BRRRR: Deal Analysis and Strategy Training
The BRRRR (Buy, Rehab, Rent, Refi and Repeat) real estate investment strategy is a powerful way to build wealth in real estate quickly! But there are many pitfalls that investors who don't know what they're doing regularly fall in. This training video goes through the BRRRR strategy in detail, then shows you how to perform deal analysis in minutes and instantly know which deals are a “go” and which deals are lemons. Watch this video to learn more about this method for analyzing real estate deals.
Video Transcript Below
All right. Daniil Kleyman here and this video is going to show you how to analyze your BRRRR Deals. And if you don't know what this is, we're going to talk about it. It's an incredibly powerful real estate investment strategy. I'm actually going to give you a link to a full training video on the strategy as well, but we're going to talk about how to analyze your deals in minutes, how to avoid the common pitfalls that most investors seem to fall in to when doing these types of deals, and lastly, obviously, how to build lasting wealth with this strategy.
This is one of the most powerful wealth building strategies that I've ever encountered. It allows for rapid portfolio building. If you want to build a portfolio of income producing properties then this is something you should be paying attention to. It allows for rapid portfolio building using a limited amount of cash or private money. So it's a very unique strategy because it does not rely on you continuing raising more and more private capital. You can literally build multi-million dollar rental portfolios with no long-term partners or joint venture partners or long-term private lenders. And along with it life changing cash flow.
I absolutely love this strategy because it changed my life. This strategy was responsible for the first roughly 70 units in my rental portfolio, which allowed me to never have to work a day again in my life if I choose not to. But for most people even just 10 to 20 rental units, and by the way 10 to 20 rental units that have long term financing on them, not over-leveraged, but long-term financing. These are not 10 or 20 free and clear units. Just 10 to 20 moderately leveraged rental units can allow most people to walk away from their job. You can run that math on your own. Income right now from your job, if you're working a job. Take an average rental cash flow of $350, and figure out how many $350 a month units you would need to replace your current income. For most people it's 10 to 20 units. It's very easy to do.
This strategy takes advantage of the concept of velocity of money, to help you roll over the same cash, the same small amount of cash in to deal after deal after deal. The beauty of the strategy is that it works in the flat market, a market that's not appreciating. You can even make this work in a declining market. And we are potentially headed in to a market that's going to decline at some point in the next years, and I actually look forward to using this strategy more in a declining and in a down market. And I'll show you why in a second.
And this strategy allows you to build a portfolio with little to no money of your own tied up. If you execute this strategy correctly you will have no money of your own tied up, yet you're going to have an at least 20% equity position on paper versus the value of the property, which again, will protect you in a down side. Again, if you have 20, 25, 30% equity position in your property, you have 20 to 25 to 30% cushion versus the fall in that property's value before you become underwater.
There is actually an in-depth training on every step of this strategy located at, if you go to RehabValuator.com/developers. There is an entire real estate development playbook that I am putting together and I am adding more and more content. It is all free content by the way. But today's training is going to show you how to analyze your deals properly, how to avoid the mistakes that most investors make, and how to line up your financing consistently on the short-term and on the long-term side. So today we're going to dive deeper in to the numbers.
Before we do that, let's do a quick recap of this strategy. And again, the video if you go to RehabValuator.com/developers there's a longer video, breaking down every step of BRRR. It's a lot of R's, but it stands for buy, rehab, rent, refi, and repeat. But let's do a quick recap.
Step one is buy. You're going to find a single family or a multi-family building in need of a renovation. Maybe it requires a cosmetic renovation. Maybe it requires a full rehab. I personally am a fan of gut rehabs because you can typically buy them much cheaper versus after repair value, and create more sweat equity versus buying cosmetic rehabs. The key here is getting the deal at the right price, and you'll see why in a minute. Your total basis in the deal should be below 80% of after repair value. After repair value being what is the property worth once you've renovated it. The way you calculate your total cost basis is what does it cost you to buy plus your closing costs plus the costs of your renovation plus all of your holding costs. That all together should be below 80% of after repair value. And note, buy in this case can also mean buy land. Something that I've been doing a lot lately is ground up development. Instead of buying buildings you can buy land and use this strategy.
Then, once you buy you need short-term finance. Right? You're going to purchase the property with short-term financing, and that financing can come from cash. Can come from your own cash. Can come from a private lender. It can come from a credit line. It can come from your own credit line, a private lender's credit line, a friend's or a family members. It can come from seller financing. Seller financing is a great source of other people's money. If there is a house that you buy and you can say to the seller, “Look, I can pay you $40,000 cash, but if you seller finance to me for six months or 12 months, I can pay you $45,000 or $50,000.” They become your bank and you don't need to bring any of your own cash in to the deal. Now, you will still need money to rehab the property and so that's going to have to be raised elsewhere.
For a true 100% funding you will need somebody to finance your renovations. So if you're dealing with a private lender make sure that they finance your rehab as well. And just as a side note, out of all the options I listed, private money my view is the ideal short-term lending tool for these deals. The beauty of this strategy if you execute it correctly is that you can take the same private lender, as you will see in a minute, you can take the same private lender use them for short-term funding on one deal. You're going to rehab, rent the property out, refinance in to long-term financing, and pay your private lender off. Then you can take that same private lender, that same amount of money that you just paid them off and roll that money in to the next deal, the next two deals, the next three deals. Hopefully that makes sense. This will become more clear as we go through the strategy.
By the way, we're recently released a fantastic training on raising private money. It talks about how to find legit private lenders, how to build rapport with them, how to structure your deals, how to create presentations that get your lenders to open up their checkbooks, and takes you all the way through closing the deal. So far the people that have signed up for this training absolutely love it. You can find more information at artofprivatemoney.com. All right? So let's keep going.
Then you've got your short-term funding. You close on the property. Then you're going to rehab it. So this is going to be a rental property, so keep the finishes in line with what your market expects and don't overdo it. If you're doing a class C rental or a class B rental, don't do over the top finishes because it won't fit in to the market. On the other hand, if you're doing a class A type product, which is what I have been doing mostly over the last couple of years, then make sure that your finishes are in line with what your tenants will demand. Granite countertops, stainless steal appliances, brushed nickel fixtures, you know? We're doing really cool stuff lately. Wine racks, Nest thermostats, Ring doorbells, et. cetera.
Typically, unless you're buying something way below today's fair market value, you'll be able to create the highest appreciation through biggest rehabs. As I mentioned earlier, the bigger the rehab the more appreciation you can force in the property and the more sweat equity you can create, which is crucial to this strategy. And when you rehab is done you're going to go to a bank, a local community bank. And we'll talk about that in a second. You're going to get this property reappraised. So being able to show them that you've made major upgrades to the property, like system upgrades, electrical, HVAC, plumbing, but also exterior envelop upgrades, new roof, new windows, new siding. Any major upgrades that you can demonstrate a higher appraisal, along with any cosmetic upgrades you've made. Right? So rule of thumb, the bigger the rehab the more value you'll be able to create. And again, rehab can also be built. So if you are buying land then you're building and then renting. So this applies to new construction as well.
So my rule of thumb when it comes to rehabbing, a lot of investors go in and do the bare minimum to the property. They invest the bare minimum amount of money. Just enough to make it livable and that's I think a recipe for disaster, because you're going to have nonstop maintenance calls for as long as you own this property. I like to go in and do all of the work required to make sure that you have absolutely zero maintenance calls for the next five years, right? I go in and I redo everything that needs to be redone top to bottom. The other reason I like to do that is because then when I refinance I get all that money back out on my refi, whereas if I'm reinvesting that money six months or 12 months from now I'm putting my cash flow back in to this deferred maintenance. Two very different worlds. Put the money in now. Replace everything that needs to be replaced. Renovate as much as you can. Create a maintenance free property. And then get all that money back out on your refi. So better to spend the money before you refinance and then roll it over in to the permanent financing.
The alternative is to pay for things in cash later from your cash flow. And all of sudden, you think you're getting $500 a month in cash flow and all of that money, you know? You replace one heat pump and that's your cash flow for the whole year. And then you're going to rent the property out, right? Step three is rent. We typically start showing the property to potential tenants well before we complete the renovations. Usually by the time the renovation is complete I have leases and deposits on file and tenants are ready to move in just as we're finishing the renovation.
And this allows me to proceed to step four much quicker. Step four is refi. You've bought the property, you've gotten your short-term financing, you've renovated it, you've found the tenant, you've put the tenants in to the property, you've got a lease in hand. Now, you're going to a bank or a source of long-term funding and you're going to get all of the money out so that you can pay back your short-term financing, whether that was your own cash or your own credit line, a private lender, a short-term loan from a bank, et. cetera. You're going to fully pay off the shirt-term loan and put long-term financing in place. I typically like to go to a local community bank or credit union for these loans. This is primarily where I've gotten all of my long-term financing.
So why local banks? And by the way, in the more detailed training that I gave you a link to I talk about this in more detail. But basically local banks are what's called portfolio lenders. Portfolio lenders essentially keep the loans that they generate on their own books. They don't seel these loans in to the secondary market, to wall street, which means the loans that they generate don't have to check very strict specific boxes. These banks can essentially create their own lending criteria and they're much more flexible when it comes to dealing with investors than the big banks like Wells Fargo and Chase. Local banks typically will not limit you on how many properties you can have financed.
They typically will not have seasoning requirements either. At least banks I've come across, will not require you to own the property for six, nine, or 12 months before they will refi. All they care about is what's the value of the property now and what's the income that that property generates? What's going to be the net operating income and the debt coverage ratio on the new loan that the bank is going to give? And I'll show you how to run those numbers in a second. But the big take away is that local banks in this scenario will lend you money based on the percent of the new market value, not based on your costs. So just because you bought for 50 and spent 20 to renovate, they won't lend you based on 70. They're going to lend you based on the new appraisal, which hopefully is 100 or more. That's key.
Let's look at how a typical deal would look. And I hope you're paying attention. Maybe get your calculator out. This should be pretty clear, but you really got to pay attention here. So let's say, and we're going to use really clean simple numbers for just simplicity's sake. This works whether you're buying a $50,000 house, a $500,000 house, or a $5,000,000 apartment building. As long as the relative numbers work the way I show you. So for simplicity's sake let's say you're buying a house for $50,000. You found a property that needs renovation, you got a good deal on it. You're going to have 15,000 bucks in closing costs and then you're going to put about $20,000 of renovations in to the property. You'll have another $1,000 worth of holding costs and then you're going to get a private loan on this deal for three months from a private lender and you're going to pay 8% interest for three months, that's another $1,400.
You're total cost basis now, your purchase plus closing plus rehab plus holding costs, including your interest, is now $73,900. That's the total money spent on this project so far, but because you've created value, right? Because you found this property cheap, you found it off market. It needed work, so you got a big discount on it. And look, in today's market this is not as easy to do as it was a few years ago. You have to work harder to find deals where you can make this strategy work, but those deals are still out there. They're just a little tougher to get now than they were back in the good old days, 2011, 2012, but these deals are out there. So this is your total cost basis. You're going to rent this property out for let's say $1,000 a month and the new appraisal when you take it to a bank is going to come in at $100,000.
So you're going to say, “Okay, great Mr. Local banker. Property is worth $100,000. Why don't you give me a loan for 80% of that.” So now you're going to get a new refi loan for $80,000. You're going to pay 3,000 in closing costs on that $80,000, and the math here is not 100% correct, but to keep it simple let's say that after your closing costs you're going to get $77,000 in loan proceeds, from the new loan. That $77,000 let's you pay off your private lender in full, including the interest or let's you recoup your own cash that you spent, right? $77,000 pays off the $73,900 right here, assuming you had a private lender and loan you're going to pay them off the purchase and the rehab costs, and then you're going to pocket the difference between the loan proceeds and then what you've spent on the deal. So 77,000 minus 73,900, you're actually $3,100 in your pocket. So it's pretty great.
The net result of this is that you fully repaid your private lender or paid off your own cash investment, put that money back in your pocket or in your private lender's pocket. You have a property that's worth a $100,000 where you only owe 80 on it. And hopefully you have an asset that's cash flowing, and we'll see if it's cash flowing in a second.
And then step five is repeat, right? As I said, the result of step four is that you paid off your short-term financing in full. Now you can take that money and put it in to the next deal and the next deal and the next deal, and just keep rolling that money over. That's the power in the strategy. You've also got now a cash flowing asset that brings in positive cash flow. And you've got no money tied up in that property. On paper you have 20% equity, which is the difference between the value and the new loan. Now you can take that initial money, whether it came from your own pocket, your own credit line, or your private lender, and rotate it in to the next deal. But here is the thing, our BRRRR analysis isn't complete, right? It looks pretty good on paper, but what's our new cash flow?
Given the scenario I just showed you, will the house even cash flow at all? What's the new debt coverage ratio assuming those numbers, right? That's a great sanity check to make sure that you can actually get the long-term take out financing. How do you know you can even get the take out loan I just described? What happens if our rehab goes over budget and you've got to leave some money tied up? What happens then? What if your rehab takes longer and you've got to pay the interest on your short-term financing longer? How does that effect your deal? Et. cetera.
Let me show you how to very easily figure all of this out. All right, so we're going to log in to Rehab Valuator, and most of what I'm going to show you you can do with the free version of this software. You can just go to RehabValuator.com, if you don't have it and create a free account. But we're going to click start new deal. We're going to call it BRRR scenario one, all right? And let's punch in an address here. Let's just use a house as an example. We'll use a house that I just actually sold. It was one of my properties. Bedrooms. Two and a half baths, and 1,600 square feet. And all the other information is already here from my profile. So let's enter the scenario that I just showed you in our numbers, right? You're going to buy this property for $50,000. And by the way, again, if you're not familiar with this software or if you just signed up for a free account, every step of the way we have video tutorials here. Every input and output there is an explanation. We link in the top menu to our tutorials. Detailed case studies with a ton of information, so again, if you're not using this software right now I highly recommend you start.
You really shouldn't be doing these deals without a tool like this. And again, most of the analysis that I'm going to show you you can do with the free version. You don't even need the premium. All right. So $50,000 is the purchase price. Now what did we say was going to be our closing costs? 1,500 and holding costs is 1,000. So we're going to enter our closing costs here as 1,500. And you can enter them as a lump sum or you can do a detailed input and itemize them if you want. And then for our holding cost we'll say $1,000. And again, holding costs you can itemize them as well. Very easy to do. Then we're going to enter our rehab budget. With the light version you can just enter a lump sum budget here. Now with the premium version you get the whole project management functionality and you can start building out detailed budgets, scopes of work. You can load any one of our pre-populated rehab and new construction templates as well, but for now we're just going to say $20,000 is going to be the rehab. And the renovation is going to take us three, let's say it's going to take us two months. Let's say it's a quick rehab.
Now we need to enter our financing assumptions. Let's assume we're going to get 100% of the costs of this project, including acquisition, closing, holding costs, rehab, financed by our private lender. We're going to go here and switch from finance from all cash to financing. And under costs we're going to say 100% financing. We're not going to pay any points to our private lender, but we're going to pay them 8% interest rate. And we're going to defer the interest rate payments until we pay our private lender off. Some lenders will allow you to do that. Some lenders will want interest payments every single month. We'll just assume that we can defer all of our interest payments until we refinance and pay our private lender off. You've got an option here to do joint ventures with your private lenders or with your hard money lenders, but we're not going to use that option for now.
Then we're going to go up here and instead of flip we're going to use the hold analysis. And we're going to say again, according to our numbers the after repair value is $100,000 and it's going to take us a month after rehab. This is best case scenario. It's going to take us two months to rehab and one month after the rehab to lease it out and refinance. So the next thing we're going to is make sure that our cost basis is correct, so total all in cost at the end of the renovation is just under $74,000. That's how much our lender is financing us and we have to bring zero cash to the table. Great.
Now, we're going to go here and enter operating income, projected rent of the house, once it's leased, once it's renovated and leased. And here you can enter a single family house or you can model a 1,000 unit apartment building. For now, we're going to say this is a single family home that is going to rent according to our numbers here. If you remember correctly it's going to rent for $1,000 a month, and we can enter our rent annually, we can enter our rent monthly. And we're going to say there's going to be an 8% vacancy. Usually your bank will require you to model some kind of vacancy number, so if we have one month of vacancy that's going to be 8% vacancy. We're going to quick update and then we're going to enter our operating expenses.
Let's assume that you're going to manage this property yourself. We're going to enter zero for management fee. Insurance is going to cost us about 600 bucks a year. Property taxes, let's just leave that at 100 bucks a month or you can enter them annually 1,200 bucks a year. And then let's enter a figure here for repairs and maintenance. If you do a full renovation you really should not have a lot of repairs and maintenance, but again, when you take this to a local bank they'll want to see some number, so let's say $100 a month in maintenance and we'll leave everything else along. This is a single family house. Your tenants should pay all of their own utilities. They should do all of their own landscaping. Our leases all state that, so there shouldn't be any other expenses here. Let's click update.
So what can we see? Net operating income every single month is going to be $670. The next thing we're going to do is under number 45 we're going to select yes, we're going to refinance this. And we're going to refinance this for 80% of after repair value. Our new mortgage rate is going to be five and a half percent, and most local banks will want to do 20 amortization. This is not a typical Fanny or Freddy loan, a conventional loan where you can do 30 year amortization. Most of these local banks are commercial lenders and they don't do 30 year amortization on these, especially on smaller properties. You might be able to get 25 year from them, but let's assume it's going to be 20 year amortization and we're going to pay two points in closing and miscellaneous costs to close this loan.
So here is our analysis. Here is what we can see. Our new mortgage payment is going to be $550 monthly. Our new loan amount is going to be $80,000. This $80,000 is going to pay off our private lender in full, $74,000. And we're actually going to pocket $4,400 on refi. There's going to be $20,000 on paper left in the deal in equity, but here is the number that concerns me, right? Our monthly cash flow is going to be $120. And there's another number here that concerns me as well, which is the debt coverage ratio. The debt coverage ratio is what tells the bank how safe is this loan. It's the amount of your mortgage payment divided… I'm sorry. It's the amount of your net operating income divided by your mortgage payment. Basically that coverage ratio tells the bank how much income is coming in every month versus how much debt does that property have to service. So if the debt coverage ratio is one, that means that there is $1 of income for every dollar of the mortgage payment that has to be made, and that's not very safe.
So typically local banks will look for a debt coverage ratio of at least, in my experience, 1.25 to 1.3. They want you to have more income coming in than the debt that you have to pay to the bank. Hopefully that makes sense. So this is a very borderline number. I'm not sure if you'll be able to get a loan at this figure. And this amount concerns me as well, because you're going to spend time managing this property and 120 bucks a months is not very much cash flow.
Now, what if you decide you have to leave town or maybe you don't want to manage these properties yourself? You're going to pay a management company now to take over. And now if we add a 8% management fee here look what happens to our cash flow and to our debt coverage ratio. Our cash flow is only $46, and our debt coverage ratio drops to 1.08. When you go to a local bank, even if you plan on managing this property yourself, they may force you to put this number in, because that's how they underwrite loans. So what that tells me is that this is not… Even though your new value is high versus what you've spent on the deal, there's not enough income coming in from this property to make this deal doable. So what does that mean?
If you go in to this deal blindly without doing this type of analysis you're going to leave money tied up in this deal, because what's going to happen is the bank is going to look at this and say, “Well we can't lend you 80% of ARV. We can only lend you 65%, to get our debt coverage ratio to where it needs to be.” Are you following me? Now if they lend 65% of ARV, now that gets their debt coverage ratio over 1.3, which is what will make most of these local lenders comfortable. That still only leaves you 150 bucks in cash flow, but look you owe $74,000 to your private lender, but you're only getting a $65,000 loan. And after closing costs, this is how much lender's money you're leaving tied up in the deal. So to pay your private lender off you would have to come up with this amount of money in cash, which breaks the entire point of this strategy.
So what are your options to make this deal work and to make this deal allow you to fully pay off your private lender and not leave any money tied up? Well one thing you can do is find a house that will generate more than $1,000 in rent. For something that typically costs me $75,000 to $80,000 to renovate, I'd like that property to generate $1,200 in rent instead of $1,000. If it generates $1,200 in rent look what happens. We can go back to an 80% loan. Debt coverage ratio is now 1.39. Our cash flow is over 200 bucks and we're able to fully pay off our private lender. So that's option one, right? Find a house that's going to generate at least $1,200 in income if it's going to cost you $75,000 to $80,000 all in.
The other option would be to have a smaller renovation budget, right? If this was a $5,000 renovation we could go back to having $1,000 in income and only refi 65%. Boom, same thing. 1.33 DCR, 150 bucks in monthly cash flow, and we fully paid off our private lender and pocketed 5,000. Are you following me on this analysis? Do you understand how important this is? Let's go back to a $20,000 renovation and $1,200 in income and I want to show you, so this is a strong deal, right? Your total loan amount is 74,000. Your private lender finances the entire cost of the project. Your new loan is $80,000. You've paid off your private lender in full. You've pocketed, that's your profit at closing, 4,400 bucks. Your bank is happy because they've just generated a strong loan and you're putting just a little over 200 bucks in cash in your pocket. You have no money tied up in the deal and on your balance sheet you have $20,000 in equity, in wealth essentially that you can show when you go to get the next loan and the next loan. Now you can take this 74,000 that you just paid back to your private lender and put it in to the next deal.
So let me show you a couple of other really important things. When I go to my private lender I'm going to show them something like this and this comes with the premium version of the software. I'm going to show them a report that looks like this. I'm going to show them hey, I'm looking for a loan for three months. I'm looking to borrow this amount. This is what the money is going to be used for. 50 towards purchase price, 20,000 towards renovations, and then I'd like you to fund my closing and holding costs as well and I'm going to defer interest and I'll pay you at closing. But look you're only lending me 74% of the after repair value and I'm going to pay you 8% interest for those three months, and here is what you're going to earn. In three months you'll make 1,500 bucks off of interest. That's an 8% cash on cash annualized return. I upload a couple of pictures here. So here, let's do that now.
All right, here is one. Let's upload another one. And then all I need to is just click show PDF and I can print this out and take it my meeting with my private lender or I can save this as an attachment and email it to them. Now of course, I can also go and create a full presentation that's going to include additional pictures. I can even include comparable sales here. So all I do is I go to my comparable sales report and then click Zillow comps, and all of my comparable sales show up. I can sort them by quality score. I can map them to see where they're located. And of course, I can include a bunch of additional pictures. I can click show PDF and create a full presentation. Obviously, it is going to look a lot prettier once I have some pictures in here and I can print this out or I can send this to my private lender.
When I go to my local bank, I generate a marketing sheet for hold, and this is what it shows my lender. By the way, I've secured literally close to $10,000,000 in funding so far using this. This is what I show my lender to get my take out financing. Pay attention because this is very important. This is my total cost basis for the project. Here's what the property will appraise for. Here's what I've spent. I bought it for 50, I put 20 in to it. These are my closing, holding costs, financing costs. This is what I've spent on this project. This is net of vacancy, the current income that the property generates. Here is a lease to prove it. I owned it for three months. Here is the new loan I'm looking for. I want $80,000. This will be my monthly cash flow and this is the debt coverage ratio on your new loan Mr. Banker, assuming five and a half rate and 20 year amortization.
Now of course, I can include with this presentation a detailed renovation budget. I can include pictures of the property. I can include an executive summary. If I go to review reports, I can include additional pictures. And if I had a detailed budget created for this deal I can include that as well with my presentation. So this works like magic to secure funding. But the most important part of the software is here. It's in this analysis. It's in verifying that these numbers work. Right here at the bottom of hold exit strategy. It's making sure that hey, if I do this deal, before I make an offer on this deal, will it work? Will I be able to get all of my money out? Because if this number, cash out of refi, is negative, you're leaving money tied up. If it's positive you're making money on the refi. If this is anywhere below $200 I wouldn't do this deal. If property debt coverage is below 1.3, chances are this deal won't work.
And this is also a good sanity check, right? Because you're saying the after repair is $100,000. Well, even for a single family home I look at cap rates. What's my cap rate based on costs and what's my cap rate based on after repair value. This is a good sanity check, because if you're saying the value of this income producing property will be $200,000, well that's only a four and a half cap rate. It's not right. And even for a single family home, again, most lenders won't look at cap rates, but I do, because it's a good sanity check. I hope this makes sense. I'm going to do more training on this specific strategy and this specific topic.
Let me give you a couple of rules of thumb before I let you go about this strategy. All right? So as we discussed, you should be looking for rent to cost multiple of one and a half times or better. So if your deal all in costs you $80,000, as in our example, your rent should be $1,200 a month or more. It's a very simple rule. You don't need a calculator for this. Take your costs multiply it by one and a half times and divide it by 100. All right, so if you've spent a 100,000 on a project, your rent before vacancy and before all of your expenses, your monthly income should be $1,500. Look for debt coverage ratios on your take out financing of 1.3 or better. Otherwise you will likely not be able to get the loan that you think you'll be able to get.
And then stress test your expenses. Even if you are managing the property yourself your lender will likely want to see a management fee in there. They will want to see a vacancy. We don't have vacancies in our portfolio, but my lender still makes me model a five to eight percent vacancy. No matter what, because that is what their rules require. If you are leaving cash tied up in a deal, your cash and cash return, in my view, at least 10% or more. So we're in a different market now and you may be doing deals where you are going to be forced to leave some case tied up. You won't be able to fully get your money out and roll it over to the next deal, and that's perfectly all right, but make sure that your cash on cash is a good number. Make sure that the cash you leaved tied up in the deal generates a good return.
So let me show this really quick. Let's go back to our example for a second. Let's assume I was doing this deal all with my cash, all with my own cash. And I was only pulling out let's say 65% of the value of the property. So you can see here, I spent 72,500 to do this deal, but my new loan is only $65,000, minus closing costs all I'm getting back is 63,000. So I've just left $8,800 tied up in this deal. But look my cash on cash return is huge, right? I'm generating 43% cash-on-cash on the money that I've left tied up. And that's very important, because if you start doing deals where the margins are tight and you can't pull all of your money out it's okay to leave that money tied up, because if I can make my money grow at 43% that's phenomenal. So make sure you're doing this analysis, all right?
Also, your loans will typically, again because they come from commercial banks, these commercial lenders are not going to give you 30 year fixed loans. They're only going to give you loans that are fixed for 20 years. You will get something that will amortize at 20 or 25 years, but these loans will typically carry five, seven, or 10 year resets where they will want to renegotiate your interest rate or they will be ARMs where your rate will automatically reset or they will have calls. A call means that after five years your lender can just call this loan due. If you have a good relationship with them they won't call it. They will just renegotiate the rate.
So if you do five year calls or five year resets you're taking on a pretty serious amount of interest rate risk. So if you can find banks that will go out seven or 10 years obviously that's preferable. It may come with a slightly higher rate, but in my view it's worth it. And then try to make the deal work with 20 year amortization. Again, you will find some lenders that will give you 25 year amortization, which will increase your cash flow and increase the amount you can borrow, but I personally love 20 year amortization, because you will be paying down your debt very quickly. Run an analysis and you will see that with 20 year amortization, in the first five years at today's interest rates you're paying down 15 to 16% of your entire loan balance. Your tenants will be paying off your debt very quickly with 20 year amortization. And that's very powerful wealth building. All right?
So what to do next. If you've enjoyed this training, if you have questions, if you have comments, if you have any thoughts leave me your comments below. Okay? And then share this training with anybody who you think will benefit from it. Share it on social media. Share it on Facebook. Share it on Twitter. We would really appreciate it if you can take the time to share this with other people, because most of the time this is not taught for free. If you do not have the Rehab Valuator software yet, you can create a free account by going to RehabValuator.com. And again, with the free account you can do all of the analysis that I just showed you. Or if you're already a light user, check out the premium features.
With the premium features you can create detailed rehab budgets and scopes of work. You can actually, we've rolled out project management functionalities where you can store all of your bids, you can store all of your transactions for the project and create basically an accounting system for that project in real time. You can create funding presentations for your private lenders. You can create funding presentations for your banks. If your a wholesaler you can sell your wholesale deals. The premium features are very powerful, so if you're already using the light version check out the premium features and upgrade. And if I can help you with anything leave me a comment below. I will be monitoring these comments regularly and answering them, answering questions, answering comments. All right? Thank you.