Estimating Expenses on SFH BRRR Deals

[Gabe Goudreau]

Going through and underwriting a couple of SFH BRRR opportunities I've came across in the Indianapolis MSA, specifically Marion County.

I'm not local to the area, and am not familiar with operating expenses for these types of projects. I'm more used to underwriting MF deals and extrapolating existing T12 data, so this is a bit different for me.

All the properties are 3 beds, ranging from 1000 to 1400 sqft. They are in Fountain Square, Crooked Creek, and Forest Manor/Audubon Gardens.

I normally see expense ratios sitting around 40-50% for SFH's, is this accurate for this area?

With that being said, how is anyone making BRRRs work in today's climate (without heinously lowballing)? The deals I underwrite have been cash flowing right up until I put debt service on them, even with taking a break even amount in a refi. 

Would love to get some inputs, and to connect with pros in the area. 

Thanks! 

[Jaycee Greene]

Hey @Gabe Goudreau! Most of my clients run their SFRs at a 25%-30% (excluding vacancy/credit loss) operating expense margin and most of the banks I deal with on their DSCR loans underwrite using 35%. Depending on your taxes and insurance rates in your market, these could be a little higher for you. I've been told New Orleans lenders use a 40% OpExp margin due to hurricane insurance premiums.

[Jaron Walling]

@Gabe Goudreau We're investors in Indy and have completed a few BRRRRs on the east side. You have to cast the fishing line over and over again until something bites. 

From an investors prospective there are few opportunities. MLS is priced aggressively and nets no profit (flip) or cash-flow (BRRRR) unless you low ball. Wholesaler is stuff is mostly bottom of the barrel. Check out 729 N Chester Ave. I walked this property about a month ago when it was full of trash. Wholesaler had it for $90k "as-is", another wholesaler bought it, cleaned it out, and relisted it for $120k. It wasn't a good deal $90k because of the age, weird layout, and the bathroom was tiny. It needs a full rehab, roof, garage, appliances, everything. We estimated the ARV to be $150-160k. Paper napkin math says skinny deal.

Don't get caught in a wholesaler shuffle. A cleanout does not create $30k in value.

Update; that property is pending at $120k so maybe I'm dumb. If it sells for >$120k I'll get a good chuckle and continue being clueless about this market. 

[Gabe Goudreau]

Quote from @Jaron Walling:

@Gabe Goudreau We're investors in Indy and have completed a few BRRRRs on the east side. You have to cast the fishing line over and over again until something bites. 

From an investors prospective there are few opportunities. MLS is priced aggressively and nets no profit (flip) or cash-flow (BRRRR) unless you low ball. Wholesaler is stuff is mostly bottom of the barrel. Check out 729 N Chester Ave. I walked this property about a month ago when it was full of trash. Wholesaler had it for $90k "as-is", another wholesaler bought it, cleaned it out, and relisted it for $120k. It wasn't a good deal $90k because of the age, weird layout, and the bathroom was tiny. It needs a full rehab, roof, garage, appliances, everything. We estimated the ARV to be $150-160k. Paper napkin math says skinny deal.

Don't get caught in a wholesaler shuffle. A cleanout does not create $30k in value.

Update; that property is pending at $120k so maybe I'm dumb. If it sells for >$120k I'll get a good chuckle and continue being clueless about this market. 

Very interesting, I just ran through the numbers of that property myself. I saw a few higher comps that may lead some to push the arv: 956 N Chester - Sold for $182.5k ($133/sqft), 607 N Chester - Sold for $165k ($130/sqft)(2 baths though), and 520 N Bradley - Sold for $170k ($113/sqft)(also 2 baths). Averaging these, I calculated ARV to be $174k. Knocking off $4k for that additional bathroom let's say it's $170k ARV, looking at this for a flip and using the 75% formula and a $120k buy price that only leaves $7500 for a reno budget - I'm no expert but I'm pretty sure it'll take more than that!

Rentometer has avg rents at only $1067/mo so I'm also not sure about paying that much for such little rent for a long-term hold perspective when from what little research I've done you can get more elsewhere for the same buy price - maybe someone looking to park money for tax purposes or an all-cash deal hoping for a big upside? 

Thank you for the advice, crazy times we are in. This deal confuses me too!