Is this a good deal / approach? BRRR a 2BR into a 3 BR- Plymouth

[Erik R.]

Hi All,

I have been running the numbers on a property that I thought may be worthwhile to get more experienced investors' advice / feedback:

Property is 2BR 900 sq. ft. in an A-/B+ area in metro Detroit (Plymouth) MI . Asking $130K, comparable 2BRs rent for $1,000/mo.

This doesn't stand to meet 10% cash ROI or meet my $250/mo cashflow goal, so my idea is to evaluate adding a 3rd BR, which would provide at least $1,500/mo rent. I walked through this property Friday and believe it is architecturally possible to add a 3rd BR off the back of the house without major interior rehab..I'm in process of getting a builder I know to the house this week to provide a quote, but directionally for my analysis I'm assuming it will cost $50K to add the bedroom.

With a conventional 20% down loan at $100K purchase price, after closing costs ($5,500), down payment ($20K), and rehab ($50K), my total cash outlay is $75K... I yield $470/mo cashflow after all expenses, but with a sub-par 7.5% cash on cash return / Cash ROI.

To increase my cash on cash return, I could refi after 6 months seasoning.. assuming a $170K ARV/appraisal with the 3rd BR, 70% cash out is $119K... which means 'net net', I'd spend $40K on this deal ($119k cash out, less payoff of 1st loan, cash outlay of $75K, and new loan closing costs).

1) Is this a good deal / idea? Typically I see BRRR strategies either put money back in your pocket, or at minimum net $0 cash investment.. this deal would require me to spend $40K after the BRRR, and probably not have a reliable backup/exit strategy (i.e. a flip would likely be a loss or net $0).

2) Is there an alternative way to purchase this property, other than hard money, that anyone would suggest? By doing a conventional mortgage at the purchase, than another as a refi- it seems I'm adding alot of closing costs, but offers the least out of my pocket up front.

3) I wouldn't want to do this deal without a cash out refi (as I don't want to plunk $75K out on 1 deal)- do my math/assumptions sound right?

any other thoughts - thanks in advance

Erik