My first potential deal: The numbers look good & feel bad. Help?

Question

I've never done any real estate investing before, and I'm considering a BRRRR owner-occupied quadruplex. I've run the numbers and they look good, but I don't know that I've done them right. The acquisition price of the property seems really high in my gut, even though the numbers seem to work. Plus, the numbers I filled in for rent are way too uncertain for my comfort; I don't know how to estimate what post-renovation rent will be.

The Numbers:

Purchase Price: $85,000Renovation Costs: $350,000 [Estimating high here due to structural damage]After Repair Value: ?????? [No idea, shouldn't matter because I'm holding for cash flow]

HomeStyle Renovation Loan: 5% down ($21,750), 4% interest rate
Acquisition Costs: $4,000? [Guesstimating cost for detailed plans to close on a HomeStyle loan]
Loan Costs: $1,490?
Total Cash Investment: $27,240

Rent: $57,600/yr (4 * 1,200/mo) [VERY unsure about this number]Vacancy Contingency: ($5,760)Property Taxes: ($1,000/yr) [I can get a 10-year tax abatement to keep it this low]Property Management: ($5,760/yr)Repairs & Maintenance: ($2,880/yr)Property Insurance: ($2,000/yr)? [Unsure about this number]Water & Sewer: ($3,000/yr)?Electric: $0 [Tenants will meter & pay themselves]Landscaping: ($2,600/yr)Total Annual Expenses: ($17,240)

NOI: $34,600/yrMortgage Payments: ($24,000/yr)PMI: ($1,200/yr)Cash Flow: $9,400/yr

CAP Rate: 7.9%

My questions for you:

• Do my numbers seem good?
• How do I get more confident about the rental income?
• How do I get more confident about the purchase price? It seems really high in my gut, given the poor condition of the property.

Thanks in advance!

Caleb Heimsoth · Answer

@Kerrick Long I would do nothing until you learn this stuff much much better.  You don’t even have half the necessary information.  You’re just guessing

Nathan Maier · Answer

You mentioned you want to BRRRR this property, and that you have no idea what the ARV is and are very unsure about the rents. Those are 2 of the 3 numbers you NEED to know for a BRRRR, the other being the rehab cost. I think you should educate yourself, and spend time figuring out your market, and comps. Once you can nail the ARV and rents, then you will feel much more confident analyzing deals.

Not saying you have to BRRR this property. It might make sense as a conventional house hack. Either way, learn to get good at comps.

Kris L. · Answer

See if you can get your realtor to run some ARV comps and your PM to run some rent comps.  Then you at least know where you would be going with the property

Kris L. · Answer

Let us know when you have the updated numbers.  That rehab though might make the deal a tough one if you don't have experience running a major reno project.

Kerrick Long · Answer

I used rentometer and also made a spreadsheet of comps in the area, and that validated that not only is my $1,200/mo reasonable, it might be a bit low -- assuming I renovate to a nice level of finish.

I've also reached out to a real estate agent to help me run comps so I can figure out what the ARV might look like. I'm still looking for solid advice on figuring out how to get this number as accurate as possible, if anybody has more.

Thanks for the advice!

Kenneth Garrett · Answer

@Kerrick Long

To determine rental numbers try using apartments.com.  Since it’s a 4 plex you want to use apartments as a comparison.  Compare similar number of bedrooms, bath, square footage.  You may not have exact matches for amenities.  Work out area, pool, etc.

You can also look at rentometer, but be careful you are comparing 2, 3, and 4 units not SFH.  Look at Zillow, Trulia and Hot Pads, but again compare similar comps.

Good Luck.

Richard Weinberg · Answer

@Kerrick Long

There are a couple low cost training courses you can check out and they are supported with access to experienced buy and hold landlords and flippers. Recommend you check out Michael Zubers, One Rental At A Time and Meet Kevin. They are both big on YouTube. On Bigger Pockets check out David Greens book on BRRR and his podcast with Brandon.

I would be very apprehensive to do the deal you laid out where 80% of the cash was in rehab without really knowing what I was doing.

Good luck!

Kerrick Long · Answer

Thanks for all your responses! I guess I wasn't being clear when I asked how to get more confident in my numbers... I should have asked, "How can I get more accurate numbers?" :)

I'll definitely be talking with a local real estate agent to try to get a bit of a range for the ARV. How can I get accurate rent estimates besides talking with a Property Management company?

Nathan Witte · Answer

@Kerrick Long It seems that you have some more knowledge than the average person when it comes to Real Estate Investing, but I think you still have a little bit more to learn. BRRRR Investing relies heavily on the ARV and rents. You need the rents to sustain the property and the ARV to estimate the LTV that you acquire when you refinance. I think you need to learn more about BRRRR Investing and then learn what the comps in the area are. If this property sells in that time, then oh well, there is always another property. If it doesn't sell and the numbers still work after learning more about the method then great.

As Warren Buffet says,

"Risk comes from not knowing what you're doing."

Best of luck Kerrick,

Nate Witte

My first potential deal: The numbers look good & feel bad. Help?

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