45% Cash-On-Cash Return — How we hit these numbers on our latest rental
This past week, we hosted a real estate meet-up and focused on three different strategies in buy–and–hold investing: Turnkey, Nomad, and BRRRR. I've purchased rental properties with each of these strategies and no single strategy is necessarily better than another. I firmly believe each have their time and place. Today, we're going to revisit the real numbers, get "into the weeds" a bit, and discuss why this specific strategy fits well with my situation. Keep reading to see how we're getting a 45% cash on cash return and approximately a 400% ROI — oh, and I spent about 40 hours total on the project.
We're big fans of Bigger Pockets here at the D | H Team. BRRRR is an acronym they use a lot that perfectly describes my favorite real estate investing strategy. So lets dig in.
Buy - $70,000
I purchased the above property for $70,000 with a hard money loan through my friends at Merchants Mortgage. Merchant's loaned me 90% of the purchase price as well as 90% of my fix-up costs on a 6 month loan for 2 points and 10% interest.
Purchase Price = $70,000
Rehab Costs = $32,000
Loan amount = $91,800 (90% of 70,000 + 32,000)
Down Payment = $10,200
Cost of the loan = $6,394 (2 points + 10% interest for appx 6 months)
Rehab - $32,000
The rehab took just about 4 months. The key to our success was having a good plan going in and having a great contractor on board. Our contractor wasn't the fastest, but I trusted him enough that I was able to stay hands-off throughout the process. He gave us a fair bid and has a great reputation. When a problem popped up, I'd get a call and we'd solve it together. And, he shot me photos once per week of the progress. Of course we ran into some unexpected issues with the rehab, but that's a given when working on any property. All in all, I couldn't have been happier with the process.
Remember, of this $32,000 spent on the rehab, I only brought 10% of this - $3,200.
Rent - $1,150/month
We hired a local property management company to handle the rental for us. They were able to rent the property for $1,150/month and they charge a flat fee of $90/month to manage the property.
There are a number of different ways to handle refinancing a property in this scenario, but I'll go through my specific situation. I completed what is called a "rate and term" refi on this property rather than a traditional cash-out refinance. There are a number of reasons for this, but the two big ones for me are that there is no title seasoning period and I don't have to pay the higher interest rate that is typically associated with a cash-out refi. Additionally, the hard money lender holds my down payment in a reserve account, allowing me to refinance the down payment amount as well.
Here's how the Refinance numbers shook out:
After Repair Value = $138,000 (This is what the property appraised for)
New Loan Amount = $102,000
My new loan of $102,000 pays off the previous hard money loan of "$102,000." Remember that down payment reserve account I mentioned? Here's where that comes into play. I initially borrowed $91,800 and put $10,200 down. That down payment is held in a reserve account, therefore allowing me to refinance for 100% of my cost. This is a key function of the hard money loan. This means I got back my initial down payment of $10,200.
Refinance cost = $2,000
New monthly payment (PITI) = $720
Now, repeat the process. We just bought a duplex that we hope will work out in a similar way.
Let's put all of these numbers together and see what the returns and monthly cashflow look like.
ARV = $138,000
New Loan = $102,000
Equity = $36,000 ($138,000 - $102,000)
Total money left in = $9000
($6,394 of financing costs + $2,000 of refinance costs + about $600 misc holding costs. We'll say $606 to get us to round numbers.)
Rent = $1,150/month
Piti + Mgmt = $810/month
Cashflow = $340/month
Cash on Cash return = 45% ($340 x 12 months = $4,080/$9,000)
Return on Investment (if sold for appraised value) = 400% ($36,000 equity / $9,000)
It's important to note that we haven't accounted for some long term expenses in these return numbers. Typically, I'll escrow 10% of rents for maintenance and 5% for vacancy. With a complete remodel like this, our maintenance costs will probably be below this amount, but it's a good rule of thumb.
Summary Pt. 2
Why does the BRRRR strategy work so well for me, in my current stage of life?
I have limited capital. This means I need to use my money, then get it back out so I can use it all over again.
I'm young, and I feel OK with this level of risk.
I'm comfortable with leverage.
I have good relationships with contractors. This allows me to be more hand off and spend my time looking for the next deal, rather than swinging a hammer on each property.
I hope this has shed some light on one avenue for real estate investing. We'll keep them coming. Don't hesitate to reach out with questions or comments.