All Forum Posts by: Jarod Clayton

First thanks to all who offered advice, and I did appreciate Roy's numbers.  Just to clarify a couple things that I misrepresented above.

I would live in for 1.5 years because of this-Reno then refi after 6 months while owner occ for best terms, then stay for remaining seasoning of 1 year before I rent it out.  Mindy the two years doesn't apply here because I am not selling I am renting, and tax differ upon sale will happen down the road with a 1031 Ex.  Also Mindy Me even mentioning $369 was irrelevant, really $329 is conservative as this will be 4 bed 2 bat 1750 Sq feet.  10 doors down(not adjacent to highway though)  A 1 story 2 bed 1 bath 1300 sq ft home with identical first floor plan just sold for $299K and there are many more comps to support. 

Here was my plan, should have just said this to begin with

I put an offer in today for 200K, which was always my target. Loan is a fanny home path for $275K with a 75K reno budget. This would put me with rough loan amount of $220k (after 20% or 55,000 down)with ARV of $329K and less than 60K out of pocket. Using Cap Ex of $200 per month(seems low but total house is getting redone) other Misc repair and Maint $30/mnth 5% vacancy rate of $154/mnth I am looking at $400 per month without refi and $200 per month after refi. After refi that would leave me at about 16% ROI, If I don't need the cash for next investment and don't refi, it would put me around 8.7% ROI with a heavy equity stake.

For this example the mortgage is for $240K and the Out of pocket would be $62,500.  Net operating income is 3900 per year. 

When calculating ROI with this strategy is it simply NOI/Cash outlay, or should it be this

NOI/(Cash outlay-cash out refi)? So here is an example.

NOI=$325/month 3,900/yr

Cash outlay=62,500k

refinance cash out=40,000k

Would ROI be 3,900/62,500=6.24%

or would it be 3,900/(62500-40,000)=17.33%

One other quick question, if you are doing a live in rehab would it make sense to switch a couple R's in the BRRRR strategy? So should you buy/rehab/REFI/rent/repeat? It may take an extra 6 months of seasoning, but would owner occ terms be worth it?

Roy I was worried that no one would answer, and thank you so much for proving me wrong!  Great advice!  Not to take this post in another direction because I would like multiple answers on the original question, but this kind of begs the question of buying rentals in the top markets for less cash flow, or going to outside markets for better deals/more cashflow/ but less appreciation in both rent and future value.  I recently got advice from a very accomplished investor in the area that gave me this advice.................

"I would try to buy as big of a multi as possible in the best location you can afford. I have always wanted to own units in X(the town this house is located) but could never get my foot in the door one way or another either I got beat out on price or couldn’t make the numbers work. If I was starting over I would concentrate more on the quality of the location versus an immediate cash flow as I have learned that great cash flows will always follow great locations, (it may not be right away but it will come)."

This home would cashflow at a higher price, so although I am aware of the 70% rule I worry that I am missing out on an opportunity to get into this town.  And really my exit strategy is there if I need to sell(I would still make money based on much higher purchase price) my real exit strategy is that I could afford to live in it for as long as I need. 

I am fighting with the above advice vs me talking myself into a deal. 

;-) Really I'm look for help to assess a deal.  Key question is what should the purchase price be. 

Info-BRRRRrrrrr(will live in for 1.5 years, Mindy would love to hear from you!)

Currently 2 bed 1 bath, AR 4 bed 2 bath.  (current owners did second story but only roughed in)

Ask price $270k

Taxes-4481 HOA $1200

Property is in an "A city" tough to cash flow normally but neg appreciation is almost never and does very well during "up" markets.  Tenants are normally of higher quality.

Reno needs are $73,300 per GC who walked the property, this is total rehab of whole house to new condition. 

ARV is very conservatively $329,000 would be $369,000 if it wasn't beside a Highway.

Monthly rent after reno would be $2200 tenant pays everything, including heat, hot water, water/septic.

Would be doing either FHA 203K or similar with 20% down. This would allow me to not lay cash for down payment as well as reno, rather include reno in loan and just put 20% down of total amount. Would refi after 6 months as owner occ to get as much equity out(up to 80% LTV) for next investment.

Pertinent info/carrying costs- for those number crunchers I am likely to not live in the house for first two months, which means paying rent elsewhere for two months as well as 1 mortgage payment.  assume rent is $1500 per month for the two months, also would need about $125 per month for storage fee's, and probably about $3,000 in closing costs and inspections. 

My expectations for this post was to actually provide enough info for the educated investors to help me, however I think this much detail may deter them from even answering, we will see! 

In Summary, what should the purchase price be?

Thanks for any help from the great BP memebers!

All great advice above, my two cents.................. Heloc is a better way to go, no taxes and the payment is interest only. 

I almost wonder if there is something we are missing because it seems so crazy the realtor would do such a thing based on the above info. 

@Andrew Meyer

Andrew when it comes to purchases think of an appraiser as working for the bank not for you, you just have to pay for it. The only reason an appraisal is necessary is because a bank will not finance a loan on a house with out knowing the value. LTV(loan to Value) is the most important factor for a bank when it comes to lending terms with credit a close second. So you are paying for an appraisal for the opportunity to get financing. It is the same thing when you refinance, as you are paying off your old loan and getting a new one, so that new loan is held to the same guidelines. Or if you get a HELOC(home equity line of credit) you need to prove you have the equity in your home before they let you cash out. This is why you don't pick your appraiser, the bank finds one on the approved list for you. If you just wanted to know the value of your house and found an appraiser, then technically they work for you and if they are decent should give you a value within 5% of your true market value.

Hope this helps, @Shaun Moore  Shaun is much more knowledgeable on this subject than I.  Listen to his advice.   

It depends on a couple factors, one is how expensive is the home?  On properties over 500k in my area it is normal to see 2.5%.  A good realtor is essential to creating foot traffic through your home, but some realtors are lazy even if they are getting paid a full 3%.  I think it can be worth it depending on the situation.  Another thing you can consider if you are not getting offers (conceivably because of lower %) is to amend the listing to include a bonus to the buying agent if under contract by X date.  I recently did this, not sure if it did help, but it went under contract a week later.  I have a very good relationship with my realtor though, it that is essential to this type of thing. 

Jim its funny you say that, that is a full size freezer and full size fridge.  They make a trim package to make it appear as one.  Best investment I made in my kitchen was that fridge, every potential buyer has been in love with it.  Only cost $3200 for the whole thing.