I need advice on a Potential BRRR

[Herve Alce]

Greetings!

I am new to investing and I'd like to hear what some of you experts have to say about my current situation. What would you do?

I am in the process of purchasing a Single Family investment property for $130,000.00. Its a 4/2, 1,100 sq ft in Miami Fl. I have a HELOC of $50,000.00 that I am using to purchase and potentially renovate.

At its current state it is being rented out for $1,600/Month. However, If I rehab it I could probably rent it out for $2,000.00/month with an ARV of $200,000 which I would cash out refi and repeat.

My dilemma: Should I rehab the property (which it needs) or should I take my additional $20,000.00 and purchase and rent out another property?

Also, I'm still learning and haven't totally grasped the way in which we determine Cash on Cash return or ROI. Can anyone help me with these and is this even a good deal or should I walk?

[David Chan]

3 issues. 

- 130k for a 1600 rental amount sounds a bit too... nice and lofty? Is it a condo or a planned suburb? Is there any HOA dues or anything? Sounds like this is under the 1% rule that you seem to be suggesting for ARV. Maybe you found a deal, or maybe there's something missing.

If the tenant intends to stay, and isn't a bad tenant (late or destructive), I'd hold off on renovating until he vacates. No reason to upend your income stream if there's already profitability with the current property. Tho I am not sure if I would buy another property if you know it needs renovation (and it sounds like you are counting on your HELOC to do the heavy lifitng here.) So unless you got extra cash resources somewhere else, you don't really have that much room to begin with to leverage expansively without taking on a riskier leverage profile.

- From a financing perspective, it depends on your relationship with your bank. Firstly, you got a HELOC for 50k. Where's the rest of the money coming from? Are you doing conventional or private funding?

Most banks at least here in the midwest, from my experience, do not like to revalue properties in too rapid a succession after purchasing once you originate a loan, even if you renovate. They will most likely offer you a <100% of your renovation cost if you were to go into renovating it some time down the road, vs these After Renovation Values. 

It may be due to the fact midwestern bankers are more conservative, but a prudent banker would be unlikely offer you a LTV on an ARV and maybe let you cash out more than what you put into renovating, unless your cashflow significantly improves or if you have a strong bank relationship, you may be able to leverage it a bit more.

Personally, I come across these type of deals quite often and I would simply buy the house and keep it on my books all-cash, and by the time I complete my renovations and bring in a higher lease, my banker would usually build the financial package at the new ARV asset value for a more attractive financing structure. Not to mention, less loan origination related costs, etc. I have managed to get close to 100% or above on some properties in this fashion in prior years especially if you hold onto them for over a year and you "season" an asset before the bankers look at it.

- Finally, you haven't really provided much in the way of expenses for operating the property to really give us any idea how your asset would perform. You need to be equally focused on your expense profile equally to the attention you give to your income side calculations.

There are plenty of calculators online where you can plug in your numbers to give you these metrics so you can always simply do your due diligence by requesting these figures from the previous owner and plug it into a calculator. 

However, I think its a fair warning to newbies to not be too caught up on these metrics on your first deal. These %s and ratios that gets thrown around a lot by people in the business, but it needs context, and as a new investor I often find the folks I come across don't necessarily understand the implications of these metrics, rather than just tossing around industry lingo.

Take a common sense approach to the business: does your property currently generate enough profitability after expenses to give you an above-average return? How does it compare to low risk options like bonds/fixed income? Do you have a better yielding business that makes more sense for you to invest in? Can you take advantage of the tax advantage of owning real estate? Does the property have long term appreciation potential for you to consider in the equation?

I find cash-on-cash returns and IRR calculations are more applicable in situations where you have multiple properties and options available to you and you need to make a comparison between 2 different deals, and thus for someone starting out, it isn't necessarily the most useful metric to gauge if a property is right for you. Also, maybe a bit more harsh a view on IRR/CoC, is that I find them to be useless if you can't project your revenue or expenses accurately. Real estate isn't just a numbers game, you need context and common sense. You should know it's a good investment if it feels right to you.

In my career, I have rarely used these metrics. If you focus on the accounting metrics, real estate has a tendency to lead you into class C or D assets or strategies. I would instead ask yourself if the property fits your long term real estate strategy and if it meets your long term goal. Last thing you want is to own 20 "attractively yielding" projects that is a jumbo'd mess of asset class and types. You should find your niche and start to build your portfolio with that strategy in mind.