Trying my first BRRRR. Need advice!

[Brandon Levi Eagan]

I'm looking at a local SFH for sale. This would be my first rental property and first BRRRR.

Asking price is currently $100,000. It’s been listed for sale for almost 4 months.

3 bedroom 2 bathroom 1780 square feet

Fenced in backyard

Attached 2 car garage

New metal roof 2018

Taxes 2200

Built 1968

Assessed in 2018 at $119,000

Lot size 71 x 110

In a good neighborhood

Very outdated interior and part of old siding is falling off

I was going to use a hard money lender and offer roughly 85k and spend 10k renovating. I was going to lend 90-100.

This rehab shouldn’t take longer then 1 month.

I was going to then refinance and aim to get an ARV of 140,000+. There are many homes in area that are selling for 150 + range that have been updated.

There’s a wall that separates living room and kitchen and was thinking on knocking it down to open it up.

Electrical and plumbing look good but have yet to call for an inspection.

Find tenants and refinance, I have been pre approved at local credit union , and pay off hard money lender.

Any help with this? I’ve ran some numbers through the BP Calculator but my cash flow is very low.

Rent in this area for this house would range from 1000-1100.

Any help would be much appreciated !!

[Andrew Postell]

@Brandon Levi Eagan sorry about the delayed response here but I wanted to bring up 3 items for you to think about:

1. Appraised Value vs. Rental Income
2. Purchasing "on market"
3. What to ask ANY lender when BRRRR'ing

So let's tackle this first area:

1. Appraised Value vs. Rental Income - for most investors we try to target properties that will rent at 1% of the total ARV of the property. Admittedly, your market might be a little different than mine but if your property value is $140,000 and you can only rent it for $1,000 that would be EXTREMELY unusual. Meaning, I feel that either our ARV is off....or our rental income is off.

HOWEVER, and this is a big HOWEVER, if it is true that your value will be $140,000....then that means you can come out of pocket $0 on this deal.  And that to me makes it 100% worth it.  Here's what I mean:

• Your Hard Money Lender will likely lend you up to 75% of the ARV.  Essentially your purchase price + rehab.  75% of $140k = $105,000
• Your lender should be able to refinance the 75% and roll in closing costs (let's just say up to 80% of ARV).  80% of ARV = $112,000
  
• So even if you buy this property AT FULL ASKING PRICE...you are only coming out of pocket a couple of grand.
  

Again, if all this is true, then you should certainly do this deal. I'll add one other thing though....if all of this is true, then every other experienced investor knows this is true too....so why hasn't this deal moved for 4 months? And that's where the crux of this scenario lays. I feel that our math is off on the ARV of the property or on the rehab numbers. I've been wrong before and keep in mind I HAVE NO CLUE what the property looks like. My recommendation is to get some professional advice on both of those numbers. If all of it checks out, pull the trigger. This is a deal that we all look for but can never find.

2. Purchasing "on market" - any time you purchase "on market" (meaning the MLS) you will have every person in the area, and sometimes nationally, seeing this property. The listing agent is also usually very informed on what a property can sell for and it usually asking for the MAXIMUM amount possible. These two situations are why most investors target "off market deals". Deals that are NOT listed on the market. Sometimes you have to self source the deals and sometimes you rely on a wholesaler. That's how most of us use the BRRRR method. Buying off market properties that are in a "challenged" state of repair. Hope this makes sense.

3. What to ask ANY lender when BRRRR'ing - your REFINANCE step will be critical to your success here. And there are multiple different loan types out there and some lenders will have rules in place that will hinder our efforts. So how do we know which lender is good for the BRRRR method? You can start by asking these questions:

Questions for Lenders

1. When do you start using rental income to help me qualify? (the answer needs to be immediately)
2. When do you start using “After Repair Value” on my property? (likewise, must be immediately)
3. How long do you need me to be on title to refinance? (this is important if you do need a short term loan to purchase then refinance out - and the answer should be 1 day...very important that it is 1 day on title is all that is needed to refinance)
4. What is my minimum down payment required? (if they only require 15% down on a single family home that is usually a good sign that you are working with a flexible lender)
5. How many loans can I have with you?
6. Can I change title to my LLC?
7. Do you sell your mortgages?
8. What is your loan minimum?
9. Can you explain to me what your reserve requirements are?

*WHEW*  I know this was a lot but I sincerely hope this helps in some way.  Thanks!