Should this property be my first BRRRR?

[Jim S.]

It's an old duplex and a detached single unit built in 1920. Currently rented out under market value, bringing in a total of 2500. Its ARV is 1.2 million, I can get it for 700k.

This is an expensive market in CA. Look up Ojai, CA if you’re curious.

Anyways, I’ve never done this but the math checks out. I’m concerned about rehab headaches in dealing with the city, pulling permits and funding it. Thoughts?

[Dan H.]

I think starting with a RE built in 1920 as your first BRRRR is likely to be quite a learning experience but if you have the ARV correct then there is a lot of margin for surprises (and I expect there to be many surprises).

If I have confidence in your ARV numbers, I would do this hands down. I would be shocked it the rehab could cross $250K even with many surprises. That places a value add of $450K.

You would have 3 units for an out of pocket (assuming $250K rehab and 75% refi LTV) of $12.5K. Even if it were initially negative cash flow, the value add of $450K could compensate for quite a bit of negative cash flow. Historically high appreciation areas tend to continue to be high appreciation areas. The RE will have positive cash flow in the future. Also Prop 13 protects against increased prop tax helping cash flow for the long term holder.

BTW my experience is that BRRRR does not increase the cash flow but I have not done a rehab that has cost that close to $250K (I am not sure if I have crossed $100K on a rehab but probably). My point is that the rents will increase but I have found that the increase in rent is usually proportional to the increase in loan resulting from the BRRRR. I have never seen this discussed but that is what I have seen having done maybe a half dozen BRRRR.

Just do not get frustrated at the surprises. Allocate a lot of budget for them.

Good luck