2nd BRRRR deal...am I on the right path?

Question

Our offer got accepted on a short sale! I'm pretty excited because this is a condo complex I've wanted a rental in for years.

Purchase price: $65k

Rehab $15k (nothing upfront but a good clean) but eventually will rehab kitchen, two full bathrooms, replace carpet with laminate wood, sliding glass door to deck

ARV: $100k

Monthly rent: $1000/mo

Taxes:           ($192)

Insurance:     ($20)

HOA:              ($196)

Maint 5%:       ($50)

Vac 5%:          ($50)

____________________

NOI $492/mo

Cash on cash return $5,904/$65,000 = 9% return

In 6 mo, we plan to refi. Worse case appraises for $90k, pull 70% out ($63K).

NOI with new mortgage payment of $319/mo would be $173/mo (+~$85/mo in equity).

We do plan on managing our self so I did not include that in the numbers. We have another similar condo in the area and they are very easy to manage. Anything I'm missing before we close?

Greg B. · Answer

I think @Brent Coombs doesn't mean it's a bad deal but it's NOT a BRRRR deal. It's a simple buy and hold at around 80%.

If you're buying at $65k and putting $15k into it you're at $80k (not including any other costs to purchase) which is already at 80% of your assumed ARV. You wouldn't be able to refi anytime soon to complete the last 2 R's.

If you're positive that you're rehab budget is sound and you don't have to hire a PM and the rest of the numbers are solid....Good deal...Congrats!!!

Brent Coombs · Answer

@Andrea Castor, I followed most of your last post OK, until the last sentence. The 70% "rule" always applies to the CURRENT buying situation - not buying at 70% of a FUTURE value!

As Greg B. reminded you, your current one didn't meet it.

And my point was: there ARE deals out there that do. All good, so long as you understood.

Brent Coombs · Answer

@Andrea Castor, wholesalers "sell something (they) don't own" ALL the time! (But yes, in Ohio especially, they ARE required to take Title first - unless Licensed). It's called "double closing" (meaning you CAN have another buyer lined up)! In case you haven't come across that, there are multiple BP threads on the topic. (Or you can phrase any new questions here).

But hang onto this: "If I got $25k for doing nothing, heck ya my first option would be selling it!"...

Andrea Castor · Answer

We havent closed on the property yet. Cant sell something we dont own. so "offers" were verbal not of the contractual type. If I got $25k for doing nothing, heck ya my first option would be selling it! Just wasn't the original plan...

Brent Coombs · Answer

@Andrea Castor, well, you already told us: "we are doing the BRRRR plan where on the 5th year you start selling 2 a year and buying 2 new per year". My question is: why wait the five years, when a "bird in the hand" is already offering to lay a golden egg for you? (Are they offering $110k+?)...

Andrea Castor · Answer

Thanks for elaborating. Im more than willing to be $2k away from the 70% rule for a place this easy. :)

I was really planning on renting but I've got two people interested in buying already when I listed for rent....crazy!

Andrea Castor · Answer

ok, I see what you are saying about it not being a true BRRRR deal because I'm leaving some of my own money in the deal. $2k, plus little closing costs (cash closing) is something Im perfectly fine with. It's an A+ neighborhood, needs just a good clean to be rentable (perfect since my husbands landscape business is about to go crazy for the season), and will rent fairly easy. I was also being fairly conservative as I could take out 80% of appraised, but the interest rate would be a little higher. I was just trying to repeat the 70% cash refi like we did on our other condo because the bank was totally open about that.

That being said, we are doing the BRRRR plan where on the 5th year you start selling 2 a year and buying 2 new per year. We will not put the $15k into it until then. Once remodeled the appraisal value will come back closer to $110k based on comps (although clearly those will change in 5 yrs). So I still believe it'll follow the 70% rule.

Brent Coombs · Answer

@Andrea Castor, what I mean is: unless the amount you can refi (using your figures: $63k) at least EQUALS the purchase price of new similar deals (using your figures again: $65k PLUS closing costs), then you are dooming yourself to either having to put more of your OWN money into each property, or, each further property will need to be successively cheaper.

Neither of those options are what BRRRR is about! Now do you see what I meant? Cheers...

Andrea Castor · Answer

@ Brent Coombs, I think I'm misunderstanding what you are saying...

Are you thinking we won't be able to find a cash out refi on a condo?

Comps right now are right around $96k when averaged in the complex, so that's why I stated $90k conservatively.

Brent Coombs · Answer

@Andrea Castor, based on those numbers, you won't get to fully buy each successive CONDO with Lenders' money - which IS what you're aiming to achieve with BRRRR.

The reason is: Lenders only give conservative appraisals on Condos (ie. seen as higher risk).

Time to think about OTHER types of property?...

2nd BRRRR deal...am I on the right path?

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