First BRRRR Deal, does this make sense?

Question

Hello!

I am planning to invest into a real estate with a business partner. We have identified a duplex in Philadelphia. We plan to purchase this property and rehab this property with cash, and obtain a cash-out refi. This would be my first property deal, my business partner already has multiple homes. My primary goal is to own enough cash-flow properties that can eventually replace my income.

Acquisition cost: $220k

Rehab cost: $65k

ARV: $325k

Total monthly rental income from both units: $2500.

After financing, we would cash flow $400 per month, after vacancy, delinquency, cap-ex, taxes.

The cash-on-cash return is only around 8%. However, the ROI after cash-out would be around 45%, which includes an assumed property appreciation at 4%, and tax benefits.

The Gross Rent Multiplier is around 9.5.

Is this a good deal? What else should I look for? There are not of multi-family inventory in the are looking at. Any thoughts, tips, concerns would be appreciated, thank you!

Adrian A.

Stuart Udis · Answer

@Adrian Au Without knowing the debt terms for the refinance there’s no way of confirming the cash flow assumptions but back of the envelope calcs suggest the cash flow will be less than $400/m on $1,200/m rentals.

Using round number a $150,000 loan amortized over 25 years at 7% interest is  $1,060/m.  With the loan terms I provided as an example and 30% expense ratio you are below $400/unit. I would imagine you are anticipating a loan of more than 46% LTV.

If you believe my 30-35% expense ratio is off, I want to remind you with operating real estate the costs are the costs. By this I mean many costs associated with a $1,200 unit will be the same as a $2,000 unit in the same market. Let’s just assume the $1,200/units are 1 beds. When that sink leaks it costs the same to repair as the sink in the $2,000 unit bathroom. When the exterminator has to be scheduled it costs the same. When the curb trap has to be replaced it costs the same etc etc. Therefore the $1,200 rental struggles to absorb the costs as well. I’m not suggesting owning $1,200 rentals are bad investments, but I wouldn’t expect $400/m in cash flow unless you have very low levered and or cheap debt.

Next, GRM is particularly meaningless with lower cost rentals. Remember they are disproportionately impacted by cap ex and operating expenses. You should throw this out entirely.

Last, to temper expectations it’s very difficult to replace W2 income with cash flow. Very few succeed. Most who are able to pursue real estate in place of W2 employment are able because they collect fees from an affiliate service (normally construction) or develop with a healthy pipeline where fees are built into their projects.

Alex Broder · Answer

Hey Adrian,

Very exciting!

As for my initial thoughts, a $400 positive cash flow is very healthy for your first deal. Hitting a 40%-50% ROI is a great sweet spot to be in as well. A GRM under 10 in Philadelphia is definitely workable, especially if you're in a growing neighborhood.

As for things to consider, did you have a contractor walk the property to give you that $65k quote? Especially with current construction costs, it can spiral pretty quickly. Also, if you're planning on to Re-Fi, be very conservative with your ARV assumption as it will be smaller, affecting your ROI. I always advise my investors to spend a lot of time comping out the deal, especially when it comes to RM1 units.

Overall, based on the numbers, I definitely think it's a very solid first deal. Many people tend to break even or even lose money there first deal, it's just the nature of the business.

Good luck!

Payton Haight · Answer

Hi Adrian,

Welcome to BP and congrats on taking action. I have a couple of questions for you below:

1)  Are you responsible for lawn maintenance or snow removal? Do you pay for water, sewer, trash, etc.? Make sure you are accounting for any of these expenses.2) What are you planning for your PITI payment to be and what are you setting aside for vacancy, repairs, & capex? I would expect to set aside AT LEAST 15% (personally I would probably be closer to 20%) for repairs, capex, and vacancy, assuming you are updating the major components in both units. Your repair and capex budget could be higher than that depending on what your rehab involves and the age of the property.

3) Is the duplex in a good area that you expect to appreciate (rent and property value) faster than other areas around Philadelphia? I am OK with breaking even if a property is in a good location with long-term upside.

Sebastian Bennett · Answer

Adrian where's the property located? Doesn't sound like you can complete a BRRRR, perhaps get some money out but not all through a refinance.

Jaycee Greene · Answer

Hey @Adrian Au, welcome to the BP Forum! What is your Loan to ARV%. I think it would have to be under 60% to get the numbers you're referencing, but I can't get to your CoC return.

First BRRRR Deal, does this make sense?

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