We are torn. One of our projects took longer than expected and it made us think – should we BRRRR it instead of flip it?
For those of you who may not know, BRRRR is an acronym for Buy, Renovate, Rent, Refinance, Repeat. It is basically flipping – except you keep it and rent it out at the end instead of selling it. Ideally, it is a great way to acquire an income-producing asset with little to no money when all is said and done.
I wanted to take you along my thought process and break down how each strategy works. For simplicity sake, I am going to use fake numbers, but it will give you an understanding of what each situation looks like.
Buckle up - it's about to get real....numbers-y....?
Flip Scenario:
The below snip is my deal analysis breaking down a flip example. It provides the purchase price, reno costs, lending terms, holding costs and the selling costs.
To summarize the analysis above, we bought the property for $100,000 and renovated it for $60,000. The hard money loan is for 12 months at 10% interest with 2 points. The flip would take about 8 months to complete from purchase date to sold.
You can see the all-in cash investment to acquire and maintain the flip is $43,133.33 and the hard money loan amount is $140,000 (80%).
We have the ARV (after repair value) at $250,000.
In this scenario, if we were to flip the property, the profit would be $48,466.67. A 26.47% ROI (return on investment). Not bad!
BRRRR Scenario:
If we were to BRRRR, we would use a no-doc loan for a cash-out refi with a hard money lender. The cost to refinance is about $7,000 – this includes lender fees, appraisal, transfer taxes etc. This loan would require a 30% down payment. Here are the lending terms:
I used a mortgage calculator to determine the monthly payment. If the house appraises at $250,000, then the monthly payment would be $1,134. This includes homeowners insurance and taxes.
The rental income that the house would produce is $2,000/month. We would subtract the mortgage payment from the rental income.
$2,000-$1,134= $866/month in passive income.
Next, we would need to consider the costs of refinancing and paying off the current loan.
$140,000 owed on the flip loan + $7,000 to refinance = $147,000 owed
If the value of the home appraises at $250,000, then
$250,000-$147,000 = $103,000 remaining
Subtract the 30% down payment,
$103,000-$75,000= $28,000
Cash out $28,000 + $866/month is passive income
Keep in mind that in this example we have about $43,133 cash invested into the flip if it were take the full 8 months.
$43,133-$28,000 = $15,133
To BRRRR this house, we would have invested a total of $15,133. With the passive income of $866/month, that investment would be returned in 17.5 months ($15,133/$866).
This is how you buy real estate with little to no money. BRRRR’ing is a brilliant strategy. In this scenario, you not only walk away with $28,000 from the cash-out refi, but you will also get $866/month in passive income from the rent. The other plus? The cash you collect from a cash-out refi isn’t considered income, it’s considered a loan. Therefore, you don’t need to pay taxes on that cash. Mind. Blown.
Closing
To recap, if we were to flip this, we would get a taxable $48,466 profit – a high return of 26%. If we were to BRRRR it, we would get a non-taxable "loan" of $28,000 + taxable $866/month + an asset with $75,000 of equity in it. An infinite return.
When you put it this way, it’s a no brainer, isn’t it? What would you do?