Advice on deal in Denver

[Tanya Maslach]

Hi everyone!
We want to get into MF (2-3units to start) doing BRRR... and rent out for Mid term rentals.

We see a house that meets our buy box, and our investment goals are;
- $300 gross profit cash flow per month
- 30% equity + with forced appreciation after rehab
- Refi (if rates come lower!) in 12-18 months and do this again with larger multifamily.



Details below.   My questions are:

a. Would it be unwise to get a HELOC that takes out almost all our equity on our SFH rental to invest in a multfamily (2 unit; 2bed/1 ba per unit).
-- We are estimated ~ $80K in rehab and comps for ARV are $775-825K. (List price is $619K)
-- We are concerned about the monthly costs to support a hard money loan AND do a HELOC.
-- Our current rental can support a higher mortgage payment (with the HELOC), and still have $200+ positive cash flow after the refi.

b. After number crunching, we want to offer terms that work for 20% down + rehab estimation.. that puts the offer at around $525K. Mortgage payment with T/I - $2633.  
-->Rental estimations for area are (conservatively): $2000 lower unit, $2600 upper unit.

What about this doesn't work for you all, given our investment goal and strategy? What numbers am I not considering?

What questions am I not asking?

Thank you! 

[Tanya Maslach]

Quote from @Noah Wright:

Hey Tanya,

Sounds like you've got a solid plan for getting into multifamily and using the BRRRR method! Let's break down your questions:

a. Using a HELOC for Down Payment and Rehab Costs:
A HELOC can be a great way to access equity for new investments, but taking out nearly all the equity on your SFH rental could pose some risks. Since you're also planning to take a hard money loan for the rehab, be mindful of the combined monthly payments. While your current rental supports a higher mortgage with positive cash flow, you’ll want to ensure you have enough cushion to cover unexpected expenses or vacancies on either property. It's all fun and games until a reckless driver jumps the curb...

Since your investment goals are $300 monthly cash flow and 30% equity, you’ll need to make sure the numbers work for both properties under these new financing terms. It’s wise to run different stress tests on your budget to see how it handles fluctuating interest rates, higher costs, potentially lower market valuations, or worst-case-scenario acts of God.

b. Offer Price and Rental Income:
With an offer of $525K and a mortgage payment around $2,633, the rental income you’ve estimated ($2,000 for the lower unit and $2,600 for the upper unit) should comfortably cover the mortgage and taxes. However, since you mentioned this is a mid-term rental strategy, make sure to factor in vacancy rates, seasonal demand, and potential furnishing costs, which can be higher than long-term rentals.

What you may also want to consider:

• Exit Strategy: If rates don’t drop within 12-18 months for your refi, what will your backup plan look like? Would you be comfortable holding on to the property longer at current rates? 
• HELOC Flexibility: HELOCs often have variable interest rates, which could increase over time. Are you prepared for rising rates, especially if the refi timeline gets pushed back?
• Contingency Fund: With both a HELOC and a hard money loan, it’s important to have a contingency fund for unexpected rehab costs or delays.

In terms of your numbers, it looks like you’ve accounted for a lot already, but running a few worst-case scenarios might give you peace of mind as you move forward. It sounds like you’re on track, but feel free to dig deeper into any potential risk factors or challenges! Happy to provide some competitive numbers on the financing side of the equation as well -

Good luck with the deal in Denver!

 Thanks !  So helpful!
Yes, I'd appreciate a one-on-one go through together.   

I've had a chance to adjust these since talking with someone else, and I'm definitely NOT doing a HELOC and a Hard money loan.
This is why I love this community!  Immediately I get relevant, helpful and such actionable advice that pertain to my exact situation.  What an amazing group of humans.