Cost Segregation 101
From Flip to STR — How Dr. Flex Turned a $120K Reno into 5X ROI + Full Cash-Out Refi
When the market shifted mid-flip, Dr. Flex turned a stalled renovation into a thriving short-term rental — refinancing out his entire down payment, recouping all renovation costs, and scoring a massive paper loss through depreciation.
overview
Dr. Flex, a 38-year-old radiologist with a keen eye for numbers, purchased a property in late 2023 with plans to flip it within six months. But interest rates spiked, and the resale market softened — so he adapted. He converted the home into a short-term rental, creating a luxury rental experience. After 12 months, he was able to cash-out refinance, recover all his capital, and still keep the asset cash-flowing. A cost segregation study sealed the deal with massive tax benefits.
The Numbers:
Purchase Price: $850,000
Renovations: $120,000
Total Invested (incl. 20% down): $290,000
$170,000 down payment (20% of $850K + closing costs)
$120,000 renovations
New Appraised Value (12 months later): $1,250,000
Loan-to-Value on Refi (75%): $937,500
Old Loan Payoff (80% of $850K): $680,000
Cash Out After Refi: $257,500
Fully recouped $170K down payment + $87.5K of reno
STR Gross Income: $14,000/month ≈ $168,000/year
STR Net (after ops + debt): ~$2,500/month ≈ $30,000/year
Cost Seg Depreciation (Year 1): ~$145,000 bonus depreciation
(assumes ~25% of property basis allocated to 5-, 7-, and 15-year assets via cost seg)
Challenge
Dr. Flex purchased the home with the intent to flip. But within weeks, the market shifted — higher interest rates, lower buyer activity, and tighter lending standards made resale risky.
Solution
Rather than selling into a cold market, he converted the home into a design-forward short-term rental, optimized for Airbnb and Furnished Finder.
After 12 months of stabilized STR income, he refinanced at a higher valuation, withdrew nearly all of his invested capital, and retained a profitable, appreciating asset.
He also commissioned a cost segregation study, which produced a paper loss of approximately $ 145,000 that wiped out a large portion of his clinical W-2 tax bill.
Result
$257,500 cash-out refinance (full recovery of down payment + partial renovation costs)
$30,000+ annual net cash flow with zero capital left in the deal
$145,000 in bonus depreciation applied to W2 income (due to STR material participation)
Property appreciated by $400,000 in 12 months
Positioned to repeat with a second acquisition using recycled capital
ROI Breakdown:
Initial Capital Invested:
$290,000 (down payment + renovation)
Capital Recovered After 12 Months:
$257,500 cash-out refinance
~$30,000 net cash flow
~$145,000 tax savings via depreciation (depending on tax bracket; not direct cash, but equivalent impact)
True Cash ROI (before tax effects):
$30,000 / $32,500 (actual unrecovered capital) ≈ 92% cash-on-cash ROI
Total Return Including Tax Shield:
($30,000 cash flow + $145,000 tax savings) / $32,500 ≈ ~537% ROI
