All Forum Posts by: John Leavelle

Howdy @Sean McCluskey

I also go for ARV first. My All-in goal is 70% of ARV. This allows for Rehab budget excesses and lower than expected appraisals. the Refinance loan is normally 75% LTV.

I do a rent analysis to see if the market rates will support my expected Loan payment. I must be able to raise rents after the rehab. Minimum Cash Flow is $150 per unit in multi families and $200 for SFR.

Then we do a quick look Rehab estimate for the initial analysis.  I don't have the experience that @Alexander Felice has so I complete a ruff SOW first. My rehabs have been between $20K to $50K so far. I mainly try to see what major components need attention. Then add to cover lip stick (I also use $10K). Plus 15% for the unknown. Once I have the property under contract I have it inspected and make appropriate adjustments to my Rehab budget and CapEx reserves. I only keep the properties for about 5 years. So everything not lasting past that is replaced/upgraded. Everything else in included in the CapEx reserves.

I use a standard $12K for Closing and Holding cost in my initial analysis.

Once I have all these numbers I work backwards to determine the offer price that works for me.

So the important numbers are ARV, Rent/price ratio, COCROI, and Cash Flow.

Howdy @Daniel Soovajian

Your analysis looks good (conservative). You will find that the ROI tends to be lower percentages in nicer neighborhoods ( A & B). Cash Flow is also typically lower. Your $163 per unit is very reasonable. Hope the inspection go's well. Be sure to include any future renovations in the CapEx reserves (if you haven't already). Good luck.

Howdy @Ted Klein

Are you sure you only need to spend $5K in Rehab cost to get the property up to the $108K ARV? What is the current condition? Why are they only selling for $60K?

You say this is a cash purchase, yet, you have $500 in points for the Acquisition financing.  What is this?

What kind of refinancing are you planning on that you only need 1 month seasoning?  Most lenders require 6 to 12 months.

You could achieve infinite on the COCROI after refinancing if you increased the loan amount to cover the remaining $513. Of course that would increase you mortgage payment by $86. It is normal to have lower Cash Flows on BRRRR deals because of the increased Value and subsequent loan amount. Without having more detailed expense data I tend to stay with the 50% Rule for Cash Flow. It looks pretty slim. You can always leave a little more cash in the property to improve the Cash Flow. I have done that. You have to decide what your criteria is and stick to it. That means minimum Cash Flow and acceptable COCROI.

You ask if this would be better as a Flip. That depends on how accurate your ARV and Rehab estimates are. Run your numbers through the Flip Calculator to see what the results would be. Then make your decision based on the comparisons and what you goals are.

@Jared Baker That is what I suspected. This does not even come close to being a good deal. The rental income is too low for the purchase price. you need to get an actual quote for the insurance (it doesn't cost anything). There are three expenses that are killers for this deal. Insurance, PMI, and HOA. I wouldn't waste any more time on this one if I were you. Numbers don't lie. Don't fudge em to make it look better. Good luck.

Howdy @Jared Baker

1.  What type property is this?  How many units?  What is the rent rate for each unit?

2.  Is the $3,600 all units fully occupied?  Or all but one (you are living in it)?  What is the additional $100 income?

3. Expenses. Vacancy and PM are good. CapEx is adequate. I would raise Repairs to 5%. Insurance is a killer. It seems extremely high. Did you get a quote for this amount?

4.  It is not unusual to have negative cash flow for a House Hack since you are not collecting rent for one unit while you live there.  However, it needs to be able to achieve Positive Cash Flow once you move out.  Otherwise what’s the point.

You need to analyze it two ways.  Once with you living there and one after you move out.

Howdy @Mary Johnson

We need more information. What type of property is it? SFR? Multi family? What kind of financing are you planning? All cash? What is your plan?

Howdy @Travis Hewlett

Congratulations on being innovative.  It sounds like you’ve done the proper market research to support your plan.  That type project may not work in all markets, but, your initial feedback seems to show otherwise.

By the way.  One of my properties had an old wooden oversized garage/shop.  We renovated it and have had it leased for 4 years now.  I originally was going to use it for my own warehouse.  But had someone approach me about renting it.  In my case it was bonus income.

Good luck.  Let us know how it turns out.

@Christopher Berggren

You appear to be complicating your analysis. For instance, rental income should reflect current rent rates and not market rates unless the property is vacant with no rental records. You want the NOI to reflect the current condition. Your incentive for the deal is the value-add perspective (raising rents to market and Rehab to increase appraised value). Using market rates (and not current rents) artificially raises the NOI. And in turn artificially increases current purchase price (using your Cap Rate). So I guess my next question is who's NOI is this? The Seller or your's? This is one reason I use an overall percentage (55%) for expenses when completing my initial analysis. If it meets my Cash Flow criteria with that then it's probably a pretty good deal. Actual numbers are verified during due diligence. Most of the time they will be lower.

You might analyze this deal using two different BP Calculators. Use the BRRRR one evaluating the 4-Plex using a conventional Residential Refinance loan. Then analyze it as a 5 unit property with a Commercial loan on the regular Rental Calculator. You can use your Market rents and Cap Rate in the second analysis.

I could ask a bunch more questions but I will not.

Also, please tag people when you post comments or ask questions in response to their post.

You can PM me if you need more detailed information.

Howdy @Bill Parker

The whole purpose of establishing investment goals and criteria are to help you stay focused and not go down a path that you may regret later. 

That being said I believe your Cash Flow will not be as good as you show. You did not include anything for CapEx. I understand the roof and A/C are fairly new. However, there are many other items that can fall under CapEx and you should save for those possibilities. There are other miscellaneous expenses that will occur that can add up to an additional 5% or more. If you add another 5% for CapEx and 5% for the miscellaneous expenses that's another $191 off your Cash Flow. Just look at the 50% Rule Cash Flow to see what could be.

The bottom line is stay conservative with your analysis and try to keep to your criteria.  It’s your choice.

Howdy @Christopher Berggren

I realize this is a little late.  Here are some responses and comments.

1. The most important numbers/ratios I look for in analyzing BRRRR deals are these; ARV, All-in Cost compared to Refinance LTV, Income/Expense ratio, Cash Flow using 50%, and COCROI after Refinancing.

2. The two ARV's are different because the first is a number you entered ($585,000). It should be based on comps. The second is derived from the calculator using the stated NOI ($38,121) dividend by the Purchase Cap Rate (rounded to 9%) which gives you a Cap Rate based value ($423,566.67).

3. Regarding your Refinance loan amount. How did you arrive at $461,500? Most lenders use a Loan to Value (LTV) metric to determine the maximum loan amount. A 4 unit property is still considered eligible for a Residential loan. However, it is also considered an investment property and therefore normally only qualify for 70 - 75% LTV. 75% is $438,740. 80% is $468,000. Double check your financing before you actually purchase a property.

4.  Your Purchase Closing costs seem low.  @Brent Coombs covered the Acquisition Loan issues.

5.  Your overall Cash Flow analysis is a little too optimistic for me.  38% is not very conservative to start with.  

6.  The last thing I would note is your suggestion to add a 5th unit.  This changes the description of the property from Residential to Commercial.  You would need to check with zoning to see if it is allowed.  Any future financing (i.e. your Refinance loan) would now be a Commercial loan with different terms for amortization, Interest rates, and shorter loan length with balloon payments.  Again, double check your financing.