Leaving some serious $$ in my BRRRR, worth it?

Question

I will try to make the post as short as possible. I am under contract on a side by side duplex ( two - 1 bed 1 baths). Purchase price is $300k. Before I continue, I would like to say, this is a VERY desirable beach town and the demand for annual and summer rentals is ALWAYS high. Originally I was going to try to keep my construction costs to around $35,000, but if I am being honest with myself and my design tastes, I KNOW I will be closer to the $50,000 number. The arv is only $380,000 - $390,000, which would put me around $305,000 when I refi. This means I am potentially going to leave $50,000- $60,000 into the deal. The only reason I have not killed the deal, is the market rents for each are around $1400- $1500 and I know they will be filled immediately upon completion of construction. This would put my $ on $ return around 14.5- 15% (property should be $800 positive each month). I currently have $300k liquid in the bank/investments. I have very low cost of living, so for me to leave the $50,000 in there would not change my quality of life. I really am leaning towards doing the deal, especially since this is the town I REALLY want to invest in. My hesitancy is the fact that compared to my other BRRRR deals, this one seems significantly less enticing.

In this crazy market, what do you guys/gals think? My goal is to keep investing for as long as I can imagine, throughout all markets. Has anyone had a similar situation and what was your outcome?! I would REALLY appreciate any and all feedback.

Thanks everyone,

James

In this crazy market, what do you guys/gals think? My goal is to keep investing for as long as I can imagine, throughout all markets. Has anyone had a similar situation and what was your outcome?! I would REALLY appreciate any and all feedback.

Thanks everyone,

James

Corby Goade · Answer

You've got some great advice above on LTV and what your options are. I'd say if you are in this for the long haul, you have faith in that property and the local market, don't sweat this small stuff, and 5 years from now, you'll look back at this as being a small thing. Do a couple more deals like this every year and you'll have all kinds of equity all over the place and it will be of much less concern to you.

Happy Investing!

Marcus Auerbach · Answer

@James Lauer this is very typical, in fact you are doing better than I do on most of my BRRRs. I average well over 90% cost to appraisal on class A and B properties here in Milwaukee. However, this is well worth it, because now I have a capex free asset, that is quite a bit ahead of the average comp in terms of condition/attractiveness and the need for future updates.

This translates into very low vacancy rates (almostzero) and very strong rents, only set to go up. It also mitigates risks, because I know I could sell any property within days and for top dollars. Also keep in mind that your principal pay down is about 3% a year (first less, than more) so on 300k that is more than many investors cash flow.

I always tell clients, the best recipie for a "succesful" BRRRR is to not do any of the important upgrades. Don't get a new roof, don't replace the entire plumbing system and don't pour a new concrete driveway - because none of these will impact your ARV and appraisal, so it is a complete "waste" of money. Of course, you are just deferring that cost to a couple years later, you have created a future liability you better carry on your books like a balloon note!

What you do is more capital intense, but this is the long game and this is how weath is created. Cashflow is a necessary condition, but you are on a better track than you might think to create wealth.

Jason Wray · Answer

James - quick question if your going to refinance your duplex after renovations.  A duplex (2-unit)cash out will be maxed at 75% LTV even at $390K at 75% LTV that allows you to pull out $292,500.00 but than minus closing costs typically 3-3.5%. $283K.  Do you have a bank/lender quoting 80%LTV on a duplex COR?

Amit Patel · Answer

Also - do you think its possible that you are falling in love with the property or the town or the possibility of appreciation. The numbers don't lie. Assuming it was in a different town and a different house, would you accept the numbers ?

I've had properties in areas I loved and I bought them outside my criteria and have regretted each one because the return was good but wasn't great and I would've made so much more by being patient and using that money for a less-sexy property with better numbers... just my humble opinion of course based on the little info you put here..

Max T. · Answer

@James Lauer

How does it compare to buying it fully renovated with 25% down?

Matt Nico · Answer

James,

My investment strategy is geared more towards cash flow rather than equity personally. I regularly leave $50k in my deals but they cash flow $1000+ a month. If you can cash flow that much per month but have to leave money in the house which you dont even need, then I wouldnt worry about it too much. It sounds on paper like a very solid investment.

Happy Housing,

Matt

Matt Nico · Answer

Jason Wray,

You sound educated in the Lending department. Do you do HELOC's on investment property at Natitonwide? I have a home worth about $340k and I owe $199k on it and want to pull out some equity without refinancing it.

-Matt

Natalie Schanne · Answer

@James Lauer - balance your expected income and appreciation off the very low interest rates currently available. A 3-4% loan for 30 years is an asset. Every property I rehabbed and sold in 18, 19, etc. has all appreciated more than the rehab profit I made. Can you find some deals off market where the seller can save on agent commissions? (Though usually a good buyers’s agent can negotiate for repairs pretty well and/or have their eye out for new properties for you.)

Check Airbnb and VRBO for actual reasonable prices you may get for a summer rental. Some high prices may be for a whole house only. Usually week to week is profit maximizing vs accepting only a weekend. I found a 2/1.5 townhouse property on the beach with an annual rent of $1800 even though the summer rents were at least $1000/week. That rental had sat empty from November until March and then they accepted a two year lease at 1700/mo. Some rentals also only offer themselves for the 6-9 months of off season at a breakeven price.

James Lauer · Answer

@Jason Wray so tough right now, there’s literally no deals for us investors in my area of New Jersey. Wondering if I should just sit on the sidelines until things calm down or maybe just accept lower returns than I’ve been accustomed to. Thanks so much

James Lauer · Answer

@Jason Wray actually I don’t have any lenders right now. I was able to get 75% or 80% on the last multi family I did in the same town, although I did call it my primary. Hmmm great point, at $283,000 it would not be worth it for what I feel comfortable investing. Crap ...

Leaving some serious $$ in my BRRRR, worth it?

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