BRRRR 4-unit good deal?

Question

Hey BP,

Looking to see if this is a deal and looking for opinions. 4 units

Purchase price - 30K   Rehab- 50K  ARV-130K (plus holding cost and closing cost)

Just based off that, it seems like a good deal and a good BRRRR strategy. But my issue is more on the after refinance.

Income - 2,350/month (2185 with 7% vac.)

expenses - 1,300/month

Mortgage- 505/month

So it seems like it cash flows just under $100/door. With these numbers would you all do this deal?

Andrey Y. · Answer

Based on what you provided, "cash flow" of <$100/door sounds like a big headache for all that work and having to deal with 4 units. Why not just find a SFH that gets you $500 of real cash flow, with only a single door.

Lauren H. · Answer

We are building cash flow right now. Other than considering location I want properties where the Gross Income is double the amount of the expenses. This is our minimum. If you don't have good margins then you may have a more difficult time with economic swings.

But, our strategy is also very aggressive. We bought our second 4plex six months ago and are now under contract for our third. We can't afford to work 40 hour a week jobs and make only $100 per door. The time spent doing management would kill our lifestyle.

Location is a consideration.

Rehab is also a consideration. If the after-rehab ROI is too low compared to the amount of rehab required I run the other way. I'm looking for 22% cash on cash or higher after rehab. Even in the hot Colorado market, persistence and patience pays off.

Zack Gerson · Answer

@Jay Dewberry @Eric Munson @Ken P. Thanks for the input guys!

Jay Dewberry · Answer

Understandable. I didn't take into consideration the market...I've been told that Cali is a whole separate monster to deal with. Either way...I think the general consensus is that you (may) have a decent deal and it sounds like you've got your head on your shoulders when it comes to analyzing units...nothing left to say but get going sir...and post some after acquisition accomplishments for team B.P. to see...again. Good Luck.

Zack Gerson · Answer

@Jay Dewberry Thanks Jay. Ill defiantly look into the financing. 30year would put us over that 100/door mark. The LLC I assumed was about 800/year to keep up. Thats at least how it is in CA. and the advertising, you are probably right, just figured id be safe. Really just being over careful with my numbers.

Eric Munson · Answer

@Jay Dewberry - once you have gone over the number of mortgages on the resi side you have commercial loans which are typically 20-25 year am with 5-10-15 year terms. Some commercial lenders will go 30 though.

Jay Dewberry · Answer

@Zack Gerson I'm a little unsure as to why the financing company is giving a 25yr commercial versus a 30 yr. residential, as its a 4 plex and not a 5+ unit where a commercial loan would be warranted. Has the area been rezoned or something? Also, the LLC is a one time expense and perhaps shouldn't be added as a "monthly" expense. Lastly, I can definitely understand factoring in the advertisement budget, however, once it's leased (according to the vacancy rate), this could be just a one time expense, instead of a recurring one...again...just thoughts. Good Luck.

Zack Gerson · Answer

@Ken P.

The deal is in WI. so I would not assume much appreciation. It would more just be icing on the cake. We are looking to grow this bigger. We already have 31 units and a team set in place to do the rehab and management. after this we would be rolling the money over to keep purchasing more 4+ unit places.

The Rehab would include a porch, partial roof, simple clean up for the units, add a breaker, water heater, some facia, and a couple windows. We have a team that has already seen the place and has quoted us. This should be enough to get us up above standard. Above is some more info.

Zack Gerson · Answer

@Jay Dewberry Expenses include water/sewer, heat, electric, repairs (lower the first year given 50K rehab), taxes, prop management, insurance, reserve, LLC, gardening/snow, even a little for advertising if needed. total =1,300/month

financing would be about 90K. 4.6% commercial for 25 years.

Ken P. · Answer

Hey @Zack Gerson, welcome to BiggerPockets.  To provide meaningful feedback on your potential deal, please provide some additional information, including:

- rough location.  For example, buying a $30k property with a $130k ARV in a great rental market like suburban Dallas has a completely different answer than buying a $30k property in a typical Detroit neighborhood, or Gary Indiana.

- assumptions behind your $1300/mo expenses.  What makes up that number?  For example, what is the amount you've set aside for insurance, property taxes (on which property value), for maintenance, for a capex fund, for common area utilities, etc?  That amount is a bit over 50% on a property that you're proposing to do $50k in rehab on, so that does seem reasonable assuming the you've got good numbers in the $1300/mo total, and that rehab addresses most major systems.  Which leads to the next question...

- assumptions behind the figure of $50k for rehab.  Is this a figure that comes from having had the renovations quoted by several contractors that you have experience with, or come recommended from other real estate investors?

- How are you financing the deal?  If the financing is right and you have almost no money of your own in the deal after you refinance, then you'd be in a decent position where you're sitting on found equity and earning $500/mo, for a great on-paper rate of return.  However, $500/mo isn't going to change most people's life and it is a lot of work managing 4 tenants to achieve that cash flow, so even with decent equity capture and $500/mo I wouldn't do this unless it was part of a larger plan to grow your portfolio and this somehow fits the plan.  Otherwise the reward just isn't worth the aggravation.