In my area, most 3br+ single family houses can't get 10% ARV after BRRRR. Smaller house or multi-family can. In the case of $50K out of pocket, it is 14% ARV, appreciation is $20K.
I have to full time job, this makes big difference. The reason I avoid multi-family is because it has much more management work. My tenants of 3+ br stay 4+ years on average, but if it is .e.g 4 units of mixed of 1br and 2br multi-family, you mange 4 families instead of 1, and turnover rate of each unit is less than 1 year according to my observations on my neighbor. If I have a PM to take over management work, the extra profit of multi-family over single family goes to PM's income. The reason I avoid 1br or 2 br single-family house is because you spend same number of hours on small property but get less income per hour (though higher income per dollar invested). Besides you can only have 10 fannie mae / freddie mac loans so I don't want to have 10 very small loans if I hold 1br or 2br houses. I assume that fannie mae / freddie mac loans are better than any other loans so you want to max the 10 first, correct? These are my thoughts am I hope to hear from your opinion.
On a side note, I tend to over-spend during rehab because I prefer make everything new or in good condition to avoid potential service calls from tenants as much as possible. I also install all hurricane proof windows and doors which you only get $1.5K return out of $15K cost just to buy myself peace of mind during hurricane season. The return is that the service calls I got from tenants of 5 rental properties is less than repair/maintenance requests from HOA of 1 property (only 1 out of the 5 properties has HOA)
200 hours of labor, $50K out of pocket, 14% ARV, $10K cash flow and $20K appreciation -- that is 60% return according to your formula. It doesn't meet your expectation, but for me to achieve this number, I can only do 1 BRRR every 6 month unless I change my strategy. I have $300K cash right now and my annual saving is $140K. So how do I turn these money into profit quickly but not take too many labor hours? I am an inexperience investor looking for directions from you guys
Originally posted by
@Dan H.:
Originally posted by @Weng L.:
Originally posted by @Dan H.:
I agree with the posts that indicate the cash flow is poor for the investment amount.
However, I invest in a poor cash flow, high appreciation market. We typically do BRRRR to get immediate return. I do not understand why it would take you 5 years to get your money back on a Brrrr. Cash flow is only one factor that determines if an RE Investment will be a good investment. Your example does not have any value add. However, how are the appreciation prospects? I have purchased cash neutral properties that due to rent appreciation now have over $1k cash flow a month (that particular property also had close to $100k value add). In addition, every RE that we have has appreciated over $1k/month over the holding period.
In summary, I would not make a purchase decision solely on cash flow unless it was in a different league than you example. You example needs to be evaluated using all sources of return.
Good luck
I believe when @Joe Villeneuve says "negative for over 10 years", he means $800/month cash flow (2700-1900=800) and $100,000 upfront investment, not counting appreciation.
I hold 6 properties, average appreciation per property is $20K/year. It may not be that much from now on though.
With BRRRR, I get about $800-$900/month cash flow with $50,000 out of pocket (So it is 5 years to get the $50,000 back). But I spent may be 200 hours on it. If I buy turn-key property and new construction, I pretty much spend no time on it. So hourly income of buying turn-key property is much higher than BRRRR. Do I evaluate it correctly?
You are leaving $50k after the refinance? if so, I hope that is less than 10% of ARV. Assuming it is and the turnkey is purchased at 80% LTV, The BRRRR has an initial cost less than 50% of the turnkey. The time to pay the BRRRR off via cash flow should be half as long as the turnkey. Ideally you extract all of your investment at the time of the refinance, but I realize that is not easy.
Now look at what the higher LTV does to your return. A LTV at 90% of ARV produces twice the return as a 80% LTV given the same cash flow/appreciation (profit).
in your example $900 * 12 = $10.8k of cash flow and $30k from appreciation for a total profit from these 2 sources of $40.8k. This profit does not include equity pay down. I am also not trying to imply all profit sources are equal (appreciation profit is more difficult to access).
With a $50k investment (90% ARV LTV) produces a 81.6% return from those 2 sources.
with a $100k investment, the turnkey, (80% ARV LTV) produces a 40.8% return.
As a reminder, the goal of a BRRRR is to extract all of the investment out. A BRRRR that traps 10% of ARV, is only a moderately successful BRRRR. The BRRRR that trapped 10% of ARV, also produced 10% of ARV in sweat equity. In the case of the example that trapped $50k, $50k of sweat equity was produced. Not a bad amount of sweat equity on 200 hours of labor. The increased return provides on going value for the sweat equity.
Good luck
