[Calc Review] Help me analyze this deal

[Mary Daugherty]

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*This link comes directly from our calculators, based on information input by the member who posted.

[John Leavelle]

Howdy @Mary Daugherty

To analyze whether a property is a good candidate for the BRRRR strategy you must work backwards from the ARV. The purchase price is the last thing I determine. This is my formula; ARV x 70% - Rehab estimate - Holding costs - Closing costs = Maximum Allowable Offer (MAO) or. Purchase price. Example: Using your numbers.

$310,000 ARV x 70 % = $217,000 (All-in Cost Target)

- $76,950 Rehab estimate = $140,050

- $6,000 Holding costs (my standard estimate) = $134,050

- $7,800 Closing costs (Purchase & Refinance) = $126,250

$126,250 is my MAO.

The primary goal of the BRRRR strategy is to recover all your cash invested to reuse over and over and over again. To meet this objective I use the 70% rule to determine my All-in costs Target. Most conventional lenders will refinance investment properties at 70% - 75% LTV. If I keep my costs within that range I have a good chance of getting my cash back. The secondary goal is to have a cash flowing property.

You have multiple problems with your analysis. The purchase price is way to high for the ARV and the amount of Rehab you are estimating. This makes it virtually impossible to get all your cash out.

With the Refinance loan amount of $236,000 and subsequent P&I payment of $1,340 your Rental Income needs to be closer to $2,360.  $1,600 is nowhere close to being enough.

For your Expenses I would raise the amount you withhold for Vacancy to at least 8.34% (one month rent). Additionally, you did not include CapEx. I understand you would have just finished a big Rehab. However, things will not last forever. They will eventually break down and need repair or replaced. You should withhold 5% - 8% for CapEx depending on the age of the property and quality of tenants.

I am assuming you are using cash for the purchase and Rehab of the property since you did not include an acquisition loan.

You mentioned utilities during the Rehab. These are part of your Holding costs. They include (but not limited to) any loan mortgage payments, taxes, insurance, utilities, HOA fees, etc that occurs during the Rehab period and up until the property is fully rented. All items entered into the BRRRR Calculator as expenses (water/sewage, taxes, insurance) will automatically be multiplied times the Rehab period and transferred to the Rehab budget. Those not included (electricity) must be manually added.

What type of property is this?  How old?  Is there room to increase rents?

Hope this helps.