Looking for feedback on my plan with the project

[Arthur C.]

Hey,

Thought I’d reach out to this community to get your perspective particularly on the numbers that may differ from what I have just to ensure I have the right “capture”.

Brief background: I bought a foreclosed property consisting of 3 bedrooms and 2.5 bathrooms with no basement but rather a crawl space for $485K from someone who bought it from auction. Keep it in mind, the former owner is still living in it so I have never had the chance to look inside the property. However, I have known the former owner for a long time since 2011 enough to believe that the condition inside the property has to be at least nice with no significant damages. It was renovated back in 2012 when she bought so I’m confident it is still in good condition. Had I not known the former owner that well, I may not have bought the property. We are currently going through eviction process. Anyway, that’s just sharing a brief background for you before going further below.

Here goes the numbers I have...

* $485K - purchase price

* +$70K - excavation cost for 8-9 feet in height inside the 700sqft space along its reserves to add an English basement

* +$70K - turn basement into finished basement as a separate legal unit and some touch ups for the main and upper levels (I have a friend who can help out with rehab so keep that in mind when you think cost estimates may be low)

Total: $625K investment

I estimate the ARV for that property with "2 units" will be approximately $675k (this number is rather conservative). Most homes like this typically go for at least $700K based on my research.

So, my plan is after the rehab with waiting period of at least 4-6 months, I would request for a cash out refi. With assumption of $675K ARV, I would get 80% LTV of $675K, which turns to $540K max cash out refi.

When I get $540K cash out refi, I would essentially get all my cash back what I put in for purchase and rehab except for $85K that will stay within the property. I expect to get $4K cash flow monthly for both units. Mortgage monthly payment along with property taxes, landlord insurance, and $300/month in reserves would be approx $2,500, leaving $1,500 monthly cash flow.

Before you tell me that $300 reserves are too small to withhold or tell me to make sure I factor in other expenses such as reserves for vacancy, maintenance, and capital replacement, I am not too worried about vacancy. I live in my neighborhood long enough since 2011 to know the demand is very strong. It will be easy to find new tenants since my fiancée and I know a lot of people not far from our university alma mater that need places to live. As for maintenance and capital replacement, they will have touch ups and we will fix any repairs necessary before I start to rent them out. Not only that, keep in mind again, the property that the former owner bought back in 2012 was fully renovated so that fact definitely helps knowing that there are small odds of any significant repairs needed in the foreseeable future.

That said, this will result to ~21% cash on cash return ($18,000 annual net cash flow/$85K equity stuck on the property after cash out refi at 80% LTV).

I know for BRRRR (buy, rehab, rent, refinance, repeat) investors, the ultimate goal is to get all your money back after rehab but I am more than willing to have some of my money kept on the property as there are a lot of ongoing developments around this central neighborhood. The appreciation of the property will be very strong in the next decade so I am more than willing to have my money being stuck on the property.

Feel free to let me know what else I may be missing here and share at least something for me to keep in mind when doing this project.

I definitely appreciate your time and would welcome any your inputs you may share.

Wishing you all Bigger Pockets members in this community Happy Holidays!

Arthur