All Forum Posts by: David A.

Thanks, everyone, for the input. I spoke with her and told her that we won't be doing this deal as it is too risky.

That said, I can't stop her from taking the advice of another family member who has been very successful in RE. They are the one advising her to switch from 401(k) to RE and she agrees as she doesn't believe stocks are going to get her to retirement at this point. Her decisions are out of my hands but I won't be taking an extremely risky move with her on this deal.

Good to know, I will put these ideas at the forefront of my thoughts.

We are going to take a look at it Monday, with my Uncle who is a GC, so I think I will get more accurate numbers after that and reassess things from a conservative point of view.

Thank you for your responses. They are helping to clarify things. The scariest parts are the things we don't know on the first one.

Hello, thank you for the response.

> one is - should you do this BRRRR or not. the other is - should you invest your mom's 401k money into it.

My mom was already planning on moving this to a rental somehow anyways, so that wasn't really a question we had, as it isn't really "my decision", more of how this deal looks if we were partnering on it. But to comment on that, I do understand the risks, which is why I told her I would do a deal *with* her, to mitigate her risks on a deal. Plus we are extremely close so we take care of each other, no questions asked, when tough times come. I was more asking about how much is too much risk for rehab on our first one. $70k is quite a lot where things could go bad imo.

But to comment on the other thing:

> on the first - maybe. it does seem like you have good experience. but your numbers on it as a BRRRR are overly optimistic. you'll have to pay points at closing for the loan; you'll have holding costs while you rehab; it's difficult to get an 80% refinance; and refinances aren't free either. so you've left tens of thousands of dollars in costs out.

So, we have already talked with the hard-money/bridge lender about all associated fees (1.5% origination, $2500 closing), they are included above. I will not have to pay points on these loans - this is what they are telling me their current rates are. The fees for rolling it into the DSCR are included above as well. This lender does 80% LTV for the DSCR on refinance - I have spoke with them quite extensively. I did however forget about $3,000 from title, attorney, appraisal fees, and $2,500 during buy, in the calculation from the image I provided so thank you for that. Holding costs are calculated into the BiggerPockets calculator, no? I have ran these numbers probably 30x, using ChatGPT and Python scripts, and they are almost identical to these numbers every time.

Am I missing something?

Edit: I just want to say, after thinking about this for a couple minutes, maybe I need to continue to do research if people are telling me my numbers are way off. I definitely don't want to make a mistake on bad/incomplete data.

Also, Fresno, CA is in the top 10% of US housing markets for appreciation, at ~9% annually over past 10 years and expected to continue given the growth we have seen here, proximity to big cities in CA, cost of living relative to the big cities, high-speed rail to LA stopping here when complete, etc. So, while this property is not "printing" money like mid-west markets, this seems to be a pretty good deal here.

Background and Current Situation
I currently own a home in Clovis, CA with $472k owed on a $487k mortgage. My total payment is $3500 (including escrow); it could rent for around $2700. The property is in a prime location, close to Old Town Clovis, Fresno State, and outdoor activities.

My debt-to-income (DTI) ratio is currently at 50%, but will drop to around 38% in April when my average income increases to $144k (its already there but for loan reasons it needs 2 years of tax returns).. I have an 800+ credit score and access to over $100k in revolving credit and much more than that in personal loan offers, but currently have less than $10k in cash reserves, which I plan to build back up to $20k in two months.

My mom, in her mid-50s, wants to invest in real estate as a means to improve her retirement. She owns a home 45 minutes away, with a $1100 mortgage payment and potential rental income of $1400 from the house, plus $500 from a mother-in-law suite (already rented). She’s been advised to move her $35k 401k into real estate investing, and she wants to move closer to me.

Potential Investment Property
I've been actively seeking investment properties and have built a relationship with an experienced broker. She recently presented an off-market property in need of significant rehab. The property owners will be asking $170k, but it needs an estimated $60-80k in repairs. After rehab, the ARV is projected at $320k, which could yield $55-65k in profit from a flip (after taxes), or a ~5% cash-on-cash ROI if we choose to BRRRR. Rents increase 5% annually on average here.

My mom is excited about the opportunity and is willing to contribute her 401k towards the 15% down payment on a hard money loan or less if we find private financing. We would both contribute to the rehab and I would repay her half of the initial investment. We're bringing a knowledgeable general contractor to the property walk-through next week to assess potential risks, and I will also check the HVAC and electrical systems myself, as I have some experience in these areas. Also to note my brother is a journeyman plumber who is willing to help on any plumbing repairs should they come up.

Financial Considerations
The numbers look good using the BiggerPockets calculator, but I have concerns about our ability to pull off a BRRRR strategy due to cash reserves and DTI constraints. Here's what we're considering:

• Flip vs. BRRRR:
  • Flip: Yields a potential profit of $55-60k after capital gains, assuming rehab stays within budget. This could be a safer bet as we wouldn’t have to deal with cash flow concerns post-rehab.
  • BRRRR: If we refinance at $256k (80% LTV of ARV), we could pull out most of the invested cash. However, holding costs would be about $2600/month, and rental income would only be around $2300/month, leaving us with a small monthly deficit until we could get an FHA/Conventional loan as my DTI is too high to qualify for FHA or conventional loans until my income average increases in April. My mom has poor credit and about $30k in revolving debt, so it would be difficult for her to qualify alone.

We would both prefer to hold the property, but the risk of tight cash reserves is concerning, especially if the rehab costs exceed our budget.

Legal Considerations
If we decide to proceed, we’re also weighing how to best structure this deal:

• LLC and DSCR: Would it be better to put both of us into an LLC and use it to apply for a DSCR loan? Does this affect the DSCR in any way? We have found local lenders with good terms, through the broker, and other ones as well.
• FHA/Conventional: If we go the FHA route, how do we structure the property as a business after the one-year occupancy requirement? Would the same structure work for a conventional loan?

Walk-through and Rehab Concerns
I’m confident in our ability to handle the rehab, especially with my mom’s hands-on experience with home repairs and the expertise we can pull in from family members (GC, plumber, etc.), and my few years of experience in the past as an apprentice plumber. However, I’m still mindful that this is our first deal, and I want to be prepared for potential surprises.

Here’s what we plan to check during the walk-through:

• - Overall condition of the HVAC system (I’ll test it myself with HVAC multimeter)
• - Electrical issues (I'll assess as well)
• - Plumbing, which my brother, a journeyman plumber, can help with if needed
• - Any significant structural concerns, mold, foundation issues, etc. (any thoughts here?)
• - Measurements of all sheetrock, flooring, cabinetry, counter tops, etc that need to be replaced for estimates.

We’re both ambitious but also realistic about the risks. We feel that this deal is within our risk tolerance but want to avoid financial strain if things don’t go according to plan.

Questions for the Community

• - Given the financial situation, would it be better to pursue a flip or BRRRR?
• - How should we structure the deal legally for a BRRRR strategy? Would creating an LLC impact the DSCR loan qualification?
• - What should we look out for during the walk-through to mitigate unexpected expenses?
• - Do you have any advice for first-time investors tackling a rehab-heavy property?
  
  

I appreciate any feedback, advice, or thoughts on this potential deal. We're excited but also want to make sure we approach this in the smartest way possible!

Note: I put $240k as purchase price because the rehab is rolled into the hard money loan.