Running comps in C / D neighborhoods

[Thomas Ackley]

My goal is to do two BRRRR's this year. I've got one cash flowing property, but all of our capital is tied up in it. I think I'm going to refi it so we have some fluid cash to go along with a HML for the next property.

As of right now I’m pretty set on a specific part of town going forward. I’m currently looking at buying duplexes or triplexes for $25k-$60k, rehabbing what needs to be rehabbed and refinancing. I’m confident I can find decent renters and I know what the rent is. When I run the numbers for the properties I’m looking at, they always come back as cash flowing. That part isn’t a concern.

My question is, how can I run comps if most of the recent sold properties aren't freshly renovated like mine will hopefully be? I'm concerned about not being able to pull money back out to pay off the HML if the comps don't come back where I need them to.

What’s a good book or two to teach me about running comps for this situation?

While chatting with other investors / bankers in my area, I’ve gotten feedback to look at a bit better neighborhoods. The cash flow on the properties I’m looking at is too enticing.

I think the neighborhoods I’m looking at are stable enough, but I probably won’t get the appreciation like in better neighborhoods.

Lots of thoughts and questions there... thanks for any input.

[Art Perkitny]

@Thomas Ackley

What radius are you running the comps on? It's seems odd that nothing is coming back that fits your criteria. If there are truly no recently renovated comps in the neighborhood you are considering BRRRRing in then maybe it's not the best place to be employing this investing strategy. Especially if this is your first BRRRR.

Another way of determining the homes values of a neighborhood is to look at Census data. While it's not available at the property level, you can look at cohort data that shows the distribution of home values. This is rather useful when first researching a location to determine what an investor can reasonable expect to get after renovating a property. Here is an example for the Tremont neighborhood in Cleveland , OH

In this particular area, as you can see, there is a trimodal distribution of home values. This means, for example, that if you bought a house in the 50k range you could reasonably except to get it appraised at 125k after rehabbing it. 

Here is another example for the Cudell neighborhood in Cleveland: 

This time, the distribution of home values has only one peak, around the 60k mark. If you rehabbed a property in this neighborhood you run a much higher risk of not getting the appraisal needed to cash out refi your initial investment due to the small number of comps at the higher end of the price spectrum. 

Also, to your point on the cash flow being very enticing. I would be carful with getting caught up with the paper returns. A high cash flow area will bring it's fair share of complication that could easily wipe out those glorious cash flow projection. 

Hope this all makes sense and it's helpful to you!