area. We own a townhouse (investment, not primary) that has about $60k left on the loan and has appreciated to $215k over the years. We want to pull the equity out of this property so that it can work harder for us and also have a substantial amount of cash saved up, in total over $200K cash to invest.
Given we have so much cash, I am leaning toward doing a BRRRR, vs tying up money in a conventional loan. There are plenty of properties in a developing area across town that would make great buy and holds and cash flow even with conservative figures. The last deal we looked at was sold at $100k, had an estimated rehab of $70k and it would easily achieve an ARV of $220k. Rent for $1600/mo. and we planned to cash out refi after a year. I felt like this was a very safe investment based on getting our money back out of the property.
Our partner has used all conventional financing for their properties in the past, and today he sent us some information about a duplex in this same area of town. Purchase price is $320k, and we expect it to rent for $3000/mo. There are a few other duplexes on the same street, as well as SFHs and this is property would be the highest sale on the street by $40k which concerns me. One of the reasons I want to invest in this area is the opportunity of potential appreciation, which I feel like we could already be toward the high end of that given this is a duplex listed for such a comparable high price. No doubts that the area is turning and that this property is in a hot area, but it seems like financing this property with a conventional loan, that I will be trading off potential for more appreciation, for steady cash flow since we're planning to buy and hold. Our down payment of approx $80k will be tied up since we won't have the instant equity of a BRRRR. The opportunity cost of having money tied up is important to me since I keep all my money in stocks otherwise / would want to pursue other deals.
My question is, what metrics should I be focused on when looking at these two scenarios? General advice toward either strategy? Appreciate different perspectives here.
Here are some other metrics for the second property to give further insight: 5% maintenance, 5% capex, 7.5% vacancy, and 10% management fees would still net us $669 mo in cash flow. CoC ROI is 11.7% and NOI is 22k. A five year annualized return would net an 18.5% return. While this is a great return and solid cash flow, I still can't get past the fact that it would likely take 5-10 years for any considerable appreciation to occur, and leave our money tied up.
Please provide your thoughts on general direction, best options and any feedback around figures (new to running these). Thanks in advance, any advice is very much appreciated.