newbie BRRRR investor - does this sample deal look good?

[Sharma Parth]

Hi - just starting to get into the BRRRR deal concept - here is an example of a deal that I am getting.

I am considering doing a flip vs buy and hold. 

Again the below is just a best estimate - Do you guys think I'm factoring in 99% of the expected costs?

[Jason Wray]

Sharma,

Just a few things on the surface the deal looks great in terms of gained equity for the price plus injected costs to renovate/repair. There is No rents to see if it will support itself after the refinance, so its tough to speculate on ROI/cash flow on a long term investment. Just from a fix & flip it looks great but have you considered a 1031 exchange to avoid the capital gains?

Who is doing the ARV evaluation because I have seen a lot of examples over the last 3 years when a new investor looks to buy a property and ends up having the wrong ARV or sale value. If you refinance keep in mind you can get up to 80% LTV even as an investment rental.

I would look into a 1031 exchange to avoid that huge Tax hit... 

[Sharma Parth]

Quote from @Jason Wray:

Sharma,

Just a few things on the surface the deal looks great in terms of gained equity for the price plus injected costs to renovate/repair. There is No rents to see if it will support itself after the refinance, so its tough to speculate on ROI/cash flow on a long term investment. Just from a fix & flip it looks great but have you considered a 1031 exchange to avoid the capital gains?

Who is doing the ARV evaluation because I have seen a lot of examples over the last 3 years when a new investor looks to buy a property and ends up having the wrong ARV or sale value. If you refinance keep in mind you can get up to 80% LTV even as an investment rental.

I would look into a 1031 exchange to avoid that huge Tax hit... 

 Hi Jason - I thought 1031 exchange on a fix and flip is not allowed by the IRS? 

On your other two points - 

The ARV is from recent comps in the area in the last 6 months

The rent is also very good/decent in the area (from Section 8 tenants) - approx $250/month of cash flow when you remove the mortgage etc.

[Sharma Parth]

Quote from @Jason Wray:

Sharma,

Just a few things on the surface the deal looks great in terms of gained equity for the price plus injected costs to renovate/repair. There is No rents to see if it will support itself after the refinance, so its tough to speculate on ROI/cash flow on a long term investment. Just from a fix & flip it looks great but have you considered a 1031 exchange to avoid the capital gains?

Who is doing the ARV evaluation because I have seen a lot of examples over the last 3 years when a new investor looks to buy a property and ends up having the wrong ARV or sale value. If you refinance keep in mind you can get up to 80% LTV even as an investment rental.

I would look into a 1031 exchange to avoid that huge Tax hit... 

 Hi Jason - any feedback?

[Jason Wray]

Quote from @Sharma Parth:

Quote from @Jason Wray:

Sharma,

Just a few things on the surface the deal looks great in terms of gained equity for the price plus injected costs to renovate/repair. There is No rents to see if it will support itself after the refinance, so its tough to speculate on ROI/cash flow on a long term investment. Just from a fix & flip it looks great but have you considered a 1031 exchange to avoid the capital gains?

Who is doing the ARV evaluation because I have seen a lot of examples over the last 3 years when a new investor looks to buy a property and ends up having the wrong ARV or sale value. If you refinance keep in mind you can get up to 80% LTV even as an investment rental.

I would look into a 1031 exchange to avoid that huge Tax hit... 

 Hi Jason - any feedback?

Yes, There are some shorter time frames on 1031 exchange you have to use a seasoned 1031 company.  In most cases there is very little fix and flip profits as a long term benefit.  This is just my opinion because in over 18+ years in banking I have had thousands of customers who started off doing fix and flips change gears and then buy and hold.  If you hold it for 8-10 months you can start the application process and close on or after the 12th month.

It makes very little sense to me to fix and flip a property if it cash flows and you have a good enough ARV to pull cash out and repeat the process.  Again my advice comes from working with investors like "Rich Dad, Poor Dad" whose whole philosophy is if it cash flow dont sell it use the equity to buy another property.  Avoid the capital gains and use your Shedule E, LLC or business returns to offset passive income with great tax deductions and write offs.

A fix and Flip can offer a good way to get some fast cash and deal with taxes in aother manner but again its still not the long game I think works best.  Especially now that home values are about to increase again, mostly in part to lower rates as of last week and still lower to come after the election and into 2025.

As these mortgage rates continue to drop further it will cause more buyers to come off of the side line putting in offers.  That will cause a sellers market due to multiple bids over bids and properties now appraising back on positives.  That also means longer holds will appreciate faster allowing you to buy a TLC property, renovate and benefit on the ARV which will gain quicker in a market similar to 2021-2022.

Reason why I mention this is if your buying fix and flips your prices will start to go up making it harder to use all cash to buy them.

[Dave Foster]

@Sharma Parth, You are correct.  You cannot do a 1031 exchange on a fix n flip.  Your intent must be to hold for productive investment use.  And although it's not a hard and fast rule, the general guideline is to hold the property for a year.

But the fix n flip also doesn't work with a BRRRR. Those are two different concepts. A BRRRR works beautifully with 1031 exchanges.

In your situation don't sell.  do the refinance.  Pull out the $140K and purchase your next property while renting the first property.  The cash flow from the rental will help your lendability.  And you won't immediately give up 40% of your profit in taxes.

Simply keep repeating this process with one addition - periodically (when you have a good reason) you will sell one of your rentals and using a 1031 exchange, purchase 1 or two new properties to again BRRRR. This way your portfolio stays fresh, non-taxed, and productive.

I have clients who have done upwards of 30 1031 exchanges in a given year - all on properties they had owned for at least a year. And all purchased through a BRRRR process.

[Connor Hibbs]

Hi Sharma, these numbers look good. I'd recommend factoring in a bit more time for how long the rehab will take to be on the safe side, but I do like the MISC Expenses buffer that you put in there. 

[Sharma Parth]

Quote from @Connor Hibbs:

Hi Sharma, these numbers look good. I'd recommend factoring in a bit more time for how long the rehab will take to be on the safe side, but I do like the MISC Expenses buffer that you put in there. 

 Thank you Conor for your feedback. I really appreciate this. 

[Sharma Parth]

Quote from @Dave Foster:

@Sharma Parth, You are correct.  You cannot do a 1031 exchange on a fix n flip.  Your intent must be to hold for productive investment use.  And although it's not a hard and fast rule, the general guideline is to hold the property for a year.

But the fix n flip also doesn't work with a BRRRR. Those are two different concepts. A BRRRR works beautifully with 1031 exchanges.

In your situation don't sell.  do the refinance.  Pull out the $140K and purchase your next property while renting the first property.  The cash flow from the rental will help your lendability.  And you won't immediately give up 40% of your profit in taxes.

Simply keep repeating this process with one addition - periodically (when you have a good reason) you will sell one of your rentals and using a 1031 exchange, purchase 1 or two new properties to again BRRRR. This way your portfolio stays fresh, non-taxed, and productive.

I have clients who have done upwards of 30 1031 exchanges in a given year - all on properties they had owned for at least a year. And all purchased through a BRRRR process.

Thank you Dave for the amazing advice. I agree with your approach totally and most likely I may end up following that. I am just a little nervous with a buy and hold with concerns if I will get a tenant but then that's on me to do my homework up front. I have identified the following people I need to have in place before I pull the trigger on a BRRRR opportunity

1. A good contractor

2. Good lender

3. Title Company

4. A good local real estate agent.

Of course having a back-up to 1-4 above will help too.

Thanks again

[Sharma Parth]

Quote from @Jason Wray:

Quote from @Sharma Parth:

Quote from @Jason Wray:

Sharma,

Just a few things on the surface the deal looks great in terms of gained equity for the price plus injected costs to renovate/repair. There is No rents to see if it will support itself after the refinance, so its tough to speculate on ROI/cash flow on a long term investment. Just from a fix & flip it looks great but have you considered a 1031 exchange to avoid the capital gains?

Who is doing the ARV evaluation because I have seen a lot of examples over the last 3 years when a new investor looks to buy a property and ends up having the wrong ARV or sale value. If you refinance keep in mind you can get up to 80% LTV even as an investment rental.

I would look into a 1031 exchange to avoid that huge Tax hit... 

 Hi Jason - any feedback?

Yes, There are some shorter time frames on 1031 exchange you have to use a seasoned 1031 company.  In most cases there is very little fix and flip profits as a long term benefit.  This is just my opinion because in over 18+ years in banking I have had thousands of customers who started off doing fix and flips change gears and then buy and hold.  If you hold it for 8-10 months you can start the application process and close on or after the 12th month.

It makes very little sense to me to fix and flip a property if it cash flows and you have a good enough ARV to pull cash out and repeat the process.  Again my advice comes from working with investors like "Rich Dad, Poor Dad" whose whole philosophy is if it cash flow dont sell it use the equity to buy another property.  Avoid the capital gains and use your Shedule E, LLC or business returns to offset passive income with great tax deductions and write offs.

A fix and Flip can offer a good way to get some fast cash and deal with taxes in aother manner but again its still not the long game I think works best.  Especially now that home values are about to increase again, mostly in part to lower rates as of last week and still lower to come after the election and into 2025.

As these mortgage rates continue to drop further it will cause more buyers to come off of the side line putting in offers.  That will cause a sellers market due to multiple bids over bids and properties now appraising back on positives.  That also means longer holds will appreciate faster allowing you to buy a TLC property, renovate and benefit on the ARV which will gain quicker in a market similar to 2021-2022.

Reason why I mention this is if your buying fix and flips your prices will start to go up making it harder to use all cash to buy them.

 Thank you so much Jason for your feedback.

You seem to be someone who has dealt with multiple investor over the years and this advice is super helpful. I really appreciate this feedback.

I am hoping to be in a buy and hold strategy vs buy and flip (as long as the numbers make sense). I posted this earlier but I also want to ID a good team in the BRRRR process -

1. A good contractor

2. Good lender

3. Title Company

4. A good local real estate agent.

Of course having a back-up to 1-4 above will help too.

Thanks again

[Sharma Parth]

Quote from @Connor Hibbs:

Hi Sharma, these numbers look good. I'd recommend factoring in a bit more time for how long the rehab will take to be on the safe side, but I do like the MISC Expenses buffer that you put in there. 

Connor - can you tell me how you would rank the following markets for a potential BRRRR deal (buy and hold) -

1. Philadelphia, Pennsylvania.

2. Flint, Michigan. or Detroit, Michigan.

3. Norfolk/Hampton/Portsmouth, Virginia.

Thank you

[Sharma Parth]

Quote from @Dave Foster:

@Sharma Parth, You are correct.  You cannot do a 1031 exchange on a fix n flip.  Your intent must be to hold for productive investment use.  And although it's not a hard and fast rule, the general guideline is to hold the property for a year.

But the fix n flip also doesn't work with a BRRRR. Those are two different concepts. A BRRRR works beautifully with 1031 exchanges.

In your situation don't sell.  do the refinance.  Pull out the $140K and purchase your next property while renting the first property.  The cash flow from the rental will help your lendability.  And you won't immediately give up 40% of your profit in taxes.

Simply keep repeating this process with one addition - periodically (when you have a good reason) you will sell one of your rentals and using a 1031 exchange, purchase 1 or two new properties to again BRRRR. This way your portfolio stays fresh, non-taxed, and productive.

I have clients who have done upwards of 30 1031 exchanges in a given year - all on properties they had owned for at least a year. And all purchased through a BRRRR process.

Hi Dave - can you tell me how you would rank the following markets for a potential BRRRR deal (buy and hold) -

1. Philadelphia, Pennsylvania.

2. Flint, Michigan. or Detroit, Michigan.

3. Norfolk/Hampton/Portsmouth, Virginia.

Thank you

[Alan Asriants]

If ARV is 200k and you can buy it for 75 and fix it for 40, I would say you are in the green. Given the low price point I would be hesitant on keeping the property depending on the quality of the area...

Keep the best, flip the rest.

If its a solid location, I'd consider keeping. 

Also, make sure you talk to a local Realtor who can analyze the market for you and tell you what you can expect when you try to sell. 

In our area, a property like this could either go in 2 days or sit on the market forever depending on location, comps, and local market. 

Looks like a solid flip, but due diligence about other factors besides numbers is very important

[Drew Sygit]

@Sharma Parth we wouldn't recommend Flint, as there is no positive business news there. Properties are super cheap in Flint for a reason!

Detroit has LOTS of exciting business news and is growing for the first time in decades:)

Curious as to where you got your example deal from and what city/state it's located in?