All Forum Posts by: John Leavelle

Howdy @Christopher Alley

Have you researched comps for that area?  Get your own Realtor to help determine the Market Value of the property.  What is the age and condition of of the property?  Have you walked the property to see what repairs are needed to get it to Market Condition?  Buying real estate is a negotiation process.  Just because they list a price doesn't mean you have to pay that amount.

 You will also need to find out the Rental Market rates for the area.  Are current rents below or above market rates?  You may be able to increase rents if they are currently below market rates.

You can solve the heating problem by using the RUBS system.  In case you don't know what that is it is a method of billing your tenants for utilities by using a third party company.

Hope this helps.  Good luck.  :)

Howdy @Kay Kim

Congratulations on your first property. Overall the deal looks good.  But, I have a few questions.  Did you get comps before putting in your offer?  What was the Bank appraisal?  Just thought provoking questions.  

Your Cash Flow analysis looks very good also. Is there a reason for such a high CapEx amount. If you have the property inspected you may find that 20% may need to be adjusted. Like @Jeff Copeland is recommending the inspection will tell you a lot about major systems usable life expectancy. You can then estimate when each may need to be replaced.  Get a ruff price for each and divide the total by X number of months to get your CapEx number.

Also, do not forget the little miscellaneous expenses like Pest control, legal, accounting, marketing, etc.  they can add up.  I use 5% for that.

Hope this helps.  :)

Howdy @Tim Kaminski

Are you saying the asking price is the same as the ARV you are using? Is that really the Market Value (using comps)? What is the age and condition of the property? With only $5,000 in Rehab it would appear it is in pretty good shape. Therefore, you are correct that that $85K off is too much. That being said let's look at the analysis.

My first question is what kind of financing are you using? Only $5,600 Down payment (3.5%) suggests a FHA Owner occupy (House Hack) loan. Is that correct? If not you will need 20% down payment.

Next you have an income of $2850.  What type units are they (2/1, 3/1)?  What is each units rent and what are the Rental Market rates for the area?  If you are house hacking you can only count 2 units rent for income.

The reason the "50% rule " tab shows $698 is this:

$2850 Income - 50% Expenses = $1,425 NOI

$1,425 NOI - $726.05 Mortgage payment = $698.95 Cash Flow

Obviously if you could get the property at the price you list it would have excellent cash flow .

Hope this helps.  :)

Howdy @Cory Melious

You have a great opportunity buying the property using Seller Finance.  Find how what terms he wants in the deal (it must still be in a written contract/Promissory Note.  What down payment?  Interest rate?  Term length? etc.

I will address the deal in regards to both BRRRR strategy and a Buy and Hold Rental.

 It looks like a very good deal as a rental.  Here is a ruff conservative analysis using the 50% rule and a Conventional Bank loan.

Appraised Value:  $85,000 (where did this number come from?)

80% LTV Loan: $68,000 ($17,000 DP/ 20%)

Terms: 30yr/4.5% APR

PITI: $516.42

or

70% LTV Loan: $59,500 ($25,500 DP/30%)

Terms: 30yr/4.5% APR

PITI: $473.35

Monthly Income: $1900

Expenses:  $950 (50%)

NOI: $950

Cash Flow loan 1 = $950 - $516.42 = $433.58 ($144.53 per unit)

Cash Flow loan 2 = $950 - $473.35 = $476.65 ($158.83 per unit)

So you can see no matter the loan amount you still get good cash flow. 

Now as far as BRRRR strategy you need to know how much cash you will put into the deal. You say $5,000 in Rehab cost, but, are you making any down payment to the Seller? How about any Holding costs? Remember the Bank/Lender doing the Cash-out Refinance loan will only give you 70-80% of the New appraised value. Like the amounts I used above. Obviously if they give you a loan for $59,500 (70% LTV) that will not even cover the purchase price from the Seller.

The idea situation for BRRRR is the total of your Purchase price, Rehab costs, and Closing/Holding costs should not be more than 70% of your ARV (and Banks LTV) to get 100% cash out. And you have to be able to pay off the original acquisition loan/financing.

As far as will the Bank finance the $85-$90K up front.  I think I already answered that.  Also they would require a new Appraisal with the property in it's current condition.  My guess it would not be the $85K.

The bottom line for me is this is a very good rental property purchase. However, it is not a potential BRRRR based on the info you have provided. Yes, use the Seller Finance to acquire the property and you can refinance (no cash out) it later to pay off the Seller (your friend). Get the property earning income and start you REI path. Keep looking afterwards for potential BRRRR opportunities.

Hope this helps.  :)

Howdy @Jeff Prather

I will piggy back on @Ryan Gerding comments. Many CapEx items cost the same no matter the price of the property. A roof will be the same cost unless you are using upgrades. HVAC will have similar cost. The only real differences are the finishes used. Have a complete inspection done to identify age of major CapEx components and an estimate of when they will need replacing. You can also see what finish upgrades are being used to help figure future repair costs. As Ryan said add these projections together and divide by the appropriate number of months. Knowing these projections are the key to determining your CapEx needs.

@Bart Modzelewski

Are you using a Realtor to get your information on potential properties?  If not, you should.  They not only can find deals for you, but, they can get the comps, rental market rates and and other info you need.  That doesn't mean not to do your own research.

I am still new at this game. I have analyzed over 200 properties using my criteria. Most do not meet my goals. I have submitted offers on around 15 properties. I now have 3 using the BRRRR strategy. I have seen expenses range from 33% up to 70% of GSI. I started using 55% after reading a blog by an experience BP investor, Michael Blank. It has been very helpful to me keeping a conservative approach. And yes, the miscellaneous expenses I mentioned are included in the 55%. Every property does not have every possible expense. Once you get into the details that's where you start adding and subtracting.

Using Trulia and Zillow are ok to get a ruff idea of rental markets.  You might also compare them with rent-o-meter.com.  None of them are completely accurate.  But I have found using all three to work decently.  If you are using them to figure comps be careful.  They are not always up to date.  I like using Redfin to run Multi-family comps.  It actually has a tab function to do it.

You can get Pre-Qualified and/or Pre-Approved for a loan. Just ask your Lender what they need to get either. Pre-Approval I think is property specific. Pre-Qualified is not. Ask around and let them know up front what your plan is. The problem I see with using 2 conventional loans in the process is there will be 2 appraisals required and may mess up the BRRRR process. Don't think you could use the same bank either (not sure).

Good Investing.

John

@Dakoda Spencer

I have not pursued a direct mail campaign yet.  However, I have read a few blogs here on BP.  you might start there and then start a forum post requesting help.

This blog is by Sharon Vornholt and was recently updated

http://www.biggerpockets.com/renewsblog/2012/04/23...

Of course you should research more here on BP.  Hope this helps.

Howdy @Bart Modzelewski

My first question is what type of loan are you using for property acquisition?  It looks like a conventional bank loan.  Is the property currently livable?  If not you may have trouble getting a conventional loan.

Closing costs are going to be 2 - 5% of the purchase price.  I use 3.5% as a Pro Forma average.

One thing you did not include in your calculations is Holding costs.  They will include the costs of the current loan (monthly payments), any utilities turned on during Rehab, and insurance during Rehab.

So Cash out goal looks more like this:

$13,280 Down payment + $30,000 Rehab + $2,324 Closing + $1,224 Holding = $46,828

Holding cost is based on 3 months Rehab ($408 * 3). It does not include insurance and/or utilities during Rehab.

Your Refinance number is $99,948. You ARV is now $142,782

Of course you need to determine the ARV first. If your $137,700 ARV is correct then your purchase price would need to be lower to get 100% Cash out on a 70% LTV bank loan.

Cash Flow analysis comments:

I like your conservative numbers on the expense items you've listed.  I like using 55% for expenses in my initial Pro forma analysis. At least until I can verify hard expense data.  Then I make appropriate adjustments.  For example; you will have other miscellaneous expenses (Lawn care/Snow removal, utilities, pest control, legal, accounting, marketing, evictions, etc.).  All these smaller items add up quickly.

It would help if you gave us more information on the property. Type (SFR, 2-Plex, 4-Plex), age and square footage, number of bedrooms/bathroom. Is it currently rented? Rates?

It appears you are using a lot of assumptions in your entire BRRRR deal. If your numbers are correct then yes this could be a good BRRRR deal. However, the most critical part of the process in establishing an accurate ARV based of good comps. Then getting a realistic Rehab cost to help establish what your purchase price needs to be.

One last thing I strongly recommend, if you haven't done it already, is get Pre-qualified for your Cash-out Refinance loan. Before you purchase the property. That way you know what your loan information is going in. The loan limit, the LTV percentage, terms, interest rates, and seasoning requirements. You have the information you need for your Cash Flow analysis up front . It will make the whole process smoother and less stressful.

Hope this helps.  :)

Howdy @Dakoda Spencer

Here's my two cents. Early 1900s home! You definitely need to have it inspected. Make sure all required upgrades (plumbing, electrical, lead paint, etc.) have been completed. Old home also means higher CapEx planning.

Not to change your chosen investment strategy, but, have you considered  doing a house hack in a Multi-Family (2 - 4 unit).  With a  5% down payment you could get into a more valuable property with the same $$ amount you are using for this property.  Live there for one year while collecting rent from other units.  Also might be easier to get loan from banks.

Hope this helps.  :)

Howdy @Yoni Rozenstein

I would agree with the overall evaluation. Your expense numbers are too low for my comfort. 20 individual properties. That's 20 roofs, HVACs, Hot Water Heaters, who knows how many appliances. I would definitely go with 10% CapEx. If @Michaela G. is correct and these properties are in lower income areas then you may have higher turnover rates.  Which means increased maintenance and repair costs.  You should also consider the other miscellaneous expenses such as; Pest control, Legal, Accounting, Marketing, etc.

Good luck.  :)