Is my BRRRR ARV too high?

Question

Hi, new investor here analyzing deals to find my first BRRRR opportunity.

I've found a property in RI that meets all the criteria I like to see... multifamily in need of rehab, some work already started, good location, etc.

The issue is this: the property could be acquired and rehabbed with a basis of $175K-$200K (assuming my offer is accepted or negotiated up a bit). The ARV on this property would be in the range of $300K- based on comps (what a steal!) The cash-out refinance would return more than the original basis invested. BUT, the mortgage on a $300k loan (plus taxes, maintenance, capex, etc) results in negative cash flow. The property simply wont rent for enough to cover the expenses.

I could do this, and (best-case scenario) put about $35K into my pocket after 6 months of seasoning. But then I'll just bleed out holding the property... What's the solution? Is this an indication that this is a flippable property but not a hold? Or is there something I can figure to raise cash-flow without sacrificing the big cash-out refi? *EDIT: Maybe I would need to sacrifice the big cash-out if I want to hold this property?

Any advice would be greatly appreciated!

Steven M Herrick · Answer

Hey Clay, thanks for the reply. I would be doing a private money loan for the initial purchase. I think without a way to get the cash flow up, I will not consider holding the property and would do a (quick as possible) flip. I don't want to flip properties for a living, but it would be a good way to increase my own capital for the next deal!

Clay Boykin · Answer

@Steven M Herrick It starts with your goals. Since this is a long term process (6 months), it would obviously be a BRRRR. BUT, in this case since you only will be able to put about 35k in your property, I would do a STR and/or flip. Most BRRRR's are going to be around a year-3 years term. Most investors pull their equity out going into the second year so that way they can make about 100-200$ a door. Also, what type of loan are you doing? If I were you, I would turn most to Hard Money for a flip/str. Most lenders want their money back in a 12 months time, and doing this you could keep your ARV high.

Happy Investing!

Chris Levarek · Answer

Most BRRRR's won't work in today's market, due to over inflated price values based on consumer demand and won't satisfy cash out refi  max limits. BRRRRR's always have a limit to the amount that makes sense and thus are difficult to accurately predict. Too high an ARV and it's a flip . Too low an ARV and you lose money. Just right and you walk away with all your equity and a cash flowing property.

Remember the goal is to reuse your equity first, and profit 2nd. However, just because a property ARV's at a price, doesn't mean you can't tell the lender you only want a loan for X amount, thus preserving cashflow. Then you can even take a HELOC for the remaining equity, if you desired.

As to the 6 month holding costs, consider reading @Alexander Felice comments in this post https://www.biggerpockets.com/...

Nicholas L. · Answer

@Steven M Herrick you really found a property where ALL COSTS - purchase, rehab, holding, closing, refi, absolutely everything - is $175K, and the ARV is $300K?  Congrats and good on you if you did... but what is the purchase price?  <$100K?

Zachary Beach · Answer

@Steven M Herrick this is a good problem to have. If you want to hold you could take out less of a refi loan normally you get a better interest rate also. If you don’t have a dedt service rate issue than you could get the extra money and just hold it in cash or invest it and us that money to pay down the extra. But it must fit your goals and often selling could be better. You could also just do a 1-2 year hold so you could 1031 or only pay capital gains if that’s better for your tax situation. Paying 25-50% in taxes on the profit may make holding even and a bit of better option. You could try something like a lease option. The option fee should make it cashflow positive for the first year or two I would think and if they buy you would have pushed the time back to save on the taxes and if they don’t by you still made extra and pushed back the time so you can save on taxes. If you have another great deal lined up but no way to find it then just flipping could be the right more.

Matthew Crivelli · Answer

@Steven M Herrick How many units is this property? Gross monthly rent, annual taxes and insurance? These numbers would give me a better idea if you would cash flow or not. The numbers on the initial purchase look good to me.

Steven M Herrick · Answer

Hi Matthew, I might have this all wrong...

Assuming $175K to purchase and renovate, and and ARV of $300K... I do a cash-out refinance at 75% LTV, which equals a mortgage of $300K and a (300 * 0.75 = 225) $225K cash-out. $225K(cash-out) - $175K(basis) = $50K, my immediate profit after refinancing. Less about (I calculated) $15K for carrying costs, closing, assessments, etc., that's where I got $35K.

Assuming $200K all in, same ARV... same 75% LTV again gets us $225K(cash-out). $225K - $200K = $25K, which is again, profit. Less the same miscellaneous expenses, equals about $10K in my pocket.

Am I missing something important here? When I initially started I had a really hard time wrapping my head around the cash-out refinance, I thought I cleared it up, but maybe not?

Matthew Crivelli · Answer

Who is doing 100% LTV cash outs? You would only to be able to pull 70%-80% of the equity out of the property. How did you work the numbers on the note? At 300k or 225k? (75%)

Is my BRRRR ARV too high?

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