A BRRRR underwritten for zero cash back returned 21 percent, and the modeling choice is why

Here's a case worth studying because the result came from a modeling choice, not a market call. A 1920s triplex in a streetcar suburb of a mid-sized midwest city, purchased at 214,000 with all three units occupied but badly under market on month to month leases. Bridge financing at 186,000, 11 percent interest only, 12 month term. Rehab ran 67,000 against a 62,000 budget, covering two kitchen and bath renovations, a full electrical panel and rewire, and separated water heaters. Carry and closing added 14,000, putting all-in cost at 295,000 against 109,000 of cash into the deal. Rents after turn moved from 2,285 gross to 3,645 gross across the three units. The underwriting standard applied going in was a zero cash back base case: the deal had to clear a 1.25 DSCR and 375 dollars a month of cash flow after 7 percent vacancy and 250 dollars of monthly reserves, with the full 109,000 assumed to stay in permanently. Anything returned at refinance was treated as a bonus rather than the plan. Appraisal came in at 386,000. A refinance at 70 percent produced 270,200, against a payoff of 194,200 once accrued interest and an extension fee were included, netting 66,600 back against the 109,000 invested, a 61 percent recovery. The 42,400 left in the deal now earns roughly 430 dollars a month after reserves at a 1.29 DSCR. The stress point was the bridge lender's 12-month term against a rehab that ran 15 weeks over schedule because of a panel permit delay, requiring a paid 90-day extension. The lesson worth keeping from a case like this is the base case itself: underwriting to zero cash back kills most candidate deals before they're bought, and the one that clears it doesn't depend on the appraiser having a good day.