All Forum Posts by: Drew Petro

Thank you for the replies and insight! 

@Dave Carpenter appreciate the thought. Congratulations on yours! Appreciate the advice on how the operations / management of it may differ. As well as getting funding, thats helpful.

@Michael Le Great point - my interpretation I took away is that perhaps if you value cash-flow more than equity/valuation increase, a car wash may be a good option. But potentially less of a clear path to substantially grow revenue and when you do, its off of a smaller multiple. Thus, if you are able to grow revenue / NOI by the same amount in an apartment or storage facility, the valuation would be higher given the cap rate calculation.

@Michael Le

Kitchen & Bathrooms get best return, I think. Also allows you to charge the highest rent. My recommendation is to ask your realtor or bank for a similar appraisal report or 2 from a comp, or even a local home. That will show you the mark-up and mark-down of specific items. For example, the report may show +$1000 for tile shower, and if it costs $2500 for you to do, you know it wont be worth it.

Also - make some calls to appraisers to see what they value more in the area; square footage, bathrooms, yard, fence, kitchen, etc.

Gross revenue of ~$75k, NOI of ~$35k, valuation based off 4.3x gross-revenue, not 5-7% cap rate. Better Cash flow monthly?

My realtor called me recently with an interesting investment opportunity - a local car wash. It is a 4 bay manual car wash with 1 bay as an automatic drive-through type wash. My question is around cash flow of this asset class. Apparently car washes are valued off a multiple of gross revenue (somewhere between 3-5 for this type, it seems, market dependent). 

Whats interesting is that when you look at this P&L next to that of a similar gross-revenue multifamily or self storage facility, it is VERY similar. Gross revenue of about $75k, NOI of about $35k. What I dont understand is the sale price of a multifamily or storage facility will be off a Cap rate of, in my area, 5-7% (sale price of about $550k+). This car wash is listed at $320k (4.3x gross revenue). Obviously a loan for $320k would require less capital and less amount in monthly payments than a loan for $550k ... increasing your cash flow. Again, top line revenue similar, expense amount similar...

What am I missing here??? Assuming you would want to manage both just as much, why not buy the less expensive asset that produces just as much cash flow??

Matt, my 2 cents ... When you refinance a property you convert "equity" into cash. The bank will send an appraiser to your house and they will judge the value of the property relative to other comps in the area (for 1-4 unit homes more or less). In your case, I am not sure if you can refinance into another FHA loan. In my experience, when we refinance with the bank, they will give us 75% loan-to-value. So, if the appraiser says your home is worth $800k, you could get a loan from them for $600k. You would then pay back your old mortgage and keep the difference in cash (if you owed $560k on your old mortgage, you would keep $40k as cash in your bank account).

Since it is your primary residence, perhaps they bank will give you 90% LTV (make you keep 10% of equity in the house), thus if your house appraises at $800k, you could get a loan for $720k and when you payoff the old loan, you keep the difference in cash.

Once the cash is in you account, there is no time limit to spend it. The "repeat" aspect is the overall vision, not necessarily an instant jump. You will then have "ammunition" in your account as capital, just wait until a good deal comes along to use it! (Contrary to if you do a 1031 transaction, which is a whole different topic, but requires you to sell).

Final thing I would say - think of the refinance as two separate transactions. You are going to a bank (could be a different bank than the one you have a mortgage with now), asking for a NEW loan. That new loan will be for the complete appraised amount minus downpayment (or equity left in). Since your old mortgage is a lien against your house, the new bank loan will be obligated to pay that loan off. They will send the money directly to the first bank to pay off the loan. They will then send you the difference as cash. That is your new refinance capital! Hope this helps!

Wanted to follow up on this thread after installing the floor and explain what we did, if it may help someone in the future. First, we took a belt sander with a heavy grit paper to the few raised spots. Spent some time working these down, which wasnt really bad with a heavy grit.

We then laid down 7/16" OSB as a subfloor. On top of that we put Home Depot's Life Proof brand LVP. It was 7 mm thick, with the built-in pad on the bottom. We laid this directly on top of the OSB subfloor, with no other underlayment in between. 

I could not be more happy with the end result. My biggest concern was that it would feel "bubbly" or "squishy" under your feet, and the entire floor is completely solid. It legitimately feels like hardwood under your feet. Even some of the "soft spots" that we noticed in the floor were solid. I would assume from the "thicker" 7/16" subfloor giving it a little more meat...? 

Not the cheapest option, but should last us a decade +. About $0.75 sq ft for OSB, $2.99 for the LifeProof, $3.00 to install per sq ft. including subfloor (about 500 sq ft total). All in, a little under $7 per sq ft. Going in to a BRRR property, so the value and finish was also important.

PS for those that said to refinish the existing original floors ... as much as we would have loved too, they were actually the original tongue and groove baseboards (albeit "hardwood"), not top-layer old finished hard woods.

@Jeremy Fruechting gotcha - yea I am in St Joe MI - figured we could connect. Nonetheless, good luck on your plan down there! Sounds like a clear, approachable target. 

@Jeremy Fruechting Saint Joseph, MI? 

Following this to see others response as well. 

For me, similar to what I have heard and learned on the BP Podcasts, the calculation for profit is Rent - mortgage P&I (principal and interest), taxes, property management, vacancy plug (~7-10%), maintenance plug (~7-10%), capex plug (~7-10). Then the remaining is your cash return. That value is then calculated against the original capital invested for your "cash on cash" return. 

So, couple things - 1. I do not include principal paid off as part of the calculated cash-on-cash return (it is not cash). I look at it as a long-term bonus. Also, since we are saving monthly a slushfund for maintenance, vacancy, and capex, when these things happen, assuming they are within your allocated budget, they dont hit your ROI. If you need $5k in year 2, assuming nothing crazy for the subsequent years, you can either not count against that since your maint or capex budget will eventually catch up, or if it is something you feel you "forgot" or "should have" invested in at the start, include it in your "initial cash invested".

But, in my opinion, with the 3 "slushfunds" accumulating money, and not counting that money as part of your return (or pocketing it, for that matter), your annual ROI wont fluctuate as much, as it will always go against your initiatl capital investment of $15k.

There are some great calculators on the BP site, which show you year by year pro forma return. Note: operating expense includes the 3 slushfunds as expense (even if the money is not spent that year, it will even itself out long term). Screenshot below:

@Annchen Knodt, @Colleen F. yes my biggest worry is having to pull it all back up! I can’t decide if the 1/4” will actually hide the unevenness (assuming 100% of the floor is covered with it)  obviously if the company requires it, it must work... I guess    House is in SW Michigan  

@Steve Morris - makes sense. That’s my problem - the beams and cinder block foundation areas sit higher than the rest of the floor. For a floating LVP, like Smartcore at Lowe’s or LifeProof at Home Depot, I’m trying to figure out if a 7.5 mm thick XL plank at 72” wide would “hide” more unevenness than a 6.5 mm thick 32” wide plank. Both with padding on the back.