Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
8y
@Casey Rondinella, yeah, just hoping that its expenses (separate to Principal and Interest) will be a lot less than 50% of its income, won't make it so. A couple of things I noticed: 5% seems too low for vacancy allowance, and, I don't know any PM that will let you off with just 5% of rent either. I reckon both of those guesses should be doubled.
Mind you, once you're convinced your individual expenses are quite accurate, you don't have to relate that to the "50% Rule" at all, because you'll have worked out an actual percentage!
My "rule of thumb" is that if you can't get (at least) 1% gross rent per month out of its value (in this case, that would be $4,000/m), you'll arrive at the very same question you're asking!
Lastly, have you paid enough attention to the Refinance terms? eg. Will you really be able to get a fixed 30 year mortgage, for a pure investment? Just sayin'. Good luck...
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
8y
@Casey Rondinella, yeah, just hoping that its expenses (separate to Principal and Interest) will be a lot less than 50% of its income, won't make it so. A couple of things I noticed: 5% seems too low for vacancy allowance, and, I don't know any PM that will let you off with just 5% of rent either. I reckon both of those guesses should be doubled.
Mind you, once you're convinced your individual expenses are quite accurate, you don't have to relate that to the "50% Rule" at all, because you'll have worked out an actual percentage!
My "rule of thumb" is that if you can't get (at least) 1% gross rent per month out of its value (in this case, that would be $4,000/m), you'll arrive at the very same question you're asking!
Lastly, have you paid enough attention to the Refinance terms? eg. Will you really be able to get a fixed 30 year mortgage, for a pure investment? Just sayin'. Good luck...
Real Estate Agent · Scottsdale, AZ · Member since 2017 · 159 posts · 59 votes
8y
@Casey Rondinella go to bellwholesalehomes.com and you will get some good deals here in Arizona. they sell FAST though. Billy has an unprecedented buyers data base.
Rental Property Investor · Burbank, CA · Member since 2015 · 30 posts · 3 votes
8y
Thanks Brent. This is helpful.
I’m going back to the editing. Going to have to make this more realistic. Seems like this just isn’t a deal.
Thank you for your time :)
Let me answer your last question first. In order for you to make this deal Cash Flow you would have to do 2 things. Lower the amount of the Refinance loan and raise rents. You are already not pulling out all your cash invested. Lowering the loan would leave even more in the deal. Defeating the purpose of the strategy. Raising rents depends on what the market rates are.
Your basic problem with this deal is the Purchase price is too high in relation to the ARV and Rehab estimate. $400K ARV x 75% LTV = $300K = All-in Target Amount. $300K - $48K Rehab estimate = $252K Offer price (this does not include Holding and Closing costs). So your purchase price should be less than $252K if you subtract Holding and Closing costs.
Your Acquisition loan P&I payment is not correct. If the loan is over 2 years amortization the interest only payments should be half of what you are using. These payments are usually lower than your Refinance loan payments.
Your Rehab time (2 months) and Time to Refinance (2 months) are not realistic. $48K Rehab sounds to be pretty extensive. I would not estimate anything less than 3 months. If you are getting Conventional Fannie/Freddie Refinancing you will have at least a 6 month seasoning period. Did you include Holding costs in your Rehab budget? If not you should. With your numbers I would estimate at least $6K to $7K in Holding Costs.
The last thing is the ultimate goal of the BRRRR strategy is to not have any cash invested in the deal after the Refinance. To achieve a reasonable cash flow amount. And have an infinite CCR. All these are not always achievable. We try to get as close as possible.
Let me answer your last question first. In order for you to make this deal Cash Flow you would have to do 2 things. Lower the amount of the Refinance loan and raise rents. You are already not pulling out all your cash invested. Lowering the loan would leave even more in the deal. Defeating the purpose of the strategy. Raising rents depends on what the market rates are.
Your basic problem with this deal is the Purchase price is too high in relation to the ARV and Rehab estimate. $400K ARV x 75% LTV = $300K = All-in Target Amount. $300K - $48K Rehab estimate = $252K Offer price (this does not include Holding and Closing costs). So your purchase price should be less than $252K if you subtract Holding and Closing costs.
Your Acquisition loan P&I payment is not correct. If the loan is over 2 years amortization the interest only payments should be half of what you are using. These payments are usually lower than your Refinance loan payments.
Your Rehab time (2 months) and Time to Refinance (2 months) are not realistic. $48K Rehab sounds to be pretty extensive. I would not estimate anything less than 3 months. If you are getting Conventional Fannie/Freddie Refinancing you will have at least a 6 month seasoning period. Did you include Holding costs in your Rehab budget? If not you should. With your numbers I would estimate at least $6K to $7K in Holding Costs.
The last thing is the ultimate goal of the BRRRR strategy is to not have any cash invested in the deal after the Refinance. To achieve a reasonable cash flow amount. And have an infinite CCR. All these are not always achievable. We try to get as close as possible.
Very good advice and insight.
@Casey Rondinella PLEASE do not get roped in to believing that raising rents on a multi-family in AZ is easy. It is NOT!
Our 2-4 units do NOT carry rental rates the same way that our SFR or even apartments (larger MF) get. There are parts of town where 2-4 units will get $450-$550 per unit in rent and there is NO hope on the horizon for increases, even though you can travel a few blocks to houses and apartments getting double that.
So part of having a good analysis is knowing what you ARE and are NOT capable of doing. Don't hinge your end game (refi or even sale) to a raised rental rate that you aren't confident that you can achieve in the market.
John is right, you won't be refinancing this for a cash out until your project is at least 6 months old. Conventional financing will not allow for cash outs before then. You can do a straight refi of the same loan amount you had at purchase, but that would defeat the point of pulling your original capital out at the time of refi.