BRRRR in Phoenix... are my numbers right?

Question

Okay, so I'm crunching numbers on different BRRRR scenarios for SFRs, and just wanted to make sure I'm crunching my numbers right.

In a nutshell as an example: if I buy at $175k, put 25% down, and add the usual closing/holding, repair costs, if the ARV for the property is $250k for refi purposes, I'll still be in the property in terms of my initial cash out of pocket for around $25k after the $75k initial out of pocket invested. The reason I used $175k and $250k is that's 70% off ARV.

I did use the BRRRR calculator here on BP, and also confirmed via my own spreadsheet. So, I'm thinking I'm going to have to 1) try and get a bigger discount at purchase, 2) let the cash flow pay itself back over time, or 3) get more cash for deals. At this rate, I can only do two deals with the cash on hand before I'm on the sidelines again :)

Is it pretty common right now for Phoenix deals to leave (a good chunk) of money in each property? Just wanted to make sure I know what I have to work with here. Thanks all!

David Avery · Answer

It's hard to buy a chicken coop in Phoenix and surrounding areas for under $200,000.But you put in $30,000-$40,000 in it and hold for a year and sale it for $300,000.Welcome to the Phoenix and surrounding area's.The economy and need for housing is so great!

Nicole Lee · Answer

@Thomas Lo as mentioned above, it’s the appreciation that makes it worth it in Arizona. The equity in the homes will grow quickly. Don’t think of it as being sidelined. Allow the investments to make your profit then reinvest

Tim Fazio · Answer

@Thomas Lo the BRRRR strategy can be a tricky one if you do not structure accordingly in the beginning with the intent to pull out most of your money. There are different constraints for cash out or refi after 3 months but before 6 months and then after 6 months. ARV can be used after 3 months and considered a delayed purchase but cost is still determined as a limiter to total cash out. Meaning you can get up to 100% of your cost out as long as the ARV is below 75% if you are an experienced investor (5 or more deals in last 3 years) If you have done less than that the ARV is limited to 70%. After 6 months, cost is not consideration and can be cashed out at 75% ARV. Hope this helps and happy to chat further.

Tim Delaney · Answer

@Thomas Lo Is there a reason you are focused on the Phoenix market? Yes, you may get the appreciation that David and Nicole mentioned...but you may not. investing for appreciation is speculation. I wasn’t in real estate in 2008-9, but I recall that Phoenix values were hit particularly hard when the bubble burst. If the initial refi and cash flow don’t return your investment quickly enough then you won’t be able to continue investing.You should calculate your Cash on Cash return with the money you leave in the deal. So, in your example you put $43k in (25% of $175k purchase) plus $30k in closing costs and rehab. If it then appraised for $250k you are able to pull out about $175k. You would get your initial $43k back and your first lender would be paid off, but you wouldn’t get the $30k back - so that is the second ‘Cash’ in the Cash on Cash return. Now add up the actual cash flow you will get on the property in the first year (after mortgage, taxes, insurance, maintenance, management, capex) and divide that by the $30k. (The BRRRR calculator also shows you this number.) personally, I won’t do a deal with less than 100% CoC, but I prefer much higher.

David Avery · Answer

If you buy in Phoenix ( or close by) your property will appreciate so fast that in 3 years you will make $100,000 on almost any property you buy!It is crazy but true!!Great market here and when your ready to pull the trigger if the property needs any work done.I have a guy!!!

Thomas Lo · Answer

Hi David,Yep. I'm crunching the numbers, and all the retail MLS deals that won't be major rehab are $200k and up. The ones being sent my way at $150k are real beaters, neighborhood included. So, I may have to figure out a niche marketing strategy and plan for the long term.Good thing is I've already got a solid property with good equity and cashflow, so it takes the pressure off. Thanks for the reply!

Tim Fazio · Answer

@Thomas Lo. Happy to chat anytime.

Thomas Lo · Answer

Hi Tim, thanks for the lending feedback. I've got a HML that's got a six month requirement before any refinancing, and another that's got a hefty fee, but does loan for any rehab costs. I've not look further than this, but will connect with you here so we can chat as I get further in. Appreciate your insights!

Thomas Lo · Answer

Hi Tim,Sorry I got caught up with Property Radar--new toy with many features! I agree with your assessment. The ROI metrics, even if I leave 50% of the initial investment in, work for me. I'm not in a rush, so am being careful (picky?) about making sure the first deal doesn't blow up on me. In the Phoenix market, I see there are deals but as many have said, the rehab costs, or complete renovation more like, can be more than the numbers make it worth. 100% COC will be tough for my parameters, so we'll see how the deals go. Thanks!

Thomas Lo · Answer

Hi Nicole,LOL, yes, I have to see the upside in this. If the appreciation is there, then doing another refi to pull out and repeat will be a-okay. Just on a longer time scale. :) Thank you for the reminder.