Seeking Input on BRRR Analysis

[Brandon Seyferth]

Scenario

Chicago: we buy 2 bed, 1 bath (900 square feet) in a decent neighborhood (Rogers Park) at $125,000 at $25,000 down (the 20% down is cash, the remaining is financed).

We add a half bath to force equity and everything goes wrong, costing us $25,000 against our current home's Heloc (25k seems to be the higher end of the cost of adding a bathroom according to a google search). The National Association of Home Builders reports that adding a half-bath to your home increases the value of an average home by 10 1/2 percent. (Adding a half bath may be more trouble than it's worth in this scenario, but let's just say we did it anyway).

Adjusted home value after adding a half bath is $137,500 if appraised as expected and 10% is added to the home value.

We stabilize with a renter after something like three months of holding cost. Then cash out refi to pull out 70% of the home's re-appraised value (which would be $96,250).

Our adjusted mortgage payment is then based on these numbers:

$137,500 "purchase"

$41,250 not liquid and left in property (30% of home value)

$96,250 pulled out and liquid on a stabilized asset

Conclusion

(Not accounting for any closing costs):

We have $71,250 in liquid funds after repaying Heloc

We have $46,250 in liquid funds after repaying our bank account for the initial downpayment

We also have an asset working on the numbers in the analysis below. Hmm... this seems too good to be true... I must be missing something

Final Analysis After Adding Half Bath and Refinancing the Property

Expected Rental Income: $1,200/mo

Expected Annual Gross Income: $14,400

Monthly Expenses

Tax $88

Insurance $56

HOA (Includes heat, water, common insurance, building maintenance) $263

Repairs $50

Total: $457/mo

Total Annual Expenses: $5,484

Expected Annual Net Income: $8,916

Cap Rate: 6% (based on home price after refi)

Principal & Interest after refi: $457/mo

Cash Flow: $286/mo

This deal is a moot point as the building is already over its rental cap, but I wonder if I'm getting close to an accurate picture of the BRRR process. It seems as though I'm making a mistake somewhere. Thanks in advance for any input from this great community!

Sincerely,

Brandon