Looking at another BRRRR, Your thoughts?

Question

Still haven't pulled the trigger on a BRRRR deal yet.  Trying to be patient and seems like all the properties I look at have a major thing that scares me off.

BUT...through the help of my Realtor, I've found a 3/1.5, 1075sf, brick, 2 car garage in an area that brings an ARV of $90k.

Asking price:  $69k.

Rehab would include (not limited to):

• Refinishing wood floors in Living room and hallways.
• Carpet in bedrooms.
• Tile, Counter tops, paint cabinets in Kitchen.
• Paint interior
• Tile, sink, vanity bathroom (maybe more).
• *All other systems and structures seem to be in good order.

Estimated rehab:  $20k

Lending:

• Hard money for initial purchase at 12.75%.  (Fee is 1% of loan and 1% payoff penalty inside one year).  
• Refi at 80% of after rehab appraisal.  15 years at current rates.

Rent potential:  $900 (neighborhood brings $850 for non remodeled properties).  Mortgage plus tax and insurance should put me around $750.  Net= $150 (not counting vacancy, capex etc.)

Further details:

• $72k= loan amount of 80% of ARV.
• $20k= rehab cost.
• $2500= est closing costs (incl. refi).
• $400= bank appraisal

QUESTIONS:

• My offer should be $49,100 in order to cash out, correct?
• I have a 790 credit score with cash assets of $48k.  The rehab money comes from this cash.  With my credit score and cash, should I be expecting a way better hard money deal than 12.75%?  I've never used this type of loan so I'm not sure if this is normal or highway robbery. If yes, where do I look for a better HML?
• Is my rental net too low?
• What other advice would you seasoned professionals give me about this deal?

Thanks in advance!

Jerod

Fernando Angelucci · Answer

Hello Jerod,

I would go in at an offer of $43,500 and get a contractor to give you a fixed bid on the high side to provide to the listing agent. Can you elaborate more on the deal, who is the seller, individual or institution? Why are they selling? How long has it been on the market?

With a 790 credit score and $48K in reserves, why don't you get a conventional loan or at least go for soft money like Lima One Capital's Rental30 or Fix2Rent product which would come in much lower than your 12.75% and 2 point HML? Hard Money loans are asset based loans and you do not benefit as much when you are a great borrower such as yourself. Go to a few local banks (in person, do not call), and ask to sit down with a banker and paint a picture of a long term relationship with the bank and see what they will do for you.

As for HML, that rate is actually right in the ball park. I have paid as high as 15% and 5 points for a 6 month loan and as low at 10% and 2 points. In my Hard Money Lending business, I charge 12% and 2-5 points. So I would say keep this Hard Money Lender close for the day that you run out of conventional mortgage slots.

Can you go a little more into your HML and what the requirements are? Do they have a loan-to-cost ratio that they will not go above? Usually they would want you to have skin in the game on the purchase side.

What are your expenses specifically? I like to break them down into Taxes (Actual), Insurance (Actual), Maintenance (12%), Management (10%), and Capital Improvement Reserves (7%) to find your un-leveraged return as a measure of the strength of the deal, then add in mortgage expense to find your Cash-on-Cash return. Two important metrics to use would be Break Even Ratio and Debt Service Coverage Ratio.

Hope this helps!

Ryland Taniguchi · Answer

You are offering way way too much. I am using the BRRRR strategy to pick up 6 cash flow rentals a month and my max offer on your numbers would be $43,000.

For me BRRRR has to fit the flip numbers (70% of ARV minus construction costs) and simulataneously fitting the at least 1% rule on the refinance loan amount.

$90,000 ARV * 70% minus $20,000 rehab = $43,000

Find a better deal to BRRRR.

Kevin Trumbull · Answer

For me, if I'm going 20% down I look for $200-$300 a month, if get creative and only have a few thousand in, I'll take $100/mo.

Aaron Montague · Answer

@Jerod Smith

With a PITI of $750 and $900 rent you are going to lose a large amount of money on this deal over time.

I'm not sure which banks you are talking to, but to make this even remotely viable you are going to need a 30 year mortgage.  If banks are telling you "20 year max" go find new banks. The difference on 72k (80% of 90k) for 30 years vs 15 years is ~$185/month at 5%.

Even with that change this deal isn't worth doing.  My guess is that you'll make ~$25/month.

Mortgage Rate 5.00%

Length of Mortgage in years 30

Monthly Mortgage payment $386.51(PITI of about $750 - $185 = $565)

Taxes $95.83 (PITI of about $750 - $185 = $565)

Sewer and Water $-

Trash $-

Heat/Utilities $-

Cap Ex and Ops $150.00 (this you need to save for replacing everything from roofs to water boilers)

Insurance $83.33 (PITI of about $750 - $185 = $565)

Mgmt Fee $90.00 (even if you want to manage it yourself, pay yourself for the time)

Vacancy $72.90 (8.3% is 1 vacancy/door/year)

Total Expenses $878.58

Total Revenue $900.00

Cashflow/month $21.42

Cashflow/year $257.06

Cash on Cash Return 4.67%

Jerod Smith · Answer

@Kevin Trumbull yes after refi.

Thanks everyone for the input. I'm learning a ton on BP. Now to learn how to find an actual deal! :)

Aaron Montague · Answer

I like to see $125/door AND 15% ROI on my money.  SFH = $200/month.

Frank B. · Answer

Calculating CAPEX as a % of rent is a terrible idea. CAPEX is a function of the physical property and has nothing to do with market rent.

Say you have a 1000sf house in some random city that rents for $1,000/mo. Say you also have a 20,000sf mansion in Detroit that also rents for $1,000/mo (sorry Detroit).

Calculating CAPEX as % of rent indicates that your CAPEX will be the same on those two properties.

Just let that one sink in for a bit.

Jerod Smith · Answer

@Ryland Taniguchi love this idea, thanks for the clarification.  I may not be there now, but will as I learn and do my first few houses.  BP has been a wealth of information for me!

Thanks again,

Jerod

Ryland Taniguchi · Answer

No. Let me clarify to help you understand what we do.

We use private money for the 2nd lien for the downpayment, and the 1st HML and 2nd private money is paid off at the refinance. So, we buy 6 rentals with no money down. Now granted it maybe impossible for you to 2nd position liens. We have built trust and track record by flipping and developing over 350 houses over the last 15 years and so we can get this 2nd position loans.

This is a great deal for our private money lenders as we pay 20% and 5 pts and payoff in 90 days because we refinance the property (versus listing it for sale).

The 25% to 35% equity we build by finding a great deal and adding value in the rehab substitutes the down-payment.

To do this, you have to really know what you are doing.

Jerod Smith · Answer

@Ryland Taniguchi So, are you leaving money in each deal?  According to the above scenario you would be leaving a sizable amount of money in at 75%.  I was under the impression most BRRRR deals allowed you to bring the rehab cost back out for the next deal.

Am I missing something?

Looking at another BRRRR, Your thoughts?

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