All Forum Posts by: John Leavelle

Howdy @William Benefield

I have not been on the forums for awhile.  Busy with another business project.  However, since you asked I will give you an answer.

I use the 1% and 50% rules as screening tools when conducting initial evaluations of property data.  I want to make quick decisions (5 to 10 minutes at most) on whether to look a little closer or move on to the next property.  Therefore, expense details are not important at this stage of evaluation.  So, yes, the 50% rule would be covering Vacancy at this point.

There are exceptions to everything.  If I am familiar with similar properties in that area.  I may recognize the Asking price is way too high or the rents are below market rates.  I may spend more time on the property.  I don’t worry about occupancy (Vacancy) until I intend to make an offer.  I always include at least 8.34% (equals one months rent)  for Vacancy in my evaluation. I even use it for Cash Flow budgeting with my current properties.  If I need it - it’s covered.  If I don’t then my Cash Flow numbers are better for the year.

Hope this helps.

John 

@Michael Norris

I would suggest you analyze the deal as if it is fully rented first to be sure it meets your Cash Flow criteria.  That way if he does House Hack you know it should cash flow when he moves out.  You probably need to do more research on the mobile home idea.

Howdy @Michael Norris

Is this a single family property?  Is the rent ($1,200) for the whole house?   If so,  this is not a deal.  That will not support a mortgage of $210K.  The rent must be closer to $2,000.  If it is a multi family property what is the full rent?

Also be absolutely sure of your ARV.

Howdy @Kyle Neff

For me there are several stages in evaluating a BRRRR deal.

1. To find good deals you have to look at lots and lots of properties (on paper/computer) to find a few to go through an initial screening. Having a good "Investor friendly " Realtor can be a big help to that process. You need to establish your investment goals. Then determine what criteria you want potential properties to meet (i.e. SFR or Multi family, 1% rule, minimum of $100 per unit/month cash flow, minimum 10% CCR ... ). If they do not meet your criteria don't waste your time looking at them.

2. Once you find properties that meet your criteria you can do a generic analysis of the property. Determine a good ARV (use your Realtor). If you can, estimate how much Rehab is needed (based on the pictures). Add an additional 15% to your estimate because it's never right. Most of my deals require significant Rehabs. No cosmetic jobs. You can use the 50% Rule for the initial Cash Flow analysis. It will provide you a conservative view of the deal. If the analysis provides a positive report then a more detailed look is warranted.

3.  Conduct a detailed analysis.  Get prequalified for the Refinance loan so you know what terms and rates you should have.  Visit the property with your Realtor and a General Contractor, if you have one.  Take lots of pictures.  Get as much details and documentation from the Seller as possible for your Analysis.  Get a quote from an insurance agent.  Contact the local utility companies.  This is how you get the accurate data you are asking about.

4. If everything looks good then determine your Maximum Allowable Offer (MAO). ARV x 75% (Lender LTV) - Rehab Estimate - Closing Costs - Holding Costs = MAO. This MAO is what the Purchase price must not go over "if" you want 100% of your costs (Aquisition Loan and your cash) back. This will rarely be the same as the Sellers Asking price. You will get a lot of "No's".

Obviously, the Purchase price is negotiable.  You will not always be able to get 100% of your cash back.  You have to determine if is an acceptable amount because of the Cash Flow.

Hope this helps.

Howdy @Kristopher Kyzar

Lots of questions.

1. Are you sure of the ARV? Are you sure you only need $10K Rehab to meet that ARV? Is this cosmetic only?

2.  What type Financing are you using for the Aquisition?  No down payment, 30 years,  and 3 years before you Refinance?

3.  $10,000 for closing costs?  That’s kinda high!

4. Have you confirmed your Refinance numbers with a lender? 81% LTV ($126K/$155K) does not sound right! For a Duplex it typically will be 75% LTV ($116,250) for a conventional 30 year mortgage. Unless you use a small local bank or credit union.

5. Your Cash Flow Analysis is a little too optimistic for me. I like to hold a minimum of one months rent (8.34%) for Vacancy reserves. Both CapEx and Repairs are too low. You are not doing a big Rehab where you replace major components. Things do wear out. $46.50 a month will not cover any major expenses that cannand do occur. Tenants do not always treat your property like you would. You will be surprised how much minor repairs will add up to. You did not include anything for utilities, lawn care, pest management, Legal, accounting, and a number of other miscellaneous expenses. The point being ... you need to take a more conservative approach to your Analysis.

Thanks @Perry Farella, I’ll have to look into that one.

@Ashley Cao

The reason I use the HELOC to cover Down payments is my Private Lender wants me to have skin in the game. Since Closing cost are part of the initial purchase process I just cover those too. Holding costs a property specific and occur monthly (Loan payments, utilities, insurance payments, etc ..) I do not use my HELOC for these as much. But, I have in some cases. I will usually use cash for them. Remember I want to use as little of my own cash as possible.

For me, starting the Refinance process occurs before I purchase a property. I get pre-qualified for the loan so I know what the terms/rate will be. It also provides the Acquisition Lender (HML/PML) and yourself reassurance of an exit strategy from the short term financing. I do not want to wait until I purchase and rehab a property to start looking for the refinancing. As you have probably seen on posts here on BP it can be very stressful to wait.

I keep my Refinance lender up to date throughout the process.  From initial purchase, to Rehab, and when it's rented.  They in turn let me know when to submit the required documentation.  Typical lender requirements require the current mortgage/title to be seasoned for 6 to 12 months.  Each have their own overlays for requirements.  The fewer overlays can result in shorter seasoning requirements.  Other basic requirements are the property must be habitable and proof of rental income or signed lease agreement.  

As far as the "BARRRR" strategy goes, that is why I have my PM start advertising for tenants when we start the Rehab.  It is all about tax strategy.  Deducting some expenses in current year verse depreciating them over 27.5 years.  Definitely check with your tax specialist before doing this.

As a side note:  it is my understanding that using the Homestyle loan mentioned by @Perry Farella for investment (rental) properties is restricted to a 1-unit property or 2-4 unit properties would require you to live in one unit (House Hack strategy).  Perry if I'm wrong please advise.

Howdy @Jim Haney

First, congratulations on your deal. If you haven't yet you need to establish some key investing goals. Develop the criteria to use to keep you on your goals. If your goals are to expand your rental empire then the BRRRR strategy is an excellent method to do that. Achieving infinite COC is the end goal. If building passive income is also a goal do not short change it by taking to much cash out. Believe me. A nice vacation will come soon enough if you continue with your current success. My recommendation is you could pull an excess amount out that still allows good cash flow. I have done this. I also have left more cash in to allow for better cash flow.

Good luck. 

Howdy @LaQuinn Bolling

Are you saying you have 3-6 months left on your Private Loan?  Or you need to refinance within 3-6 months of receiving the loan?  What is the term length?   Regardless your best option is to get pre-qualified for the refinance loan before ever purchasing any properties.  This will give you good numbers to use in your analysis, provide reassurance to your Private leader of repaying the loan, and give you peace of mind.

If you have already started the process (Purchase and Rehab) start getting the refinance loan arrangements going now (it can take 30 to 60 days).  If you are going to have a time crunch see if you can negotiate an extension with the Private lender (with penalties probably).  If you cannot work a solution out with the Private lender try finding another Private/Hard Money Lender to get you through to the refinance.  Problem with this option is it will extend the time for the refinance.

Additional details would help.

Howdy @Ashley Cao

I use a HELOC all the time with my deals in conjunction with a Private Money Lender (PML) and a LOC (No Cash). I only do BRRRR. I prefer to use Other Peoples Money (Private Investor) before I use any of my own (HELOC or LOC). The HELOC does have one main concern you will need to be aware of. Most have a variable rate. So if you use it have a plan to pay it off as soon as possible. Using a Hard Money Lender is more expensive, but, you don't worry about any rate changes. I'm told there are HELOC's with fixed rates that are a little higher. There are two big keys for me to successfully complete a BRRRR deal. Getting the ARV right and having the Refinance loan arranged before even buying a property.

Here's how I do it. 1. Find a distressed property. 2. Complete my analysis. Provide a report to my Private Lender and Refinance Lender (for pre-qualification). 3. Use a PML loan to purchase the property and pay for the Rehab (depending on total costs and funds available). 4. I use my HELOC to cover Down payment, Closing costs, and Holding costs. I also use it to cover any Rehab costs not covered by the PML. I use my LOC as a back-up if my other funding options are already stretched. 5. Once we start the Rehab the PM will start advertising for tenants. They are usually screened and ready to move in within a few days of the Rehab completion. 6. Start the Refinance process 4 - 6 months after purchase (depends on Rehab). 7. Refinance the property and get cash back (payoff original loan and HELOC). Note: The Refinance process can take 30 to 60 days. 8. Start all over with a new property.