Good BRRRR opportunity or run like h*ll?

Question

Hi all!

Was contacted today by a wholesaler looking to offload this property.  Asking $75K with an ARV of around $160,000.  Property is located in a decent area that I am familiar with and there are quite a few comps that have been sold over the past year around the ARV.  Lookin for opinions on if this is one you would tackle or run without looking back.  Thanks!

Bruce Woodruff · Answer

So $75k and $80k = $155k

Current value is $160......

Let me see........ummmmm........NO

Michael Plante · Answer

What am I missingthere is zero profit and actually a loss

Why are you even considering this?

Bruce Woodruff · Answer

Or the repair cost.....$80k seems high.....

Kenneth Williams · Answer

How much for the rehab? Are you borrowing the money?@Joe Lijoi

Alexander Szikla · Answer

Seems like a pass - wholesaler probably pumped the ARV and you aren't taking into account your utility costs, cost of financing, taxes, etc.

Doesn't seem like too much meat on the bone.

Andrew Croley · Answer

RUN away.

If it's $75K purchase and $80K rehab (always seems to go beyond the budget), then your max flip profit is $5K, assuming you pay NO realtor fees, NO closing costs, and have NO cost over runs, NO holding Costs, NO finance costs, etc.  With Max $5K to be made, the only one who actually stand to make money on the deal is 1) The WHOLESALER and 2) the CONTRACTOR, there is NO money to be made from the investor.

** Now, having said that, there is ONE case where the deal may be worth it, and only if it otherwise fits in your long term financial planning.  That is the BRRRR (how many R's in that?) method.  IF you buy for $75K and the rehab actually costs you $80K, you will likely technically be a little bit upside down on the cashout with closing costs, etc likely exceeding $5K on a cashout refi of investment property, BUT the upside I see it is that you have a FULLY Renovated LONG TERM rental that YOU did the rehab on (managed and paid for, made decisions about, etc) so you can be relatively sure that it was done right (assuming you had a quality contractor and managed the rehab properly).  As opposed to someone else's FLIP project where you don't actually know where they cut corners, etc likely until after the fact.  So, in this BRRR  hold scenario, you can at least have peace of mind that you have a quality long term rental to hold and since you just did a great modern rehab on it, you should be able to command the high end of the rental price spectrum.

I've done this a number of times, and have had some projects overrun their budgets to where I was technically negative equity in the place, BUT, since it's not a FLIP/SELL, I'm not forced to sell.  Instead I get a GREAT rent price out of the home and end up with a GREAT ROI after I do a cashout refi and get 70-75% of my money back out (hopefully more like 80-100+%, but I really can't complain about getting 75% back out and only having 25% equity in the house since I know the rehab was done well from my contractors).

Basic Scenario example: $100K all in estimate for purchase and rehab.  Actual cost say $105K, plus $5K closing on the cashout refi of 75% LTV.  Appraises for $100K, you're into it for $110K and you cashout $75K.  In this scenario you have $35K of your money tied up into the property (not ideal), BUT you know it is likely in the top 5% of rentals for how nice the property is, fit and finish of the materials and rehab, modern, AND you are likely commanding a much higher rent rate than typical dated/run down "comparable" properties for rent.  As a result, if you get an extra $200/mo rent on the place and it cost you an extra $5K (cause $5K of the expense was the closing costs on the refi that you would have even if you were under budget on the rehab), your ROI on that 5% overrun is still great!   This is compared to buying a "turnkey" rental for $100K, still having to put 20-25% down and pay closing costs.  I find most MLS "turnkey" investment property listings are NOWHERE near as nice as my rehabs and as a result, I get MUCH HIGHER RENT RATES.

One example was the "rent survey" from the appraiser was like $1400/mo rent and I already had it rented for $1800/mo.  Why?  Because the "comps" are typically clean but dated properties and good quality tenants (I find) are typically willing to pay much more for a NICE, Quality updated/modern rental.

So, short answer, RUN don't take on the project with such short margins, but IF you do, do so with a LONG TERM HOLD mindset and NOT a flip/sell goal.  AND make sure you don't borrow funding that will force you to sell if you don't have additional funds to cover the overages.  DON'T over leverage the project so that you are NEVER forced to sell to pay off a Note....otherwise you're just asking to lose money, and that means ALL the time you spent managing the project is a LOSS as well as the financial loss.

PM if you want to discuss this or other scenarios further.  I enjoy talking RE.

thanks!

Drew

Kristina Kuba · Answer

With holding costs you are at a loss.

Tim Delaney · Answer

@Joe Lijoi when you say $80k in financing do you mean that is what the rehab would be? It doesn’t seem like a great deal if that is the case unless the cash flow is over a $1000/month.

Kenneth Williams · Answer

@Joe Lijoi I think this one is a pass unless you can negotiate the cost down.

Scotty Brown · Answer

$80K... If days on market in that market are short, and you can fix it fast...

Good BRRRR opportunity or run like h*ll?

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