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

[Erik R.]

Thanks to all- I've certainly scouted Livonia, Redford, and other lower priced metro Detroit markets.. and agree that ROI can be better achieved in these areas, given the right deal- no doubt.

I am very attracted to Plymouth due to the transient demographic there, and the obviously strong property values and appreciation (same with Northville).. which is why nearly anything that pops up there that is selling for less than $150K, I take a good look at.

That said, I would be happy to find a good deal in Livonia, am subscribed to Livonia MLS listing updates and synced up with a few realtors, but honestly haven't seen any good deals in a while (but that goes for much of metro Detroit, outside of C markets). That said, anyone with off market deals - I'd be happy to see them.. but I suppose I'm speaking for many.

thx again-

Erik