All Forum Posts by: John Leavelle

Howdy @Ethan Perkins

You need to post a report and ask specific questions so we can help.

@Samuel Ruelke

1. I have not used HML money yet. However, I have contacted some previously. Most are going to require you have skin in the game. 20% to 30% Down payments are common. This can depend on your track record and experience. They will also require points be paid up front. 2% - 3% of Purchase price is average. Never base your analysis on "Best case Scenarios ". Just the opposite. Be conservative and use Worst case Scenarios.

2.  You can do it however you feel comfortable doing it.  Be prepared to compensate contractors for their time.  If you want actual bids for a property you fully intend to purchase then that’s a little different.

3. Staying conservative with your analysis is always smart. Using rules of thumb, such as the 1% and 50% rules, are a common means of being conservative. If monthly rental income is less than 1% of the Purchase price it starts getting hard to meet minimum cash flow criteria. We use the 50% rule for expenses with the hope that the actual numbers are less. Most experienced investors will tell you that over longer periods expenses do average around 50%. This can depend on your Market and how well you maintain your properties. Some areas have higher expenses do to things like higher taxes, higher insurance rates, HOA fees, etc.

4. I do not use the BP Calculator. When you do a BRRRR deal of Flip there are 4 distinct areas of costs. The Purchase price, Rehab costs, Closing costs, and Holding costs. The Purchase/Acquisition Cost is self explanatory. The Rehab costs are all the Material, Labor, and Appliances. It also includes permits, termite and mold remediation. There can be 3 Closing costs; Purchase Closing, Refinance Closing/Fees, and Hard Money Lender Points/Fees. These first three areas are fairly easy to find where you enter the data.

 The Holding costs are entered in two different areas.  It is confusing.  When you start entering data on the 2nd page there is a block for “Estimated Repair Costs “.  Below it it tells you to enter the total value or you can click on “provide cost breakdown “.  At the bottom of the cost breakdown page there are General Components; Permits, Termites, Mold, and Miscellaneous.  You could enter additional Holding costs in the Misc block.  Not sure if it works.  That’s the main reason I don’t use this Calculator.

If you go back to review your report you can scroll down past where it says Calculator Report; Download, Edit, Discuss, Other.  There are three tabs you can click on; Rehab, Rental, Refinance.  If you click on the Rehab tab it will display additional information not on the printed report.  The first thing you see is Holding Costs.  However, this number does not seem to be included in the total project cost.  Not sure why?!

You asked if the Holding Costs are in addition to the Rehab costs while sitting vacant. The simple answer is YES. The best way to look at Holding Costs are those expenses that occur while it is vacant, but, would normally be covered by rental income. Mortgage payments, utilities, taxes, insurance , HOA fees, etc. Does your $60K Rehab Estimate include these? Probably not.

Howdy @Dan Galvan

The first thing you need to do is determine the ARV for the property based on recently sold comps. Have an investor friendly Realtor run a CMA for you. You will use that to decide your initial and Maximum Allowable Offer. ARV minus Rehab estimate will get you started. If it will require extensive work that could effect tenants you will need to consider Holding costs.

The property meets the 1% rule (Purchase price vs Monthly Rental income).  Your Cash Flow numbers are not accurate.  You have left of several major expenses; 

Vacancy reserve - I do not go below 8.34% ($145.92) (one months rent) for analysis and budgeting.  

CapEx - 10% ($380) you do not know the current condition. Once the property is under contract have it inspected to determine the current condition and life expectancy of all major components and appliances. You can then decide what needs immediate repair/upgrading and what can be deferred. Adjust the CapEx reserve based on this report.

Maintenance/Repairs - 5% - 8% ($190 - $304) depends on the age and condition of the property and the quality of tenants.

Property Management - 10% ($380).  Always include PM in your analysis even if you plan to self manage.  Your time is worth something, right!  Also, if you plan to expand you may eventually need a PM service.  If you did not include it in your initial analysis and budget it would be hard to cover it later.

There are other miscellaneous expenses, but, I will not cover those now.

Lets see what your Cash Flow looks like now.

$2270 - $145.92 - $380 - $190 - $380 = $1174.08 

You still need to include mortgage payment (P&I)

Purchase Price $259,000

Down payment (25%) $64,750

Loan Amount  $194,250

5.5% APR/30 years

P&I = $1102.93

$1174.08 - $1102.93 = $71.15 Cash Flow per Month

Using the 50% rule Cash Flow looks like this:

$3800 - $1900 (50%) - $1102.93 = $797.07 CF per month

My point for doing this is to make you aware of the need to be very conservative when you analyze deals.  The 50% rule is considered a conservative measure to use.  Be sure to look at all possible expenses.  Do not smooth over the numbers to make it look good (That is what Sellers do!).

Hope this helps.

Howdy @Steve Uhlig

There is no rule to use for estimating Rehab costs for the BRRRR strategy. Some experienced Rehabbers have used an amount per square foot to come up with a general number. Such as $30 per sq ft. But this has obvious limitations. Finish quality, Large system replacement (eg. roof or electrical) can all muddy the numbers. I have used this a few times for properties I could not go see. You need to have some decent current photos to at least have a chance. I go strictly be numbers for my initial analysis to weed out most properties. Anything meeting my minimum criteria justify a look. Either myself, my Realtor, or sometimes my GC will go by to look at it. Even though I have walked through roughly 30 properties I do not consider myself experienced enough to do it sight unseen. If you cannot do it yourself at least have your Realtor go by and take lots of pictures and give their opinion of the condition. I strongly recommend you get J Scott's "The Book on Estimating Rehab Costs" available here on BP. It breaks down the process step by step and provides you a good foundation.

@Jason Gott

That is completely understandable and wise to be cautious. It is important to be comfortable with leverage and debt. The HELOC provides a powerful tool for my investing. Quick accessible cash when I need it for low interest rate that can be used over and over. I primarily use it to fund the Rehab, Closing, and Holding costs for my deals. My Private Lender funds the Purchase. I pay interest only to the HELOC and PML until I have the property refinanced at which time both are fully paid off. To me it would be hard to scale up your portfolio as quickly without using leverage. Maybe after you have completed a BRRRR deal or two you will think differently.

Howdy @Samuel Ruelke

Strictly from a numbers perspective the report looks good.   But I do have a few comments and questions.

1.  Are you sure you can get a Hard Money Loan with no down payment?  Not sure why you show a surplus for the down payment.

2.  As far as learning how to estimate Rehab costs you can get J Scott’s “The Book on Estimating Rehab Costs “ available here on BP.  It breaks down the process step by step and provides a good foundation to learn from.  Have a contractor (or 2 or 3) walk the property with you and provide bids.

3. Your Cash Flow is a little lite. But, that is common with the BRRRR strateg with the increased value and mortgage. The good thing is you have stayed conservative with your analysis. Most you may have better Cash Flow than your analysis shows. Look at the 50% Cash Flow line. It is better than what you estimate. Very good indication.

4. The last thing I would say is to make sure you included all your Holding costs in the Rehab worksheet. That includes loan payments, utilities, insurance, taxes, HOA fees, and any other expenses that can occur during the Rehab period and up until the property is fully rented. The Calculator will automatically transfer any expenses you include in the cash flow analysis (loan payments, insurance and taxes). All others need to be entered by you. This is an area many new to the strategy fail to include. My average Holding costs add up to around $6,000. So you can see it could potentially blow your deal.

If your numbers are correct I would definitely pursue this deal.

@Jason Gott

For smaller loan amounts ($50K and under) you may find more success with portfolio lenders like small local banks and credit unions. All my loans are currently with Portfolio Lenders. I also use a Private Money Lender to fund my acquisitions and help with Rehab costs. I try to use as little of my own cash as possible. Other methods of funding I use are a Personal Line of Credit and a HELOC.

Howdy @Meredith Witzel

1.  What is the Cap Rate for that area?

2.  What is the Rental Market range for that type property?  I see you are using $700. 

3.  What is the $300 Other Income?

4.  Are the expenses listed a guess or did you get legitimate numbers?

5.  This is considered a commercial property (5 plus units).  I doubt you will be able to obtain that type of refinance loan.  More like 15 to 25 years  amortization and a balloon payment in 5 years.

6. What is your objective for this property? Are you planning to use the BRRRR strategy? Do you want to recover all your cash invested? Or are you looking for a good Cash Flowing property?

If you are wanting to do the BRRRR strategy the numbers you are using will not work.

Answer these questions and I’ll try to provide better information.

@Jimmy Solano

I think your expense estimates are way too optimistic. You did not state what you used for Vacancy, CapEx, and Repairs. For analysis and budgeting I never go below 8.34% for Vacancy. That's $1008 just for Vacancy. Not knowing the condition of all the buildings I would keep CapEx at 10%. That's another $1,210. Repairs are going to be somewhere between 5% to 8% depending on age and condition of the property, and the quality of tenants. That's another $605 to $968. Make it a nice round $3,000 for these three expenses. You will be lucky to break even.

I strongly recommend you stay conservative with all your analyzing until actual numbers can be verified.

How did you arrive at your Offer price? What Cap Rate and NOI are you basing it on? What is the Cap Rate in that area?

Lots of question marks.

Howdy @KYLE W.

1.  I would want to know what the difference is between the $275K - $300K properties and this one.

2.  Is there more repairs/updating required than you think?

I agree with @Jim Cummings.  If the property currently meets your Cash Flow criteria and has a good tenant it might be best to keep the status quo.  If you put it under contract have it inspected to determine the current condition and life expectancy of all major components and appliances.  That will let you know what really needs fixing up front and what can be deferred.