All Forum Posts by: John Leavelle

@Luis Saenz

We need a lot more information to even begin analyzing this as a rental?

Based on what you have provided the margins are way too small.  Looks like investor would actually lose money.  Sorry, it's not a deal to me.

@Jesse Holshouser

Understand property was renovated into 3-Plex in 2000 (16 years ago).  Just recommending you verify electrical and plumbing systems are up to code.  When was major items last replaced; HVAC, Water heater, Roof, Appliances, etc...  Some may be coming due in near future.  Agree with @Account Closed to have the property thoroughly inspected. If you can identify any CapEx items I listed to be near end of normal life expectancy, then, you can use that as part of you discount negotiation.

I assumed you would be self managing.  However, make sure you still include PM fee in your analysis.  Long term you may eventually need someone else to manage your properties for you.  Also, if you ever sell the property the new buyer will include it in their analysis.  Always best to use full cash flow analysis parameters.

@Jesse Holshouser

What are comps for the area? Make sure the property is not over priced. What are all expenses you have identified? Vacancy, PM, CapEx, maintenance, lawn care/snow removal, Insurance, Tax, utilities, other. Any Rehab needed? The property was built in the 70's so it could require updating. Been listed for over 200 days. Must be a reason. Just be careful and do a thorough analysis of the property.

@Saim Chaudhry

If the property is currently 100% occupied how where you going to handle rehabbing them.  Force them out?  Provide hotel room during renovation?  At any rate seems to me you would have 2 units vacant at some time each month.  I would not cut percentages or make it complicated, go with 5% forced vacancy.  What is the current vacancy rate for the area?  If it is higher I guess that could solve that issue.  I do not have the experience to recommend how many units to do at a time.  So I will leave that to others.

As far as raising rents to Market rates I would go with a two of options.  Give 60 days notice prior to implementing any rate or billing changes (including RUBS).  Option 1:  Plan on annual increases to meet Market rents within 3 years.  Option B:  Newly renovated vacant units can be increased faster.  Then tenants must understand increases will occur annually after that to keep up with market trends.

Are all utilities paid by current owner?  Is that common for the area?  Do other Landlords in the area use RUBS?  In order to be competitive in that market you need to find out what others are doing.  As far as implementing are you going to use a billing service or break it down yourself?  Either way you again need to give 60 notice of the change in billing.  If you are going to do both RUBS and start rent increases I would wait 6 months between them.  You don't want all you tenants to leave at once.

@Tiffany S.

You do not need comps to get pre-approval. Only for developing your ARV. The pre-approval it is basically a credit approval. You qualify for XXXXXX amount with XXXXX deposit for XX interest rate, for XX year term. Use these preliminary numbers to base what your mortgage payment could be. And for conducting you cash flow analysis. When you go back with a deal the process is already started. That is when the lender will request the appraisal and the appraiser will use comps.

@Tiffany S.

You need to use the same thing the lender will use.  Comps!  Recently sold properties in the area that are similar to the one you plan to purchase.  Your Real Estate agent/Broker will be able to get this for you.  The lender will require an appraisal.  The appraiser will use comps as part of their process to determine the Market Value.  It helps if you provided the appraiser a package containing before and after pictures, a comprehensive list of repairs, your comps, and anything else that will help get you a favorable appraisal (like @Franklin Romine, a starbucks coffee!).

@Tiffany S.

Yes it could be! If all your costs (purchase, rehab, holding/closing) are no more than $100K (70% of $143K). Assuming $143K is Market Value and your projected ARV. Remember, it still must be able to cash flow after you refi. So do a conservative Cash Flow analysis base on what you know.

@Mike Austin

You are correct. The property still must cash flow with the new refi loan. Before you purchase a property you need to get all your ducks in a row. You should get pre-approved by the refi lender prior to the purchase based the projected ARV. For now disregard the distressed purchase, rehab, holding/closing costs. Use the ARV and the numbers you normally would Rental income, operating expenses, mortgage payment) to determine if the property will cash flow. If not then move on to the next one. Yes you want to use the BRRRR strategy, but, if it does not Cash Flow then what is the point!

@Tiffany S.

Howdy!

I would like to reset your question for a moment. You are asking about the BRRRR strategy. As @Andrew Postell mentioned, you must find distressed properties. Properties that can be purchased at a big discount. Most banks will not provide a loan on them. That is why you need alternative financing (HML, private money, cash, or Seller Finance). You must get them at a big enough discount to accommodate the purchase, rehab, holding costs (high interest rates and points). Hopefully no more than 70% of ARV. So, when you do refi with a conventional loan (70% of Appraised Value) you can pull all your cash invested for the next project. That is the whole purpose of BRRRR! If you cannot get your cash out it still may be a good buy and hold investment. But, it is not BRRRR strategy.

Hope this helps.  :)

@Rameez A.

I have problems with the numbers you have stated being a good deal.

1. Is this $424,900 Seller's List price? If your ARV is the same why would you pay a Total of $439,900? You are starting off in a big hole. Have you found comps to establish the current Market Value? That is what @Marcus Auerbach is referring to.  Your initial Offer should be much lower than his Desired List price.  Something like $340K (20% lower) is what I would start with.  And like Marcus would not go over $382,410 (10% below Market).  You need room to pay for rehab and closing costs.

2.  I assume your long term goal is using Buy and Hold to build cash flow income.  Therefore, it is ok to analyze the property as being 100% rented (after you move out).  But, your numbers still need to make sense and it must cash flow.  Your numbers do not and are incomplete.

Vacancy $200 (4%), repairs $200 (4%), CapEx $200 (4%). These are very low going into a new investment. Do you have actual hard data to back these numbers up? If not, Vacancy should be 8 - 10%, lets use 10% ($480). CapEx should be 10 - 15% (depending on age and condition of the property) since you say no major problems then use 10% ($480). You did include tax and insurance, but, left out some important expenses. Property Management should be included in your analysis even if you are planning to manage yourself. It is for future planning purposes. You may decide down the road to use a PM. Or if/when you sell the new Buyer will use it in their analysis. Therefore, I would include it at 10% ($480). You also should consider things like lawncare/snow removal, pest control, legal, accounting, marketing, common utilities, etc ... That can add up to an additional 10%.

I am very conservative and ALWAYs, ALWAYs, go into analyzing any property with 55% expenses.  Until I have actual hard documentation that proves otherwise.  That way I am almost assured the property will meets my minimum cash flow requirements.

Here's my reworked analysis of this property:

GSI = $4,800

Vacancy - $480 (10%)

NOI = $4,320

Expenses:

PM - $480 (10%)

CapEx - $480 (10%)

Repairs - $200 (4%)

Ins. - $300

Tax - $1103

Misc - $240 (5%)  Landscape/snow removal, pest control, etc

Remainder = $1,517

P & I - $2045.26

Future Cash Flow = ($528.26)

Less Rent Unit A - $2,000

Current Cash Flow = ($2,528.26)

Your P & I (Mortgage payment) would need to be around $1317 in order to Cash Flow $100 per unit. Even with a Purchase Price of $340K and 23.2% ($78,880) down payment, 4.5% APR on 30 yr term, your payment would be $1,323.

For me this is definitely a no go.  Hope this helps.  :)