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Updated over 4 years ago on . Most recent reply
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BRRRR - working backwards
My brain is currently stuck in a fog. Perhaps not enough coffee on a Monday morning. I am currently trying to update a worksheet I use as a reference for what to offer on properties. I am looking for any assistance to get by brain unstuck this morning.
Background: I buy properties off-market. Either to wholesale or to hold as a rental via BRRRR. I have a number of tools at my disposal including the BP calculators and other tools. One disadvantage all of them share is that you put in numbers (ARV, purchase price, rehab, taxes, etc.) and get either MOA (max allowable offer) or profit/cash-flow numbers.
The Issue: I am a fairly new subscriber to the idea of working backwards from a goal. One of my goals is monthly cash-flow from my rentals. Ideally this would be $250/mo beyond PITI and expenses, but at a minimum should be $100. As I readily have ARV and expenses, and these two goals, the only real question is MOA. I want this based off of the expected rent, repairs, and ARV. However the tools I have require me to adjust the inputs repeated to get to a MOA that works. This is a PITA when meeting with a customer to potentially buy their house. (Given the off-market nature, 90% of engagements have an offer at time of meeting.)
What I am trying to build into my spreadsheet is the following.
- Monthly Expense Summary (Completed): Based off of Expected Rent (PM, CapEx, OpEx, Vacancy, Insurance, Taxes)
- Expected Rent (Completed): Aggregated from Zillow, Rentometer, and HomeSnap
- ARV (Completed): Aggregated from selected Comps
- Pre-Debt Cash-flow (Completed): Rent - Expenses
What I am missing: I am missing the math to take my cashflow, take a DSCR (debt-service-coverage-ratio) of 1.25, and determine my maximum Principal+Interest Payment, then take that number and extract it out to what could be financed at 15,20, or 30 years at 7% APR (arbitrary). This would then determine the most I could finance on the exit of BRRR and be positive cash flow. I could then triplicate this math, running the numbers at $0 cash-flow, $100 cash-flow, and $250 cash-flow.
The end goal: My MOA then instead of being 70% of ARV or similar would be what the rent could afford to carry and allow me get 100% of my funds out. Thus changing my offer price from focusing on ARV to instead focusing on rent roll and debt coverage.
Where my brain is stuck: I am stuck going from determining the max PI to determine what could be financed at 15/20/30 years. That is the key number. If I know that, then I can subtract my repairs and closing costs and give a cash offer that would be based off of debt coverage ability ensuring I get my investment back in full. The problem I think I haven't been able to wrap my brain around is that I use the PMT function for determining payments and haven't figured out how to go backwards. Any thoughts or suggestions on this formula would be greatly appreciated.