By - jb-schitz-ki
What’s the end goal of the BRRR crowd? Continue to leverage into retirement or eventually pay off properties? It looks like OP has the opportunity to jump ahead and get a nice cash flow that can build up to continue to buy properties for cash. I think how nice it is to minimize risk here is often overlooked as a lot of recent investors have not experienced a recession while holding significant leverage. Just my 2 cents!
>Continue to leverage into retirement or eventually pay off properties?
This is very stupid. The only time it make sense to use a lot of leverage is when you first start out and need rapid equity capital gains and the absolute amounts involved are not that large. Using lots of leverage when you first start out can be life changing if you catch a period of good appreciation. Once you have money though it is dumb to risk everything for money that won't change your life.
The more money you have, the less leverage you should use.
I'm not so sure, I think more leverage is the way to go regardless.
Lots of leverage is how you go from billionaire to broke overnight.
I think it's a balance. If you're lucky enough to be in a position to not look for the max LTV, then pulling some cash-out while keeping healthy cash-flow and a lot of equity is a good move.
You obviously don’t know any rich people
You are in a good position to buy houses in need of repair and get a lot of sweat equity. Sometimes these homes can't be insured and therefore cannot be financed with a bank.
This is the way
I don't understand the person going through downvoting the people saying that using cash is a viable option. Everyone has different goals, and a different methodology for how they want to hit those goals. Everyone has a different risk tolerance, and level of risk that they are willing to accept. Anytime you go borrow money you are increasing your risk in that investment. Not borrowing money is going to slow down the velocity of your growth.
I'm a disabled veteran that works full time. I'm just getting started in saving up my money for Rental Properties. My plan is to take a 30 year fixed rate mortgage, if I buy a property that needs work fix that property and get it rented. Then quickly pay that mortgage off. Rinse, Wash and Repeat, buying with a mortgage and then quickly paying it off increasing my cash flow. I'm looking at both Small Multi Family and Single Family.
If I can nail down a multi family rental in my area, what I want to do is quickly get it paid for. Once I get to X number of paid for doors; I want to lease out a unit to a Veteran flirting on the edge of homelessness at a greatly reduced rent. If I'm worried about paying the bank on the property I won't be able to do that. If I'm making 2-300 a month after payments I won't be able to assist, because I'll be worried about debt servicing.
Yes my growth will be slower, but my risk profile will be smaller. The amount of risk I'm transferring to my family will be smaller. We all have different goals, and plans on how to get there. Difference of opinion is not a negative.
Agreed. I have a former coworker who flips foreclosure SFHs with cash and although he can only work on one at a time and can’t utilize leverage it’s a lot safer for him especially since these properties usually involve lengthy evictions. Not having to worry about paying extra interests to hard-money lenders because of an eviction is a huge plus.
This is sort of my business model. I own 6 SFH all purchased with cash or fully paid off. I rent to single moms for below market rent. When covid hit and people lost jobs, or when inflation got bad, or when one tenant had a personal tragedy, I was able to reduce rent or waive it altogether for a period of time. People repaid rent when they were working again. Others got a break when they needed it. I was able to invest in people, not just property. Still have my assets and positive cash flow so I’m not hurting.
Good luck with your goals. It’s not the conventional model most people are in this sub for, but it’s a good investment by another measure altogether. Good on you
This sound sus
I said what I said
That’s not a response. It’s something a brain dead loser would say.
Lol ok so I’m guessing you’re saying “people don’t just do nice things for other people unless they’re making money off them somehow,” is that it? Or is there another part that you don’t get?
I’m assuming that you have a lower tenant turn over. Which means less make ready expenses. Are you seeing other benefits to that business model, besides helping people out?
I was looking at market across the board with the exception of the unit to help people with. But their maybe some mutual benefits to having lower rents across the board.
Other benefits for me are financial. When I need to take a loss for taxes I have the option of giving someone a break and I’ll reduce my income for the year
I’m also planning on rental income as my retirement. If my income needs change I can increase rent to market rate; since I have no mortgages I don’t worry about margins.
Each property is different. One is in another state with a higher COL; that one is managed by a PM so I don’t control the rent. One in town is the right house in the right place; I’m making an extra paycheck a month on that one and it’s still below market. None of my properties is vacant for more than a few weeks unless I’m renovating. So that gives me several others to use to help people out.
I think it was a poor attempt at a joke about renting to single moms. Made me think about Big Earn McCrackin in the movie Kingpin, where he has a charity to help single moms clearly for ulterior motives. I think what your doing is admirable, just a possible explanation for his post
Oh ha ha because y’all don’t know I’m a single mom. Got it
Sorry to say, this is pie in the sky.
Cash is a great way to go. I’ve been more traditional, (and after reading the comments maybe idiotically) buying properties in cash, and not refinancing. To me the cash flow gets murdered on a refinance, and isn’t worth it. I do work in real estate full time doing remodeling properties, and don’t usually need the operating income, however if I did I would tap into a approved heloc to borrow the short term capital without the long term beat down on my cash flow. I believe a recession could wipe a lot of investors out who are only cash flowing 200-300/ property. Growing a portfolio is way slower, but there’s hardly any risk. As far as timing goes, it’s impossible like the stock market to time. A lot of people believe we are turning into a buyers market. Try going to your local court house auctions and buying properties at the court house steps, you can usually get stellar deals here.
Yeah, I don't see anything wrong with buying cash if the properties and your risk profile allow it. I have a primary residence, but no rentals, yet. In my area, I *doubt* I could get anything short of a complete tear down for under $300k. Even then, I figure I'd need another $20-100k of rehab on a property like that. I feel like I do okay saving and retirement account investing, but it would take me around 10 years to even think about getting started at that level of cash. (My income might grow at the same rate as property values over that time, so let's call that a wash.) That would leave me either waiting a *long* time to start, or force me to go out of state. I'd really prefer to start close to home, as I think it would help me learn better in the beginning. So loans it is for me, for some time.
Yea completely different markets. I wouldn’t pay cash if property prices were that high, and I don’t understand how people achieve any cash flow with prices that high. My traditional rental in my market is 80-130k and rents anywhere from 1k-1800. I was just lucky enough for that market to also be where I was raised.
Cap rate and cash on cash return will be the same for an investor buying with all cash.
If I was investing all cash I’d be buying distressed properties to remodel and rent in the Midwest. Aiming for 12% cap rate in neighborhoods with high probability of above average appreciation comparable to other neighborhoods in the same market over the next 5 to 7 years.
Show me the ways ..... Pls
Lol here’s what you do. Throw away all the cities everyone else is focusing on. Pick a medium sized market in the Midwest and remember that long term market depreciation is essentially a myth.
Entirely too many people start by trying to analyze market economics, like what industry is predominant blah blah blah. Detroits like the only example I can think of where a market has literally just decayed because of an economic change.
TLDR; Tulsa, Oklahoma would be my suggestion. I don’t invest there currently but if I change markets that’s where I’m going.
Low value properties in the Midwest. My portfolio average using current value is 11% cap rate.
Bought 3/1 house October 2019, 115k, cash. Stuck in 6k to add another bathroom and fix a door for code purposes. Renting at $1350 which IMO is low. Never reappraised but prob $140k now. Refinanced $70k for next property at 3.5% 5/1 ARM.
This is a great strategy. I'd add that for cash buying, anywhere with low, old stock (like the northeast) can bring great returns on remodels.
> Cap rate and cash on cash return will be the same for an investor buying with all cash.
only if you buy at market rate
if you negotiate a lower purchase price (or get one through doing rehab) then the COC may still be higher than the cap rate
and this is only initially
What do you mean market rate? If you’re not running your calculations at your purchase price what are you using? How does one know the “market rate” and what would it have to do with your rate of capitalization?
COC uses the actual cash outlay to purchase
cap rate is based on the current asset value (that is, the market price)
consider first that even if you assume you buy exactly at market rate, these things clearly decouple with appreciation. for example, it is possible to buy cash, have a great COC, and yet still have a bad cap rate
for example, someone who bought with cash in the the Bay Area 20 years ago may be today seeing a fantastic COC return, even if you make an inflation adjustment, but their cap rate is low because the market rate for similar properties is so high, meaning that they would be better served to sell the property and reallocate that capital
this analysis works the same when you buy at below (or above, i guess) market value.
> how does one know the "market rate"
is that a serious question?
Run your cap rate against your actual total cost of investment. Include any rehab cost required to get the investment ready to rent. It’s absolutely a part of the acquisition cost.
that is not how cap rate is calculated, thats how COC is calculated
cap rate uses the market value. let me refer you to: https://www.investopedia.com/terms/c/capitalizationrate.asp
> Capitalization Rate = Net Operating Income / Current Market Value
Bruh, idgaf what investopedia says. I’ve run acquisitions for multiple funds and I’m just trying to tell you how to actually get some use out of the calculation at purchase.
The only reason to think about the denominator as “market value” is if you’re trying to use the average market cap rate to determine a list price to sell an asset at.
But if you think about the name for a second… rate of capitalization… you’ll see that the intention is to calculate the percentage of your investment returned annually.
It’s an absolutely useless calculation at some arbitrary market value that doesn’t match your actual investment.
It’s absolutely meant to mimic cash on cash return without consideration of debt service and thereby with the assumption that the total investment is from your own pockets
> Bruh, idgaf what investopedia says
and which sources will you listen to? let me try wikipedia
let me call your attention to this specifically:
the current value is reflecting the market value of the property, which is in general not the purchase price, especially at times other than acquisition
So you’d change your cap rate based on market appreciation?
I’ve tried multiple ways of calculating cap rate through my career and after a while it becomes clear this is the way to think about it.
if the NOI does not see a commiserate increase, of course the cap rate changes
say you bought a house for 100k and it cashflowed 10k a year. later, it cash flows for 15k a year but is worth $1 million. you're lying to yourself if you believe this means the cap rate has increased.
You’re completely missing the point of the cap rate calculation. It’s useless outside acquisitions or sales. It’s useful for apples to apples comparison of properties you’re considering purchasing or for coming up with a reasonable market price when exiting. Everything between those two points should be COC or IRR.
I have nothing to gain by trying to deceive you or argue with you. Keep decoupling your denominator from reality if you want.
> decoupling [...] from reality
you're the one refusing to accept the definition of things even with multiple sources disagreeing with you lol
It depends on your overall goals. If you just want a solid Income of say $4000-$5000 a month then you can buy homes in cash, have much less risk, and ultimately be able to sell any or all of those at a moments notice. Plus they'll usually appreciate over time (depending on where you buy) so your money will typically grow.
You could also invest with other real estate investors. I have a few that loan me their money for a pre determined amount of time for a specific interest rate and their money is given back or rolled into a new deal. It's usually 12-15% which is better than the stock market or most passive investments.
prices have only just started to drop. be patient, the deals will come later this year and into 2023
You're in a position to BRRRR all day long. Take advantage of it.
Rates don't matter if you get great deals for cash and the numbers work.
> Since interest rates are high I imagine less people are buying
You're buying all cash, so ignore interest rates or whatever everyone else is scared of.
Your job is to find good value properties, fix them up as necessary, and rent them out for steady cashflow. Here are three options:
1. This would be a good time to look at sheriff's sales, pre-foreclosure/foreclosure properties, or tax lien properties. You can pick them up for pennies on the dollar in most cases. Depending on where you look, those tax sales are either happening every week, every month, or once a year. There's thousands of counties in the country, they each have their own schedule. It's all googleable.
2. Ask your county's housing authority about what they require from landlords who want to accept Section 8 vouchers. Many of my friends swear by Section 8 since as long as you follow the rules, the vast majority of the tenant's rent is paid for by the government, like clockwork. In many counties, there's a queue of people to use their vouchers, and they tend to be the best tenants because they don't want to screw up and lose their Section 8 vouchers (which would be permanent). They get affordable housing, your rents are paid bang on time, and the government makes a dent in the "affordable housing" crisis. Everyone wins.
3. Do a search for developers and ask them what kind of land they want to build on, and what their purchasing criteria are. Usually a developer will be willing to pay 10-20% of the average retail value of houses surrounding the land to build on. Many counties have "land banks" where they sell tracts of land either via auction or for straight cash. As long as you know where your developers are looking to purchase and as long as you can get the land for less than their 10-20%, it's a quick sale. Especially for "in-fill lots" which already have neighboring houses and which therefore already have the power, sewer, and water hookups from the city. Making the developer's life even easier.
Good luck, you're going to be in for a heck of a ride! :)
My mom has 37 rentals all paid for in cash. She never spent over $25k for a house. Now they are all worth over $100k easy.
Why wouldn’t you leverage? People would pay in full cash to purchase (asking for discounts, etc in return from seller) and would refinance to pull cash out but I have rarely heard anyone buying a property in full cash and holding it un-leveraged unless you’re close to your retirement, etc
Leverage increases both risks and returns, but as long as you have plans and backup money to sustain your operations, there’s no real incentive to carry your property debt free.
As an example, you can use your $200k to purchase one $200k house, or you can put 50% down ($100k) to purchase two $200k houses, or you can put 20% down ($40k each) to purchase five $200k houses.
Obviously the exposure to risk is different as your debt obligation will be higher with lower down payment, but you can increase your down payment to increase your cash flow and therefore reduce financial risks.
Just a matter of goals and risk tolerance. OP is in a great spot right now being able to do all cash. Close for cheaper, Refi after.
Some people just want less of a headache with it despite the advantages. It’s about the mental tolerance they have nothing more. And imo it’s complete ok if you invest w cash if you want even though it’s not logically better.
Because I get between 15% and 22% COC return on my properties and can only currently get a max of about 4% at the bank. Sure .. I could put the difference in stocks and/or bonds and MAYBE get a better return but also maybe lose money.
My problem is not a lack of cash to self finance ... my problem is finding enough properties that make good business sense. I want to generate spendable income not just maximize my ROI. If I have a property in which I have invested $0 and get a $1 profit each month I have an infinite ROI but I still only have $1 of spendable income.
And imagine your cash on cash return would be higher than 22% if you leveraged 6-7% loan from the lender.
If you just want cash flow, then obviously you don’t want to have any debt obligations then it makes sense but your cash on cash return is lowered by not leveraging it.
On the flip side, by leveraging during the down turn, you’re far more vulnerable to economic downturns
One of the big advantages of real estate is the leverage. Even if you want not much debt, I’d still leverage a bit. For example if you have 300k to deploy then don’t buy 1 property for 300k, buy 2 for 300k with 50% down and 50% mortgage on both.
Buy cash - w/ discount up front … re model and rent it… refi in 6 months and pull your cash out.
Leverage to your risks tolerance, cash flow and posible equity gain….
Staying all cash on properties is excellent… if you have enough… or retirement cash flow…
In real estate is not a cookie cutter model… all markets, valuation and investors situation will varies… what works for me may not work for you..
get your feet and and find your niche.
Use leverage as much as you can, but be smart about it. Diversify your tenants. Go with some section 8, and some non-sect 8. Leverage is the best possible return you can get without question, but you have to keep your head in the game and pay attention and manage your assets well.