BRRRR Calculator: Need help in analyzing a property to determine if I hit the 1% rule

[Bria LaShee]

Hi I'm new to the BRRR calculator and I'm getting a little confused to know if this is a good deal and whether I will hit the 1% rule. Does anyone know where I can get someone to help me to analyze this property?

[Nicholas L.]

@Bria LaShee

yep - right here.  paste the numbers into this post.  or ask any general questions you have.

[Bria LaShee]

Quote from @Nicholas L.:

@Bria LaShee

yep - right here.  paste the numbers into this post.  or ask any general questions you have.

As is property asking 140k. The purchase loan is 126,000 with 10% down. 
points are 3.3
The estimated arv is 220,000. Rents can go for $1700. The loan to cost is 90%

[Jaycee Greene]

@Bria LaShee

How much will the rehab cost and how long will it take to finish? Using BP's 70% Rule, it would suggest $25k in rehab costs.

And how many bedrooms are there and in what market/city is this located? This sounds like a Section 8 play if you're open to it.

Also, with 10% down, are you house hacking this and purchasing this in your own name rather than an LLC?

[Bria LaShee]

The loan officer put 25k for rehab too. Bedrooms are 3 bedroom 1 bath. I was purchasing it in my LLC using the DSCR loan. Interest rate 7% over a 30 year loan.

[Nicholas L.]

@Bria LaShee

a few reactions:

-maybe i am misunderstanding, but you wouldn't typically buy with a DSCR loan, as you'd then have to refinance into another DSCR loan when you were done. you would typically buy with cash or hard money. are you buying with a hard money loan? 3.3 points is brutal.

-what the loan officer thinks the rehab will cost is irrelevant - you need your own rock-solid estimate.

-it likely will not cash flow after rehab and refinancing.  but post your estimated expenses if you have them.

hope this helps - if there are more details we are missing, add them.

[Bria LaShee]

Hi yes sorry it's a hard money with 3.3 points and then I'm going to refinance into a DSCR loan. Yes that's what the calculator is telling me but I'm not sure if I did the Numbers right because the loan officer keeps saying it's a good deal but you know the company have their best interest.

[Steven Worley]

It sounds like an okay deal, but a few factors to consider with the Philly market:

1. Location and Rentability: Philly’s rental market can vary widely depending on the neighborhood, and even the block that it's on. Make sure the expected $1,700 rent aligns with similar properties in your specific area. Vacancy rates and tenant demand are key, so researching current market trends in that neighborhood will give you a clearer picture.
2. Rehab and ARV: A $25,000 rehab estimate is reasonable, but make sure you have a detailed and reliable quote from a contractor. The quality of the rehab can significantly impact your ability to refinance and secure the projected ARV of $220,000.
3. Hard Money Loan Fees: 3.3 points on the hard money loan is on the higher side, and that upfront cost could eat into your cash flow. Make sure you account for all closing costs and holding expenses, as these can add up quickly.
4. Cash Flow After Refinance: Once the rehab is done and you refinance into the DSCR loan, ensure your monthly expenses, including mortgage and property management fees, allow for positive cash flow at the expected rent. If rent doesn't come in as projected or takes longer to secure, it could affect your profitability.

If you’re comfortable with these factors and confident in your numbers, it could work well. Keep an eye on the rehab costs and local rent comps to make sure everything aligns.

[Bria LaShee]

Quote from @Steven Worley:

It sounds like an okay deal, but a few factors to consider with the Philly market:

1. Location and Rentability: Philly’s rental market can vary widely depending on the neighborhood, and even the block that it's on. Make sure the expected $1,700 rent aligns with similar properties in your specific area. Vacancy rates and tenant demand are key, so researching current market trends in that neighborhood will give you a clearer picture.
2. Rehab and ARV: A $25,000 rehab estimate is reasonable, but make sure you have a detailed and reliable quote from a contractor. The quality of the rehab can significantly impact your ability to refinance and secure the projected ARV of $220,000.
3. Hard Money Loan Fees: 3.3 points on the hard money loan is on the higher side, and that upfront cost could eat into your cash flow. Make sure you account for all closing costs and holding expenses, as these can add up quickly.
4. Cash Flow After Refinance: Once the rehab is done and you refinance into the DSCR loan, ensure your monthly expenses, including mortgage and property management fees, allow for positive cash flow at the expected rent. If rent doesn't come in as projected or takes longer to secure, it could affect your profitability.

If you’re comfortable with these factors and confident in your numbers, it could work well. Keep an eye on the rehab costs and local rent comps to make sure everything aligns.

This is going to be a section 8 tenant but the numbers are stating $140 per month cash flowing using those numbers. On average for a single family what would be a decent amount for cash flow on a single family as a first time investor ?

[Jaycee Greene]

Quote from @Bria LaShee:

Quote from @Steven Worley:

It sounds like an okay deal, but a few factors to consider with the Philly market:

1. Location and Rentability: Philly’s rental market can vary widely depending on the neighborhood, and even the block that it's on. Make sure the expected $1,700 rent aligns with similar properties in your specific area. Vacancy rates and tenant demand are key, so researching current market trends in that neighborhood will give you a clearer picture.
2. Rehab and ARV: A $25,000 rehab estimate is reasonable, but make sure you have a detailed and reliable quote from a contractor. The quality of the rehab can significantly impact your ability to refinance and secure the projected ARV of $220,000.
3. Hard Money Loan Fees: 3.3 points on the hard money loan is on the higher side, and that upfront cost could eat into your cash flow. Make sure you account for all closing costs and holding expenses, as these can add up quickly.
4. Cash Flow After Refinance: Once the rehab is done and you refinance into the DSCR loan, ensure your monthly expenses, including mortgage and property management fees, allow for positive cash flow at the expected rent. If rent doesn't come in as projected or takes longer to secure, it could affect your profitability.

If you’re comfortable with these factors and confident in your numbers, it could work well. Keep an eye on the rehab costs and local rent comps to make sure everything aligns.

This is going to be a section 8 tenant but the numbers are stating $140 per month cash flowing using those numbers. On average for a single family what would be a decent amount for cash flow on a single family as a first time investor ?

Is the $1,700 you listed for rent based on the FMR for 3 bedroom units in the county the property is located? I see a reference to Philadelphia, but I'm not sure if that's where your property is.

[Bria LaShee]

Quote from @Jaycee Greene:

Quote from @Bria LaShee:

Quote from @Steven Worley:

It sounds like an okay deal, but a few factors to consider with the Philly market:

1. Location and Rentability: Philly’s rental market can vary widely depending on the neighborhood, and even the block that it's on. Make sure the expected $1,700 rent aligns with similar properties in your specific area. Vacancy rates and tenant demand are key, so researching current market trends in that neighborhood will give you a clearer picture.
2. Rehab and ARV: A $25,000 rehab estimate is reasonable, but make sure you have a detailed and reliable quote from a contractor. The quality of the rehab can significantly impact your ability to refinance and secure the projected ARV of $220,000.
3. Hard Money Loan Fees: 3.3 points on the hard money loan is on the higher side, and that upfront cost could eat into your cash flow. Make sure you account for all closing costs and holding expenses, as these can add up quickly.
4. Cash Flow After Refinance: Once the rehab is done and you refinance into the DSCR loan, ensure your monthly expenses, including mortgage and property management fees, allow for positive cash flow at the expected rent. If rent doesn't come in as projected or takes longer to secure, it could affect your profitability.

If you’re comfortable with these factors and confident in your numbers, it could work well. Keep an eye on the rehab costs and local rent comps to make sure everything aligns.

This is going to be a section 8 tenant but the numbers are stating $140 per month cash flowing using those numbers. On average for a single family what would be a decent amount for cash flow on a single family as a first time investor ?

Is the $1,700 you listed for rent based on the FMR for 3 bedroom units in the county the property is located? I see a reference to Philadelphia, but I'm not sure if that's where your property is.

Yes it’s 19120. For a 3 bedroom its showing 1780

[Stuart Udis]

@Bria LaShee Let’s take a step back here. You are buying a single family rental in the 19120 zip code with the intent of leasing this home to a PHA Voucher recipient. What’s the thesis behind this purchase? By this I mean why will this property appreciate? Cash flow alone won’t get you anywhere because the cash flow in section 8 SF homes get wiped away with cap ex and operating expenses and your spreadsheet doesn’t tell the true story, trust me on that. 

19120 is comprised of neighborhoods with relatively weak fundamentals that’s experienced limited appreciation/growth compared to other areas of Philadelphia. This is a casebook study of placing too much focus on the 1% rule which is not at all a good indicator of a properties performance while ignoring the factors that are far more telling.

Unfortunately the 1% rule gets so much attention and so many new investors are trained to look for properties that meet the 1% rule. Quite possibly the worst advice new investors rely on. 

[Jake Baker]

@Bria LaShee

Be sure to be conservative with your numbers:
Rehab Budget: Ensure that bids are received from multiple contractors and that adequate reserves are made for cost overruns.
ARV: Be conservative on your ARV since the appraisal concerns one person's opinion.
Timeline: Whatever a contractor says, add 4-8 weeks.

25k for the rehab seems light. What do you plan to do?

[Pat Lulewicz]

If those are real numbers - flip it! You're probably in for $180k - $185k. After closing costs, you're probably netting $21k - $26k...if you're newer and this is a deal in your hands, I'd run with it all day.

[Kevin Sobilo]

Quote from @Bria LaShee:

Quote from @Jaycee Greene:

Quote from @Bria LaShee:

Quote from @Steven Worley:

It sounds like an okay deal, but a few factors to consider with the Philly market:

1. Location and Rentability: Philly’s rental market can vary widely depending on the neighborhood, and even the block that it's on. Make sure the expected $1,700 rent aligns with similar properties in your specific area. Vacancy rates and tenant demand are key, so researching current market trends in that neighborhood will give you a clearer picture.
2. Rehab and ARV: A $25,000 rehab estimate is reasonable, but make sure you have a detailed and reliable quote from a contractor. The quality of the rehab can significantly impact your ability to refinance and secure the projected ARV of $220,000.
3. Hard Money Loan Fees: 3.3 points on the hard money loan is on the higher side, and that upfront cost could eat into your cash flow. Make sure you account for all closing costs and holding expenses, as these can add up quickly.
4. Cash Flow After Refinance: Once the rehab is done and you refinance into the DSCR loan, ensure your monthly expenses, including mortgage and property management fees, allow for positive cash flow at the expected rent. If rent doesn't come in as projected or takes longer to secure, it could affect your profitability.

If you’re comfortable with these factors and confident in your numbers, it could work well. Keep an eye on the rehab costs and local rent comps to make sure everything aligns.

This is going to be a section 8 tenant but the numbers are stating $140 per month cash flowing using those numbers. On average for a single family what would be a decent amount for cash flow on a single family as a first time investor ?

Is the $1,700 you listed for rent based on the FMR for 3 bedroom units in the county the property is located? I see a reference to Philadelphia, but I'm not sure if that's where your property is.

Yes it’s 19120. For a 3 bedroom its showing 1780

I believe the FMR (Fair Market Rent) tables for section 8 include all utilities. So, they may not approve $1700 rent if that is the table you're looking at unless you are including all utilities which I don't recommend for a single family.

[Bria LaShee]

Quote from @Kevin Sobilo:

Quote from @Bria LaShee:

Quote from @Jaycee Greene:

Quote from @Bria LaShee:

Quote from @Steven Worley:

It sounds like an okay deal, but a few factors to consider with the Philly market:

1. Location and Rentability: Philly’s rental market can vary widely depending on the neighborhood, and even the block that it's on. Make sure the expected $1,700 rent aligns with similar properties in your specific area. Vacancy rates and tenant demand are key, so researching current market trends in that neighborhood will give you a clearer picture.
2. Rehab and ARV: A $25,000 rehab estimate is reasonable, but make sure you have a detailed and reliable quote from a contractor. The quality of the rehab can significantly impact your ability to refinance and secure the projected ARV of $220,000.
3. Hard Money Loan Fees: 3.3 points on the hard money loan is on the higher side, and that upfront cost could eat into your cash flow. Make sure you account for all closing costs and holding expenses, as these can add up quickly.
4. Cash Flow After Refinance: Once the rehab is done and you refinance into the DSCR loan, ensure your monthly expenses, including mortgage and property management fees, allow for positive cash flow at the expected rent. If rent doesn't come in as projected or takes longer to secure, it could affect your profitability.

If you’re comfortable with these factors and confident in your numbers, it could work well. Keep an eye on the rehab costs and local rent comps to make sure everything aligns.

This is going to be a section 8 tenant but the numbers are stating $140 per month cash flowing using those numbers. On average for a single family what would be a decent amount for cash flow on a single family as a first time investor ?

Is the $1,700 you listed for rent based on the FMR for 3 bedroom units in the county the property is located? I see a reference to Philadelphia, but I'm not sure if that's where your property is.

Yes it’s 19120. For a 3 bedroom its showing 1780

I believe the FMR (Fair Market Rent) tables for section 8 include all utilities. So, they may not approve $1700 rent if that is the table you're looking at unless you are including all utilities which I don't recommend for a single family.

May I ask what table do you look at? 

[Stuart Udis]

@Pat Lulewicz There is no margin in this deal based on the numbers @Bria LaShee shared despite how it may appear on the surface.  Lower priced real estate is disproportionately impacted by transactional costs as a general rule of thumb and layer on to that City/State transfer taxes in Philadelphia are north of 4% (customarily split between buyer/seller). Furthermore, Bria mentioned she's using a loan with 3.3 points on origination which is quite high. 

Most importantly, the question most section 8 housing investors never consider is what's the exit? This applies to all section 8/lower priced point SFH investors. No investor is going to pay $220,000 for this house which means Bria will be looking for an owner occupant and that buyer is most likely relying on FHA financing. Preparing a home for a section 8 tenant is very different than selling a home to an FHA buyer.

You should use conservative assumptions in general but when it comes to transacting at price points with FHA buyers you should use the worst case assumptions because they are often times the reality. This means 5-6% seller assist & a 15 page inspection report of corrective items because the buyer has no money and realizing this they require the home to have as little deferred maintenance as possible.

Paying 13-15% in transaction/exit related fees and expenses is the unfortunate reality of selling affordable SFH housing. It gets even worse if you have to first vacate a Section 8 tenant and turn over the unit before putting it on the market because there are added turnover costs as well.

[Pat Lulewicz]

@Stuart Udis no need to call people out for their suggestions when "based on the numbers [she shared]" good-ole, 4th-grade math says there's margin; make your point in a more worthwhile way...on Tgiving nonetheless.

[Stuart Udis]

@Pat Lulewicz You can rely on your "4th grade math" but it's not the reality of transacting in the $200K SFH house space in Philadelphia. Shouldn't those who rely on these forums for advice hear the truths of investing in the entry level SFH's. Philadelphia just happens to have even higher transactional costs than most cities which makes matters worse.

[Alan Asriants]

So, from my understanding, the 1% rule is simply that the monthly rent is 1% of the purchase price of the property. As you move down in class of real estate, you will get closer to this number naturally. Typically properties that are higher risk are going to yield higher returns. But the key is in the risk part. Since Real Estate is not just a paper investment, or a simple note, it involves housing people for a long period of time, and when you move into riskier areas, your paper results tend to be not in line with the reality. This is due to higher chances for eviction, higher maintenance costs, higher turnover, higher vacancy, etc. 

It's important to know that the 1% rule that is often found in educational material is already a bit outdated simply due to the times of the market and how the market has changed since the publishing of that book or material. Also, the area in which you purchase property will largely affect this as well. 

To add to Stuart's point he's just trying to make sure that Bria understands that investing in these kinds of areas and aiming to meet certain return parameters is not the only thing to look at when analyzing RE. 

Real Estate is a long-term investment that should be looked at over a 5 to 10 year perspective. 

Here are the following things that I recommend that you look at before making an investment. And these are often more important than cash flow.

1. Location - would you live here? How has this neighborhood appreciated in the past 10 years? Has this neighborhood improved? Hasn't remain steady or is it on the decline? 

2. Condition and age - what is the overall condition of the property is it well-maintained? Does it need to be completely redone? How old are the plumbing and electrical lines in the property? This is especially true when buying in Philadelphia or some of the properties are over 100 years old. 

3. Layout and style - lots of older homes might appear to be very enticing because of the attractive price points but when you look at the overall functionality of the property and compare it to something that flows better, you'll easily understand that it is more difficult to change our property functions with simple cosmetic rehab. Plus, it makes it easier for you to rent to people when you have a more functional layout

Investors that I met that have had the largest amount of success bought properties in the best areas took great care of them and put people in them. They took care of the properties. 

Long story short, you will find yourself to be in a better position (in the long term) if you buy a property in a great location that is well kept has a great layout and has great tenants in the building. Not only will your property appreciate more overtime getting you more wealth, but rent will also increase larger proportionally, while your payments remain more or less the same. 

Best of luck!