Ask me about real estate investing
01-11-2024
, 01:55 PM
Quote:
something i've read about and don't totally understand:
say you have a 5m capital base and BRRRR with an average ARV of 500k.
how do you think about your port when the sum of your property ARV's becomes north of your capital base? you're obviously still cash flowing (w whatever slippages from vacancy and maintenance are priced in) but when you're north of 5m ARV is that starting to feel like leverage? or no
i'm still at the drawing board phase and i know it would take years to even scale to that degree, but it's been on my mind. for example, even if i found amazing discounts in FL after hurricane insurance adjustments... my port would still be exposed entirely to a hurricane. so i'm just staying the hell away from FL. same with AZ. if it's too hot in 10 years the vacancies could kill me.
will be re-reading this thread in the meantime
say you have a 5m capital base and BRRRR with an average ARV of 500k.
how do you think about your port when the sum of your property ARV's becomes north of your capital base? you're obviously still cash flowing (w whatever slippages from vacancy and maintenance are priced in) but when you're north of 5m ARV is that starting to feel like leverage? or no
i'm still at the drawing board phase and i know it would take years to even scale to that degree, but it's been on my mind. for example, even if i found amazing discounts in FL after hurricane insurance adjustments... my port would still be exposed entirely to a hurricane. so i'm just staying the hell away from FL. same with AZ. if it's too hot in 10 years the vacancies could kill me.
will be re-reading this thread in the meantime
I'm not totally sure I'm following your question. But I'm going to take a crack at it based on what I think I'm picking up.
If you put $5M to work on BRRRS, you're *expecting* your property values to surpass your capital base. Otherwise you wouldn't do the deal. So with an ideal BRRR, you're looking for a property that you can keep no to minimal cash in after the refinance. That's really the only reason to do a BRRR. Which means, you want to be able to acquire and renovate for like 70-80% of the ARV, then use debt to pull your cash back out. To put it another way, you're *making* the 20-30% in profit (in the form of equity). That 20-30% increases your net worth, but it doesn't increase your capital base until you turn that equity into cash (by selling or refinancing).
Once you have all of this profit in equity on your books, you want to start looking at your return on equity to see if you're actually getting a good return. In real estate, your equity (less transaction fees) is the same as cash -- treat it as such. I think what you will find is that most professional investors either 1) renovate and sell, or 2) buy stabilized for cash flow. So why don't many professional investors BRRR? Because once you book the big equity gain from renovation, the RoE almost always looks pretty bad. There's no sense in holding a property that is yielding 5% RoE when you can take that cash out and put in risk free treasuries at the same rate of return. Make sense?
I run a similar process in my new construction work (but I don't call it BRRR bc no serious professionals in RE use buzz words like that lol). I build duplexes with 100% cash from investors (no debt), stabilize them, then refinance to 70% market value. That pulls back about 93% of investor capital, but leaves the equity gain of 19% in the property. I'm doing this for now on a cyrstalization structure designed for long term hold. But admittedly, I don't think this will solve the fundamental RoE problem unless we can reliably get property appreciation every 5 years that allows us to pull out more cash.