All Forum Posts by: John Leavelle

Howdy @Markesha Smith

A couple of things.

Where is your HELOC payment? You need to show that cost somewhere. You could add it as part of the Cash Flow expenses.

Not knowing the actual current condition of the property you should increase your CapEx and Repairs reserves. I would use 10% CapEx and 5% Repairs at least until you have the property inspected.

Vacancy is also lower than I like when analyzing a new property.  I want a minimum of one month rent (8.34%) until I have my own history to go by.

I recommend you stay conservative with your analysis.  Look at the 50% Rule Cash Flow.  It is still a decent amount.  

Be sure you can get a loan with only a 20% Down payment.  This is an investment property.  Many lenders will require 25% Down (not all).  Just make sure before you commit.

If there turns out to be problems as a result of an inspection, just get a estimate on the cost to remediate it. Reduce your offer price to account for that cost.  Or try to negotiate with the Seller to meet you in the middle covering the cost.

Howdy @Ryan Clevenger

Besides living in it for one year you will have to figure out how to increase the equity in the property. You are starting out with only 3.5% due to the FHA Down payment. When you Refinance you will need to have 20% - 25% equity. That is hard to do in one year with minimum renovations.

Be sure to line up all your ducks before you pull the trigger.

@Kevin Scott

Ok, using a HELOC for Down payment and Rehab costs is fine. However, you didn't say how your financing the remaining Purchase price.

Dropping the Purchase price down to $20K is not a reasonable price. You have to justify why you are not meeting the asking price. Use the formula I showed above. You will be able to payoff any existing loan (Conventional, HML, HELOC) and recover all or most of your cash invested.

Evaluating a BRRRR deal is a 2 step process. First can you purchase and Rehab the property then Refinance to payoff any acquisition loans and get all or most of your cash back. Secondly, will the property provide sufficient cash flow that meets your criteria. If either answer is no then it's not a good BRRRR deal.

If your Rental Income is approximately 1% of the ARV, then, the Refinance loan is not the problem. High taxes and paying for utilities is the problem. In your deal if you can payoff all loans and get your cash out with less than 75% of the ARV, then, do it. It will lower the loan amount and reduce the Mortgage payment. Thereby, increasing your Cash Flow.

This strategy may not work in every market.  Just as every investment strategy does not work in every market.  My market expense ratio might be completely different from yours.  Just as individual property expenses vary from one to another.

Try to connect with other investors in your area. Attend local REI club or meet-up group meetings. They will be able to help get you where you want to be.

@Riten Bhatia

Yes, a 4 unit is not considered commercial property.  However, the key term here is “Investment “ property.  I’m not saying 20% Down is not possible.  Just be aware since you will not be living there it is categorized differently.  The typical Down payment requirement for a Fourplex is 25%.  Get the actual amount from a lender before you purchase the property.

@Medi Sarwary

I don't find them on the MLS normally. My Realtor gets some from pocket lists or referrals. We find them just driving neighborhoods (Driving for Dollars), looking on Craigslist (FSBO), or from Birddogs.

The market is getting very competitive making it harder to find good deals.  

I believe there are some websites that you can search for vacant properties.  But, I don’t know what they are or how good they are.

Howdy @Riten Bhatia

Welcome to BP.  You are correct, this is not a good deal with the numbers you have.  First, are you sure you can do a 20% Down payment.  This is a Multi family investment property.  Most lenders require 25% Down.

How many units? what Types?

What is the age and current condition of the property?  Is it like new and rent ready?  Are there any repairs or upgrades needed?

Your COC Return of 2.53% is way to low. A good investment should be 10% or better.

You are missing Property Management in your Expenses.  It should be 10% unless you have a lower quote from a PM Service.  Include this even if you plan on self managing.  Your time is worth something.  And you may eventually want to use the service when your Portfolio expands.

Your reserve Holding (Vacancy, CapEx, and Repairs) are too low. Unless you have good historic data to confirm the low Vacancy rate I would go with a minimum of one month rent (8.34%) for analysis and budgeting purposes. You have not included any Rehab estimate. Therefore, I would use 10% CapEx and 5% Repairs until you have the property inspected to determine the current condition and life expectancy of all major components and appliances. Once you know this you can adjust the amount for your reserve withholding.

I recommend you look at the Cash Flow using the 50% rule. That is a good indicator for many properties. What is the license fee? HOA?

Howdy @Kevin Scott

It appears you are planning to use a conventional lender for both the acquisition and refinance loans for this deal.  20% Down payment for the purchase.  6 months to Refinance.  Unless you have this already arranged with a lender these assumptions are all wrong.

This is an investment property. You will usually be required to put 25% as a Down payment. With a 75% LTV. Is the property currently live-in ready? Are you sure a conventional lender will finance it as is? If they will your timeline for Refinance will extend to 12 months in most cases. The Refinance Lender normally will not accept a shorter period between appraisals. Of course there are always exceptions or different lender requirements. Double check your are able to do this.

If you plan to use the BRRRR strategy you need to rework your numbers to where they make sense for you. Otherwise you are wasting your time. You now say the ARV is $125K. Are you sure? If it is, great. Let's keep the $119K for now. Here's how I would work the numbers:

$119K ARV

x 75% ( My All-in Cost Target) also Refi LTV.

= $89,250

- $20K Rehab estimate 

= $69,250

- $4,500 Closing costs 

= $64,750

- $???? Holding costs 

= Maximum Allowable Offer (MAO) or Purchase price

Did you include Holding Costs in your Rehab estimate? Mortgage payments, insurance, taxes, utilities, HOA fees, etc that occurs during the Rehab period and up until the property is fully rented.

This may seem like an absurdly low offer price. However, that's the price range it nee to be to make this a workable BRRRR deal.

Your Cash on Cash Return is non existent. My Daughter's Savings account would make more than this. You need to incorporate the recommended changes everyone has suggested. Rework the BRRRR Calculator and also do a report from the regular Buy and Hold Rental Calculator.

You may want to move on to another property.

Howdy @John Patton

Your numbers do not support a BRRRR deal. What type of property is it? Age?

Here's my quick look at the BRRRR calculation:

$220,000 ARV

x 70% (All-in Costs Target) & Refi LTV

= $154,000

- $35,000 Rehab estimate 

= $119,000

- Closing Costs 

- Holding Costs 

= Maximum Allowable Offer (MAO) or Purchase price

Your $165K Purchase price is already over the 70% (without Rehab, Closing, or Holding Costs). Even with the 75% LTV you use it doesn't work.

You would not be able to payoff the original Acquisition Loan and get your cash back.

How soon would you want to Refinance this property?  If you use conventional loan for the purchase you may have to wait longer to Refinance.  Double check with your Lender to make sure you can do it.

Your reserves are a little lower than I prefer. Vacancy 3%, CapEx 5%, and Repairs 5%. I like maintaining one month rent (8.34%) for Vacancy and hope for 3%. 12% - 15% combined for CapEx and Repairs depending on the age, current condition, and type of property.

It still may be a good Buy and Hold deal. Just not a BRRRR with that ARV and Purchase price.

Howdy @Cliff Mitchell

Good start on your analysis. Is this a SFR or Multi family?

Your Repair and CapEx amounts are a little light for my taste. Are you doing a complete gut job on the Rehab? Probably not for only $20K. Therefore, I would assume there are some major components or appliances that will need replacing/repairs in the near future. Unless you have the property inspected to determine the current condition and life expectancy. You can not know for sure. I like to maintain 12% - 15% combined or no less than $2K per year. It again depends on the age, condition, and type of property.

The rest of your numbers look good.

BTW if using a HELOC there is no Down payment. Just the full purchase price for the loan amount.

Also did you include Holding Costs in your Rehab estimate? These include (but not limited to) mortgage payments, insurance, taxes, utilities, HOA fees, etc. that occurs during the Rehab period and up until the property is fully rented. Once fully rented the tenants cover these costs.

Howdy @Clarence Tillman

When you put these under contract (and you should) make sure you have them inspected. You want to know the current condition and life expectancy of all major components and appliances for each property. You can budget for any initial repairs required and determine what deferred maintenance requirements will look like. I would recommend keeping a minimum of 15% to cover CapEx and Maintenance reserves. Section 8 properties require annual inspections and there is always something needing attention.