does this hard money, brrrr combo strategy look right?

Question

Hi folks,

I've been studying the BRRRR method and would love to run this hypothetical analysis with you to make sure there's nothing I'm missing, especially with the added complexity with using a HML.

POTENTIAL CONCERNS:

• I'm okay with the trade-off with less cash flow given my goals.
• I know it'll be a million times easier to go with the private lender route but I wanted to run numbers to see what it would look like using HML.
• I know it's going to very hard, maybe impossible to find anything with the purchase price so low but again, this is an experiment to make sure I understand how these numbers work

REFINANCE / CASH FLOW ANALYSIS:

https://www.biggerpockets.com/calculators/shared/593575/4c4d609b-475b-4c09-81a1-39f0280f291d

• ARV: 90,000
• NOI: 1,400
• Expenses (PITI + Repairs + Vacancy + CapEx + Utilities + Property Manager) : 1,300
• Cash flow: $100

BUY + REHAB:

• Financing: I'll be using a HML that can finance 90% of acquisition and 90% of rehab. 10.5% interest rate on full note amount, 12 month term. 3% origination fee.
• LTV: 75% but let's use 70% as conservative estimate in case unplanned scenarios pop (i.e, appraisal comes in lower):
• Rehab: 25,000
• Holding cost: 2,000
• Closing cost: 5,000
• HML cost: 45,000 * 10.5% = 4,725. Let's say it takes us 3 months to rehab and rent out (or at least make it seem like we're about to have a tenant move in). Because we're using HML, I believe we would also be able to bypass the seasoning period typically needed for a conventional loan. 4,725 / 3 = 1,575
• Out of pocket to cover 10% of acquisition and rehab: 2,500 + 2,500 = 5,000
• Purchase: (90,000 * .70) - 25,000 - 2,000 - 5,000 - 1,575 - 5,000 = 25,000 (rounded up a few hundred to make it an even number).

Actionable Next Steps:

I need to find a property that will sell for around 25,000. I have some wiggle room with the conservative LTV refinance number and it can of course change depending on what the actual rehab costs are but assuming it's around 25,000.

Is there anything I'm missing here?

Thanks y'all!

Jack Inman · Answer

Hey @Albert L. If you're accounting for the 3% origination points in the 'HML cost' then you're right; dividing by 3 is the way to go. If you do it that way then your closing cost estimation of 5k is a little high. It usually costs less than 2% of the sales price to close a cash or cash equivalent deal.

Jack Inman · Answer

Hey Albert,

Your holding costs seem kind of high for a property in that price range; since you've already factored the loan holding costs separate, your remaining holding costs should just be taxes and insurance for the 3 month vacant period.

Couple things:

• 1,400 isn't your NOI it's your monthly rental rate

• If you have the HML for 3 months, then divide the annual interest rate by 4
• Your 10% ($5,000) out-of-pocket cost doesn't need to be deducted from the all-in price. You only need to deduct the costs associated with borrowing the acquisition capital, not the capital itself.

That's all I've noticed; looks like the rest of the math is correct. Good work!

Albert L. · Answer

@Jack Inman thanks for checking my work! Quick follow up question regarding HML. Are we dividing by 4 to count for the 1st month itself with closing AND the 3 additional for rehab? Would you mind clarifying that?