[Calc Review] Would you do this BRRRR?

Question

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

I am borrowing 100% of the money from my parents HELOC to do the deal so i won't have any of my own $ in the deal unless I have to leave some in due to a low appraisal or something at the end.

All opinions are welcome.

Thank you,

Steve Mikrut

Lucas Duce · Answer

Hey Steve, There's a few things that concern me on your deal. For the refinance section, you put in a 9% interest rate. Was that a mistake? 9% is understandable from your private money, but for a bank's refinance, you'd be looking at more around 4.5%. The other thing is the loan amount. Banks will give you a Loan to Value (LTV) amount of %70-80% of the value of the house. So at a ARV of $87K, you may be only able to pull out around $60,900. Which you would be leaving about $14K into the deal. So you wouldn't get all the money back to pay back your private money. You're cash flow is only showing around $120 a month based on your entered expenses, likely due to you entering in 9% interest rate on the refinance for the loan. Fix that and then let me know what the P&I payment is. In a single family rental, you would try to have the tenant pay for all utilities, so you wouldn't be paying for the electricity, water, and garbage in your post-refinance expenses, so that would take away $30 worth of expenses in your calculations. I would also bump repairs up to 7%. Good luck! - Lucas Duce

Steve Mikrut · Answer

I have talked with a lender. I contacted about 6 actually before I found one that said he can do it. I have a call with him today but here's the programs he's got...Conventional Loan Option: I can help you refinance up to 85% LTV based on the appraised value (not purchase price). Translation: It’s possible to get ALL of your initial investment back. Because the LTV (Loan to Value) is defined by the appraised value, as opposed to purchase price, it’s possible to get your purchase price + rehab costs back… The appraisal must support. Depending the timing of your initial acquisition and the completion of the renovations, I can treat your transaction as Delayed (aka Deferred) financing. Translation: Conventional guidelines do not consider it a “cash-out.” Thus, the loan pricing is optimized in your favor. This would utilize a 30-yr. fixed rate. Actually, you can have any loan type you want. The 30-yr. fixed simply has the best pricing and longest amortization right now. A 10, 15, 20, or even 25 yr. fixed have shorter amortizations and therefore higher payments despite lower interest rates. (Most Bigger Pockets investors seek to maximize their monthly cash flow.) Depending on your loan size, credit score and other factors the rate would range from as low as 3.875% to 5.5% in the current market. Forgive me, the wide range in rates is not me being vague. Rather, the rate will also depend on whether you want closing costs or not. (As the rate rises, closing costs drop.) I am finding that no two Bigger Pockets / BRRRR investors have the same strategy when it comes to balancing the short-term goal of minimum-closing-costs against the long-term goal of minimum payments. Nonconforming Loan Options It’s possible to get as high as a 95% LTV on a non-owner-occupied single-family residence. Rates are higher for nonconforming loansWhile rates are higher, there is no PMI if/when the LTV is over 80%. Rates are likely to be 6.5% to 8.5% on a 30-yr. amortization. Again, you can get all of your sunken costs back. It just depends on the appraisal. Given the analysis you attached, if/when the value is 89,000 and you stay on budget, you should be able to leverage all of your sunken costs. I.E. you should be able to get all your liquidity back out.

Lucas Duce · Answer

Hey Steve, I'm happy to help! The link worked too. Have you talked to a bank that you're planning on refinancing through? It would be a good idea to begin communications with the bank to get an approximate interest rate as well as dialing in on at what LTV they are willing to loan on. You should also look into possibly getting prequalified for the loan just to make sure there are no surprises that come up during the underwriting process. Also, confirm the seasoning time for the refinance, 6 months renter stability in the property is often what banks want, but if you confirmed 5 months with them, that's good. Where did you get your ARV estimate and your rehab estimate from? If those numbers came from a reliable source, like a property manager and contractor, and are correct, then it looks like a good deal to me. - Lucas Duce

Steve Mikrut · Answer

One more thing, the broker/PM said when the rehab was complete that it should rent for $1200/mo. I calculated as only getting $1100. The rental comps show it's possible to reach $1200

Steve Mikrut · Answer

Lucas,Thank you so much for looking at my analysis. I didn't know what to put for the rate on the refinance which is why I had 9%. I agree that's not what it's going to be. I changed that to 6% and bumped Cap EX and Repairs to 7%. Now the cash flow is $131/mo, Cash on Cash ROI is 19.4% and I would possibly leave around $8k in the deal which is ok with me.I'm not sure how to attach the new analysis to this thread. Lets see if this works...https://www.dropbox.com/s/sge3...

Steve Mikrut · Answer

Looks like I accidentally made the monthly payment P and I during the acquisition phase when it's supposed to be interest only. I fixed it on the calculator but not sure how to upload the new analysis without starting a new thread.

Steve Mikrut · Answer

By the way, It's a SFR 2/1 that we will be changes to a 3/1. Property is located in Beloit WI.