BRRRR advise! Looking at my first one!

[Jonathan Guerrero]

Hello everyone,

I am looking to make an offer on a multi family using HM. However, this would be my first time. I am looking for advise or formulas you guys use to come up with an offer price that makes sense. Possibly using some real life examples. It would be greatly appreciated. TIA!

[Ryan Howell]

I analyze for a minimum of $100/door positive cash flow (after vacancy, repairs, reserves, PM, taxes, insurance, mortgage). I then look at the ARV after I fix up the units. If I'm using a conventional loan that offers 70% LTV on a cash-out refi, I calculate the maximum loan I can get.

I then calculate two maximum allowable offers (MAO). First is 70% LTV minus expenses, closing costs, etc. This is my MAO for a perfect BRRRR. I may go above this but I still have a CoC return target of 20%+ I never compromise on.

The second MAO is based on my cash flow target to ensure I always have positive cash flow. I take the lesser of these two values.

Real life example (numbers simplified):  Duplex in Hendersonville, NC (outside Asheville)

(this is a few years ago, so these numbers vary today)

ARV is $200k with $800/mo market rent

70% LTV = $140k

Expenses are ~40% of gross rent 

NOI = $960/mo

Rehab/closing costs, etc = $10k (this one needed very little)

Perfect BRRRR = $130k purchase price (I went above this)

$200/mo cash flow = $760 P&I mortgage payment @ 4% = $159,000 mortgage - $10k = $149k MAO

Actual Purchase Price:  $142,500

Mortgage:  $140k @ 4% = $668/mo

Cash Flow:  $292/mo

Basis after BRRRR = $142500 + $10k - $140k = $12,500

CoC = $292*12 = $3504/year / $12,500 = 28%

The BRRRR was great, but the real value is this property is now worth $280k. Market rent is now ~$950+/side. I added $47,500 to my net worth after the BRRRR and now another $80k by holding this property. This is why I love real estate.