How to Analyze a Deal

A subscriber to our YouTube Channel asked “I just found a home owner who is about to be foreclosed on next month. What would you do in this situation? Would you catch up all the past due payments and do a wrap-around mortgage or buy it outright and do a BRRRR? I would love your opinion on this. Right now he owes about $135,000 with the mortgage and HOA lien. The ARV is $200,000 with less than $10,000 in repairs and the property would rent for about $1,700.”

This is a great question! There's still a couple bits and pieces of information that we're missing but we’ll fill in the details with a best guess and give you high-level analysis.

If you don’t have your own tool to analyze deals, or you want to follow along, simply go to our Facebook Page, where you can download the property analysis tool for free. It’s the same exact tool I use to analyze all my deals.

Now back to the deal!

Here are the numbers:

• Mortgage & lien - $135,000
• Interest rate - 5% (estimated)
• Repairs - $10,000
• ARV - $200,000
• ARV Rent - $1,700/mo
• Property Taxes - $4,000/yr (usually 2-3% for Houston)
• Insurance - $1,200/yr (usually 1-2% for Houston non-flood zone)
• Capex - $200/mo
• Property Management, Vacancy & Leasing - 16% of gross rents

Option 1: Conventionally buying the property and renting:

• Net Cash Flow (bought conventionally)- ~$215/mo
• ROE - 22% (including principle paydown & 2% appreciation)
• ROI - 13% (including principle paydown & 2% appreciation)

At first glance, Option 1 looks like a great strategy! The cash flow is solid as well as the ROE & ROI. Each investor has different criteria for what they want to see from a cash flow or return perspective. By any measure, over $200/mo is a solid return but you may find 13% ROI to be on the middle/low end.

However, one of the best strategies to keep your cash and further increase your returns is to do a subject-to/seller finance/taking-over-payments OR a BRRRR. So let’s look at those options!

Option 2: BRRRR (at 80% ARV)

• Net Cash Flow - negative $65/mo
• ROE - 42% (including principle paydown & 2% appreciation)
• ROI - infinity (including principle paydown & 2% appreciation)

Unfortunately, the BRRRR method doesn’t really work in this instance. You’ll get some money back but you definitely won’t have any cash flow after a refinance of 75-80% ARV, because your mortgage is over $800/mo. While you might make more on paper (via equity paydown and appreciation), for your first or second property I would try to steer clear of negative cash flowing properties. So let’s look at the next Option.

Option 3: Subject-to/Seller Financing/Taking-Over-Payments

• Net Cash Flow - unknown but likely the same as Option 1
• ROE - unknown
• ROI - unknown

This is one of my favorite strategies! You can significantly reduce your cash invested with this strategy, since there’s no down payment. The only out of pocket costs are those associated with catching up the mortgage, closing costs and repairs. You can provide the seller some money if there’s a lot of room in the deal but typically you’re doing them a favor by taking over the payments and getting them current. Here’s a video explaining the contracts and addendums we use to close our sub-to’s in Texas.

To successfully use this strategy you need to know three things in addition to the information provided at the beginning of this article: the seller's current interest rate, how many years they have left the loan and the sellers monthly payment. If the seller purchased this house in the last 10 years the odds are the interest rate is low, since we’ve been in a relatively low interest rate environment.

To determine the cash flow you simply replace the calculated conventional mortgage payment cell ($580 in this case) with the sellers monthly mortgage payment. ROI & ROE will be a simple calculation you’ll have to make, taking into consideration how much you had to spend to get the sellers current, closing costs and repairs.

Option 4: Double Wrap

• Net Cash Flow - difference between your note (sub-2’d from the sellers old note) and the note you give to the new buyer.
• ROE - unknown
• ROI - unknown

In the double wrap scenario you sub-2 the property then owner/seller finance it to an end buyer. While this is a lucrative strategy it is also advanced and requires a solid team including an attorney or title company and a realtor familiar with these transactions. The money you make from this strategy is the difference between your note (sub-2’d from the sellers old note) and the note you give to the new buyer. Here’s a video with more details on a double wrap transaction.

Summary:

After reviewing the four options above, I would try to sub-2 and rent the property (assuming there’s no issues with the current mortgage). If the numbers don’t work out or I was concerned about the due-on-sale clause then I would buy the property as a conventional rental - getting $78,000 in equity with over $200/mo in cash flow on only $39,000 invested.

Remember, there are other options out there, like lease-sandwiches, etc. that I’m not familiar with. I just provided the four ways I’m comfortable analyzing and buying property.

Happy investing!