Help Analyze my BRRR. Deal or no Deal (section 8)

Buying & Selling Real Estate
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Help Analyze my BRRR. Deal or no Deal (section 8)

Paul Daniels
Flipper · Matawan, NJ · Member since 2013 · 21 posts · 5 votes

Hello, all.  I would like to gather some input from some season investors about a possible deal I am pondering.  

About me:

I run a general contracting construction business located in central NJ specializing in distressed property repair.  We complete rehabs for investors, banks, realtors. flippers, etc.  We also do a lot of work for homeowners, insurance companies, etc.  Last year we completed 6 of our own flips.  These were low end homes bought for around 30K totally rehabbed with every single thing brand new and sold for $140K in C type neighborhoods. The work takes about 30 days but the entire process is closer to 4-6 months.  Marketing, finding a buyer who can get approved, closing, etc

About my Deal

While I very much enjoy the property flips it ties up cash flow, which prevents us from doing many properties simultaneously. There is a lot of opportunity in the rental markets in Trenton NJ.(F type neighborhoods for those of you unfamiliar with the area. Very poor high crime areas). I am interested in a SFH with an asking price of 30K. Rehab cost are approx 30K to have the home look amazing. We might be able to cut some corners and get the cost a little lower as well. We would purchase the property and complete the rehab with cash. The ARV should be around $120K. We should be able to take around 15-20K in cash equity out of the project using conventional financing upon completion. That would leave us with a mortgage payment of around $400 per month. Taxes are $1,569 per year, another $1,200 per year for homeowners insurance. We will also need to budget for lawn care, snow removal, repairs etc.

I am able to calculate flips very well but rentals are a totally different animal so I wanted to see what the BP community thinks.  My crew can easily handle the repairs of the property as needed so I do not consider that a major problem.  We will be replacing the major components of the property so we should not anticipate any major repair issues.  The question here is would this seem like a good deal for long term buy a hold even though the property is not producing major monthly cash flow numbers.

Let me know your thoughts.

Thank you all in advance. 

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Jason D.
Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
7y
@Paul Daniels it can certainly be done and "F" neighborhoods can, on paper, generate great cashflow. Two word of caution.... 1. You will run into the same cashflow issues with the BRRRR as you have been running into with flips. The normal 6 month seasoning requirement will slow you down without the cash to do multiple deals at once. 2. Notice I said "on paper"? War zone neighborhood rentals require a TON of oversight, and can be a full time job on their own. If you arent equipped to handle the workload required to manage these units, they can get away from you very quickly.
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  • Stanley Choung
    Rental Property Investor · FL · Member since 2015 · 29 posts · 9 votes
    7y

    Hi Paul, 

    What are you estimating for rent? 

    Also, If you were to rent out I'm not sure that conventional financing will be available.

    0Reply
  • Paul Daniels
    OP
    Flipper · Matawan, NJ · Member since 2013 · 21 posts · 5 votes
    7y

    Rent is approx. $1,400. 

    Conventional financing meaning flip and hold financing as opposed to hard money.

    0Reply
  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    7y
    @Paul Daniels it can certainly be done and "F" neighborhoods can, on paper, generate great cashflow. Two word of caution.... 1. You will run into the same cashflow issues with the BRRRR as you have been running into with flips. The normal 6 month seasoning requirement will slow you down without the cash to do multiple deals at once. 2. Notice I said "on paper"? War zone neighborhood rentals require a TON of oversight, and can be a full time job on their own. If you arent equipped to handle the workload required to manage these units, they can get away from you very quickly.
    1Reply
  • Stanley Choung
    Rental Property Investor · FL · Member since 2015 · 29 posts · 9 votes
    7y

    Your numbers sound about right for Trenton.  Given that the property is in the rougher areas, factor in your model extra slippage from turnover and delayed/no rent payments.

    As @Jason D. mentioned, most of the local lenders require a a seasoning period before they loan against ARV. Inside of a year it's generally cost + improvements.

    If you have repairs and maintenance covered and you can handle property management (placing good tenants and rent collection), then you probably can get a worthwhile return for a buy-fix-rent place in Trenton. 

    0Reply
  • Romeo E.
    Central New Jersey · Member since 2018 · 71 posts · 17 votes
    7y

    Hey Paul, I'm an agent/ investor out of North Brunswick, I own a few properties in New Brunswick and was looking to the Trenton area to expand into. Personally I'm a little hesitant to buy a unit with cash flow that low only because I dont see how it can cover incidentals such as a pipe bursting or roof leaking.  I would rather go for a $150k unit in New Brunswick/ Somerset that can rent out for $1600 with no vacancy than a unit in Trenton that'll take months to rent out in an area with sky high vacancy. How many units would it take to get to the level of income you're hoping to generate?

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  • Romeo E.
    Central New Jersey · Member since 2018 · 71 posts · 17 votes
    7y

    Hey Paul, I'm an agent/ investor out of North Brunswick, I own a few properties in New Brunswick and was looking to the Trenton area to expand into. Personally I'm a little hesitant to buy a unit with cash flow that low only because I dont see how it can cover incidentals such as a pipe bursting or roof leaking.  I would rather go for a $150k unit in New Brunswick/ Somerset that can rent out for $1600 with no vacancy than a unit in Trenton that'll take months to rent out in an area with sky high vacancy. How many units would it take to get to the level of income you're hoping to generate?

    1Reply
  • Paul Daniels
    OP
    Flipper · Matawan, NJ · Member since 2013 · 21 posts · 5 votes
    7y

    Thanks for the reply everyone. To Romeos point, being a contractor I am only paying for time and materials to complete any necessary repairs. Since we will be completing a full rehab most items including roof, plumbing and heating/hot water equipment will be new. Therefore, we do not anticipate many large repair issues. While I agree Somerset is a much nicer area and have lower vacancy rates, the properties do not cash flow as well. I would rather receive $1,200 per month from section 8 on a property that I invested 50K total instead of a higher value home that the investment is upwards of $200K. Trenton properties come with a lot more headaches but I think the ROI is much higher.

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