Help understanding the BRRRR method; sample analysis

[Laura C.]

I am a new investor looking for my first deal and came across this duplex that I thought might work great with the BRRRR method, but could use some input on my analysis. I also want to make sure I'm understanding the method correctly.

Property is a duplex with a 4 bed/2 bath unit & 3 bed/2 bath unit in a B- neighborhood in the Inland Empire

Proposed Purchase price: $315k

Rehab costs: 40K

Predicted ARV: 425k (currently a similar unit on the same street with fewer bedrooms selling for 430k)

I have analyzed the deal completely using the BRRRR calculator, but have some questions after doing that:

1) What are holding costs . . . the mortgage before I rent it, or is there more? 

2) How exactly do I get my money back out? Don't I still need a down payment if I go with the traditional financing for the refinance? 

3) With the scenario above, I was planning to borrow 125k (private money) for the down payment (initial purchase), closing costs, holding costs, and rehab costs. Then if I refinance in 12-18 months at 425k at 70% LTV that would be 297,500. Does this mean I can pull the difference between 425k and 297,500 out as cash? (That would be $127,500) I'm confused how to calculate the amount of cash I "get back" in the deal.

4) Lastly, if the amount I can pull out is 127,500 that's barely enough to pay back my private money investor with interest, but I would have an income producing property at roughly $250 per door. Is that worth it? 

Thank you in advance for you input. I appreciate it! 

Laura

[John Leavelle]

Howdy @Laura C.

Your numbers are a little confusing.

Is $315K the Purchase Price or List Price? I start "ALL" BRRRR deals with the projected ARV. Then work backwards.

ARV $425K * 70% = $297.5K All-in Cost Basis (Purchase price, Rehab cost, Holding and Closing costs)

$297.5K minus $40K Rehab costs = $257.5K - minus Holding costs - minus Closing costs (2 closings) = MAO (Maximum Allowable Offer) or Purchase Price

Here are my answers to your questions:

(1)  Holding costs include loan payments, insurance, utility costs (and any other expense) before the property is 100% occupied.  Once you start collecting rent will it cover the loan payments?  Most Private or Hard money loan payments are interest only with the balance due at a future date (6 to 12 months, maybe longer).

(2) To get all your money back out you need to keep all your costs within the 70% of ARV. However, it does not appear you have any cash in this deal. A refinance loan does not require a down payment. You are required to keep 20% - 30% equity in the property depending on what the LTV is In your example 70% requires 30% equity. This acts the same as a down payment.

(3) This is another confusing part.  If you borrow 125k (private money) for the down payment, then, where  is the remaining $190K coming from?  Or is that covering everything?  purchase, closing costs, holding costs, and rehab costs?  You are correct that If you refinance in 12-18 months at 425k at 70% LTV that would be $297,500. It does not mean you can pull the difference between 425k and 297,500 out as cash.  It means you get $297.5K to payoff any existing loans leaving you what ever (if any) is left as cash.  If the Purchase price is $315K, then, this will be a problem.

4) You need to clarify this deal and  the information on the private lender.  What are the private lender terms and interest rate?  What is the Purchase Price?   You have not provided any information to analyze the cash flow.  If it does produce $250 per door. It's definitely worth it.   However, I would need to see your numbers before saying it's a good deal.   Need a lot more information.