BRRRR Deal Analysis - What Am I Missing Here?

Question

Hi Everyone,

For some background, I have access to short-term private money at 3% and long-term financing for 80% of LTV at 7%. Based off of the private money I have access to, I would be able to get into a deal with none of my own cash. My goal here is to find a property to BRRRR. The problem I'm having is that after I refinance, the rents aren't supporting the refinanced loan's P&I + my Expenses. Even when I'm using absurd purchase prices, leaving no money in the deal doesn't seem to work. It goes without saying that a "Cash Out" refinance would definitely not work. Can someone with some more experience here "diagnose" what is going on with my numbers? Thanks in advance for the help!

Notes:

- I am baking all of the rehab, closing costs, and purchases prices into the same line item to reflect the PM and HM loans
- For the sake of this deep dive, please assume rehab costs and ARV are accurate
- I understand that in a few of these rents are somewhat low, but even in those cases substantially higher rents wouldn't solve my cash flow problems

https://www.biggerpockets.com/calculators/shared/1257767/ee02b620-98f7-42eb-b5bc-e3c4df4f24de

https://www.biggerpockets.com/calculators/shared/1257767/837aaf4f-4a55-48c6-a3f3-fa84ff3de55b

https://www.biggerpockets.com/calculators/shared/1257767/2ea102f2-2f17-4b58-a7df-cc23f63caa3b

https://www.biggerpockets.com/calculators/shared/1257767/d9f0e556-f161-47ad-8669-6efd017b8c8d

Thanks,

Nick

David Ripplinger · Answer

@Nicholas Anderson If your plan is to hold and rent, and the cash flow doesn't work out, it's not a deal. Don't do it. If it's really hard to find a good deal in your area, consider investing long distance. I'm in Utah, and I plan to invest out of state because everything is inflated in my area.

Natalie Schanne · Answer

@Nicholas Anderson - I sold a house that backed to a major highway and had constant roadway noise like it seems this house might have based on your analysis photos. Consider that it could reduce your value (arv) 10-30k from constant road noise and some people will not consider renting or buying it at all. When you refi long term you want a loan under 6%. My investor friends have been getting 4.5-5%. If your house loan is costing you more than the cap rate (your ROI), you’re losing value unless the house is appreciating. (You’re spending 7% to make 6% return after expenses). Lastly, consider tricks that could juice your returns whether that’s room by room furnished rental or Airbnb or buying via direct mail (off mls) or even subject to someone else’s (low interest) mortgage. If I buy a house for $200k, I’m aiming for $2500-3000+ market rent. I also hate HOAs for a rental because change of terms can put you out of business. Good luck!

Ned Carey · Answer

@Nicholas Anderson by my calculations the 1% rule doesn’t work. Also while BRRRR sounds great In Theory, It takes a really good deal to pull off. To expect to do that and leave zero money In the deal consistently Is not realistic

Greg K. · Answer

@Nicholas Anderson1. HOA is high, if this is a condo. Check to see how much the HOA has in reserves because that might allow you to adjust your capex budget down if they are flush and recent improvements have been made.2. Insurance is high if this is a condo. Master insurance is covered by the HOA so your “walls in” policy should be less than $300/year.3. Refi with a traditional bank and your rate should be 4-5%4. Vacancy seems very high. National average vacancy is 5%. Also that’s a non-cash item so your cash flow will be positive then you might go a month without rent during a turnover. 5. If you target 1% rule these generally work. You’re being super conservative on expenses. If this is a BRRRR and you put in new appliance and fix HVAC and plumbing up front, then your capes and maintenance will be less. 6. If this is a condo then you can self-manage since the HOA will cover most of the maintenance for you.

David Ripplinger · Answer

Ok, I took a look at the reports. A couple of them have HOA listed as a cost, and that's eating a lot into your margins. So, if you're considering a place in an HOA, you'll need an even better rent to value ratio. Also, I'm not sure about this, but I think the 1 percent rule of thumb compares the after repair value, not your all in cost. Somebody else will know better than me.I'm wondering if the number 1 issue that's making your numbers just come under for cash flow is the total home value. I think if you shopped for homes that instead have an after repair value of only like $100k roughly, you'll see the chunk taken out by monthly mortgage payments is significantly less. Again, if it's hard to find those numbers in your area, you might want to look out of state.Keep in mind that the 1 percent rule is the low end of this rule of thumb, and it's only a rule of thumb. People usually look for somewhere between 1 percent and 2 percent, and that's just to get a rough idea before plugging in all the numbers. As you are seeing, it's quite possible to find a property that technically meets the 1 percent rule but doesn't quite cash flow.

Nicholas Anderson · Answer

Hi @Ned Carey,Thanks for the response. This is basically where I landed off the back of my recent analysis. That’s what I was more or less “dreading” to corroborate here on the forums. I’m going to try and run some of the numbers with leaving as little of my own cash as possible in the deals.Thanks,

Nicholas Anderson · Answer

Hi @Salvatore Lentini,This is exactly what I was thinking last night! I plan to reach out this week to discuss this subject.Thanks!

Salvatore Lentini · Answer

@Nicholas Anderson Getting a loan at 80LTV at 7% is going to be expensive per month. It will be difficult to cashflow unless the deal is really good. Maybe your private lender would be ok with keeping some money in the deal for an equity percentage.

Nicholas Anderson · Answer

Hi @Greg K.,Another great response, thank you! I believe only one or two of those were HOA. I will take another look at expenses. As a new investor, vacancy is one of the most frightening things that could occur so I wanted to be conservative there.Thanks,

Nicholas Anderson · Answer

Hi @Natalie Schanne,Thanks for more great feedback. Your advice on the rate might be key here for my predicament. It’s possible that this 7% long term borrowing is killing my deals. If I can get it ~5% some of these look salvageable.Honestly though, it feels like I would still need to find property for 40 to 50 cents on the dollar to realistically make anything work. The all-in amounts I have been using are basically assuming this anyway...Thanks for your help!