All Forum Posts by: John Leavelle

@Neel Patel I missed the key word there "Shell".  However, I still would do a complete analysis of the life expectancy of all your major components and appliances.  Adjust to a more accurate reserve number.  I recently built a new 4-Plex and have a higher number that is ruffly 7%.  Just because you hold that amount in reserve does not mean you end up spending it.  It is just a conservative practice.  5% for Repairs may be ok since your property is virtually new.   It will come down to the quality of tenants.

Howdy @Stephanie Barton

The analysis looks good from what you provided.  I agree with @Sam Shueh for analysis and budgeting purposes I like using 8.34% for Vacancy.  This is equivalent to one months rent.  If you need it its there.  If you have less than a month or no vacancy then you made more income that year.

In the future it would help us provide better critics if you would include additional information in your posts.  Like the type of property, age, condition, what your plan is, and why you need help with the analysis.

Howdy @Gary Lawson

Here's how I like to work BRRRR deals.

1. Determine the ARV ($141,000)

2. Get pre-qualified for the Refi Loan. Usually 75% LTV ($105,750).

3. I want my All-in cost to be as close to 70% of ARV ($98,700). This allows for lower than expected appraisal and/or Rehab budget overages.

4. Determine my Maximium Allowable Offer (MAO). ARV * LTV - Rehab - Closing Costs - Holding Costs = MAO ($141,000 * 75% = $105,750 - $20,000 Rehab - $3,000 Closing (example) - $3,000 Holding (example) = $79,750

You can see your numbers are close to what I might use. So, yes you did the math right. However, i would not do this deal as presented because of the poor cash flow. SFR I prefer a minimum of $200 per month. Too much can go wrong with slim margin for error at $90 per month.

Howdy @Rhonda Chapman

Welcome to BP. Seems like you have a lot of educating (it's all free here on BP) to get caught up on. The first thing I would recommend is watch all the podcasts on the BRRRR strategy. Search the website for anything on this strategy. Learn all the key elements and how you get them. And of course keep posting your analysis.

As far as this report goes it definitely needs a lot of work and explanations on how you came up with the numbers, what your plan is, how old is the building, what type property (SFR, 2-unit, 3-unit, etc). I'll break it down section by section.

Purchase Price Information: I understand how you derived at $95K (not the price I would pay ... I'll explain below) and Closing Cost is fine. You state estimating $15K - $20K for Rehab. Always use the higher amount. Rehabs rarely going exactly as planned. What type Rehab are you estimating? Lip stick only, some major repairs, upgrades, etc? How did do get $135K for thew ARV? Comps? Your Rehab is tied to this number. Do you really think it will only take 1 month top complete the Rehab? I always add at least one extra month in my budget. As I said they don't always go as planned. Time to Refinance 2 months? I will address this below.

Acquisition:  What type loan is this?  Conventional lender (Fannie Mae)?  Small bank or Credit Union (Portfolio lender)?  Why 20 years and not 30 years for amortization?  Are you contributing any of your own cash to this deal?

Refinance: This is where the biggest problems are. When you refinance a property the loan amount is base on the lenders Loan-to-Value (LTV) ratio base on a new appraisal. These ratio's are usually 70% - 80% of the appraised value. When you Rehab a property you are trying to get it to a condition that it will appraise at the current Fair Market Value (FMV) for similar properties. This is referred to as the After Repaired Value (ARV). ARV is suppose to be as close to the FMV (or the banks appraised value) as possible. You say the ARV is $135K. the problems is the lender is not going to give you 100% of the value in the form of a loan. You must leave part of that value in the property as equity. So at more you will get $108K (80% LTV) for the Refinance loan. The next thing is conventional lenders will not provide a refinance loan only 2 months after your original acquisition loan. They typically require 6 - 12 months seasoning of the original loan. Unless you have already arranged something with a lender.

Income & Expenses (Cash Flow analysis):   The problem with the repair numbers have already been discussed.  Here are the basic Expense items that should be included in every property analysis you do.   Vacancy;  Rarely do properties stay fully occupied for ever.  This is a important reserve you should always account for.  You may see Vacancy rates anywhere from 2% to 5% provided by sellers and other investors here on BP.  That will not cover a full month vacancy.  I never go below 8.34% (one month rent).  If I have a unit go vacant for a month then I am covered.  If I have no vacancies then I made more income that year.   Repairs; This is a reserve to cover monthly minor repairs and maintenance costs.  Depending on the age and condition of the property and the quality of tenants.  It is common to use a percentage (5%-10%) of the projected rental income.  CapEx; This also is a reserve to cover larger repair replacement issues. I like using 10% for my initial analysis until I have the property inspected. Once I know what needs to be included in my Rehab the remaining will be considered deferred maintenance. I adjust my CapEx accordingly to a number versus a percentage. Property Management;  This cost is recommended to be included even if you plan to self-manage the property.  I am a firm believer that you time is worth something.  If you plan to expand your portfolio you may decide you need a PM service.  If you did not include it in your original analysis it will be difficult to add it later without greatly affecting your cash flow.  10% is average.  Property Tax and Insurance;  You already included these.  Other Expenses; There are numerous other expenses that occur for each property. These include (but not limited to) Utilities, HOA fees, Lawn care/Snow removal, accounting, legal, etc. If you do not have the complete list of expenses for a particular property I would suggest using the 50% rule for your initial analysis until you ca verify actual costs. That is 50% of the income as expenses.

Hope this helps.

Howdy @Neel Patel

Did you include Holding Costs in your Rehab estimate?  If not that will increase your All-in amount.

What are you using for your Refinance loan amount? LTV %?

Your rental income will have to be significantly more to provide positive cash flow (closer to $2000).  Or the purchase price and/or Refinance Amount must be lower.

I agree with @Christopher Phillips on some of your expense amounts (including Vacancy).

Howdy @Jodie Stone Daley

You did a good (conservative) job with your Analysis.  Unfortunately the results are a reasonable result (except for the financing).  A lot of the newer 4-Plex in areas such as the Medical Center come with higher Purchase prices compared to the Rental Income.  Which makes it hard to have positive cash flow.

I do not invest in that area so I am not familiar with the market rental rates.  If the current rents are significantly lower than market then it might be a viable deal.

The reason I mentioned Financing is although the property still falls into the Residential category (versus Commercial) it is considered an investment property.  Most lenders want a 25% Down payment for investment properties.  Of course there are always exceptions.

@Sean McCluskey

Just remember the lack of CapEx to this date is more a result of the Rehab than anything. I am already into small Multi ‘s (Duplex and 4-Plex).

Good luck with your investing.

@Ted Klein

Sounds like have everything under control.  I agree about the opportunity cost.  Ideally we want to be able to reuse the same bucket of money over and over.  If you keep leaving some in each deal that bucket will eventually run empty.

@Todd Dexheimer

Totally agree.  That is one reason I try to keep my All-in at 70% or less.

@Sean McCluskey

Sorry for the confusion. Everything I do is to be conservative. I repair/replace everything that will not last at least 5 years. So far I have replaced the roof on every property. But, if I did not I would include it in my CapEx reserves according to its remaining life expectancy. The same goes for all other major components and appliances. The idea is to build enough cash reserves to cover the property for 6 months of vacancy.

I've only been doing this for 4 years now. So far I have not used any of my CapEx reserves for any properties. Insurance covered one major expense and all others have been normal Maintenance /Repair Expenses.

After 5 years I plan to 1031 exchange to a larger property (small multi family or small Apartment). The reserves from the sold property will be transferred to my main Cash reserves account. The banks like this. Of course I start the whole BRRRR process again on the new property.