ROI for BRRRR Deal (Lower Appraisal = Higher ROI???)

Garrett Christensen · 2021-07-19T13:50:24-07:00

There are a lot of levels of a BRRRR deal. A "Full" BRRRR is usually referred to when the entire initial cash investment is pulled out at the refinance stage. In my deal's case we are pulling out almost, but not all of the initial investment and it's messing with my numbers. The other thing that makes this interesting is that I am in a high appreciation market and thus the cash flow isn't great. Here's the simplified summary: 328k purchase price, 40k rehab, 75% LTV, 410k ARV, $400 yearly cash flow (I understand this is low)With these numbers we will recoup all but 20.5k of our initial investment. That means the ROI is about 2.0%. If the property were to appraise for 390k though, the cash flow would be $1200/year and we would recoup all but 35.5k of out initial investment, making the ROI about 3.4% This goes against all my intuition as I'd obviously like the house to appraise for as much as possible, but in this case it's causing a lower return. Any insights on this?Note: I understand that the cash flow numbers are low and that's likely what's causing this. Calculating the Cash on Cash ROI probably isn't the best metric in an high appreciation, low cash flow market, but I thought this was interesting and wanted to see if anyone had some advice for a situation like this.

Dan Portka

Real Estate Agent · San Pedro, CA · Member since 2019 · 253 posts · 128 votes

5y

@Garrett Christensen you said it yourself, you're in a low cash flow / high appreciation market. so if your property appreciates 5% in a year $410K -> $430.5K you just made $20.5K which coincidentally is exactly how much your initial investment is - you just doubled your money in a year. Sure that money is in the form of equity, but there are ways to tap into that. Don't forget about loan paydown & tax benefits, also. There are other factors to real estate then just cash flow, and in many markets those other factors are where wealth is created.

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Tucker Cummings

Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes

5y

Exactly what @dan portka said. You make money holding Real Estate 4 ways: Cash Flow, Appreciation, Debt Paydown, Tax benefits. You're CoCR is a great metric for one of those 4 methods, but it might be better to look at your entire ROI.

For example, I have one property that I bought for $99,900 with 20% down plus closing costs, which came to $21,609.

$1,245 (Rent) – $549 (PITI) – $124.50 (PM) – $124.50(CapEx + Maint.) – $43.92 (Vacancy budget) = $403.08 Monthly Cash Flow

Looking at my CoCR, that comes to 22%. Not bad.

But when I factor in the appreciation and debt paydown, my total ROI is 131.61%. My 18 months since I've owned it, my total ROI has gone up to 176%. Appreciation is great, hence my returns, but the key is cash flow.

As long as you are cash flowing, you should be good.

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Garrett Christensen

OP

Real Estate Agent · Orem, UT · Member since 2021 · 98 posts · 80 votes

5y

@Dan Portka Thanks, yeah taking into account all the benefits of Real Estate is the key. It is an interesting scenario though, I found that there is a threshold where a higher appreciation yields a higher ROI, and this deal is sitting just below it.

@Tucker Cummings I feel that a lot of the time the industry focuses primarily on cash flow and it is key like you said. As far as scalability goes though, which do you think wins, cash flow or appreciation?

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Tucker Cummings

Investor · Raleigh, NC · Member since 2019 · 433 posts · 743 votes

5y

@Garrett Christensen

The primary purpose for the focus on cash flow is because that’s why people invest in it. Cash is is king in real estate.

- “Equity comes, equity goes but the cash should always flow.” Pace Morby

- “Cash flow is you getting paid while you wait for your property to appreciate.” David Greene

- “If it don’t cash flow, it’s a no go” Me, right now

Buying properties that don’t cash flow is an easy way to lose money in real estate. If the market turns down. You might be left with a property that is negative equity and negative cash flow. This is one thing (of many) that got a lot of people in trouble in the housing crash.

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Jon KellyPro Member

Investor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes

5y

@Garrett Christensen two quick points:

1. Why aren't you including your rehab as part of your investment? If you include the $40k rehab as cash outlay, then your CoC return decreases to 0.7% ($410k ARV) or 1.6% ($390k).

2. The reason this seems counterintuitive is because your CoC return is lower than your interest amount, assuming mortgage interest is 4-5%. You're making less than 2% on this deal. So, the more money you borrow at greater than 2%, the lower your CoC return will be. If you want to check this logic you can reduce your mortgage interest rate to 0% and see the difference in your numbers. If interest rate is 0%, the CoC should be higher if the ARV is $410k instead of $390k.

2 Reply

Garrett Christensen

OP

Real Estate Agent · Orem, UT · Member since 2021 · 98 posts · 80 votes

5y

@Tucker Cummings Hahaha you quote wins, and that's a good point. The risk is much less when you can cash flow, I just think appreciation, at least in a market like mine, is super powerful for scalability.

@Jon Kelly Ok this is a bit embarrassing, I forgot to add that into the calculations for this example, yes that is true. And to you second point, yes that is the threshold I was referring to earlier, just explained in a much better way. Thank you!

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Jon KellyPro Member

Investor · Bethlehem, PA · Member since 2016 · 929 posts · 951 votes

5y

@Garrett Christensen that's the beauty of BiggerPockets. There's no shame in vetting potential deals on the forums first before making offers

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ROI for BRRRR Deal (Lower Appraisal = Higher ROI???)

ROI for BRRRR Deal (Lower Appraisal = Higher ROI???)

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