All Forum Posts by: John Leavelle

Howdy @Mike Leising

Have you established investment goals and criteria yet?  If not you need to.  Use those to guide you in your analysis.  If a property does not meet your criteria then move on to the next.  

Example:  You want to invest in small Multifamily (2-4 unit) properties with a purchase price of no more than $75,000 per unit.  The deal must meet the 1% Rule for Purchase price/rent ratio.  It must also Cash Flow a minimum of $100 per unit using the 50% rule for expenses.

This is very simplistic criteria.  But, if you stay conservative and follow your criteria you should keep from making bad deals.  Once you get going and purchase your first couple you can refine the criteria.  This will help keep you on track and not lost.  

Howdy @Erin Elam

I'll try to answer your question in the order you asked them. Also, just so you know, even though I think it is an excellent tool, I do not use the BP BRRRR Calculator for reasons I will explain as we go.

1. Property fully occupied. If you plan to use a HML for the acquisition loan you will be on a short time line to get the property refinanced. If you do not complete the required Rehab to increase the value it will be difficult to get the stated ARV and in turn the Refinance loan amount. Be sure to thoroughly inspect the property so you know what it really take to get it "like new" rent ready and appraised at the expected ARV. If you can not accomplish this with the tenants occupying the property you will need to come up with a different plan. Tenants stay or tenants go (Cash for Keys).

2. HML points and fees. These can be paid at closing, paid at the end of the term/refinance closing or rolled into the loan. Check with the lender.

3. In the Purchase Loan Details you have the option of entering a Down payment percentage or a Loan amount (i.e. 20% down or $44,000 loan amount). These numbers come straight from the purchase price ($55,000). This is where I have a problem using this Calculator. It doesn't provide an easy means of distinguishing all the different funds used for the deal. I use a different software program for my analysis. It would be nice if they could expand this portion of the Calculator. If you provide an example of the combination funding I may be able to figure out how you could enter it. Assuming the HML is only $44,000, the remaining $11,000 is your cash/Private Money along with the Rehab, Closing and Holding costs. These show up as Cash needed at Purchase. If the PML is only charging interest for the loan you could enter it in the Other Charges from the Lender as a total amount. I haven't tried it yet. I would work this out on paper first.

Here are a few questions/comments regarding your report.

4.  Rehab estimate and time.  Are you sure it will only cost $10K to increase the value $30K?  What are you including in the Rehab?  The property needs to be in "like new" condition to achieve the best appraisals.  Will any Rehab inconvenience the tenants?  I would plan for more than 1 month Rehab time.  You never know what problems or delays may occur.  If it only takes 1 month you are still covered.  This time allotment has a direct link to Holding costs.

5. Time to Refinance. This will be 6 months or longer on average. Most conventional lenders require 6 - 12 months seasoning. I strongly recommend you get Pre-qualified for a Refinance loan before you purchase any properties. This gives you the actual terms and loan amount you qualify for. It also show any HML/PML you have an exit strategy to pay them off.

6. Refinance Loan. Where did you derive $60,700 loan amount from? $59,500 is 70% LTV and $63,750 is 75% LTV of the $85,000 ARV. Why are you using 15 years versus 30 for the loan amortization length? Are you not interested in more Cash Flow? Or are you wanting to pay down the loan faster?

7.  Your numbers do provide for a decent deal.  However, it might be better to go conventional financing for the acquisition since you are leaving $11,000 cash in the deal (the same as the down payment).  It would be a lower loan amount and P&I payment.

Howdy @Janice Delantes

Let me try to answer your initial question about the Asking price $48K versus the ARV $53K. The end buyer is actually paying lower than current value (ARV) if that number is correct. The seller would basically receive $8K in cash from the sell. $48K - $40K existing loan = $8K. You need to determine the possible loan terms you would get and the P&I for a new mortgage. As an example: $48,000 - $9,600 (20% Down payment) = $38,400 loan amount @ 5%APR/30 years = $406 P&I payment. As @Jason D. suggested you would need a higher rent rate to accommodate the increased mortgage payment.  Have you researched the market rental rates for the area?  Is $550 within those rates?  Is there room to increase?  If not this is a no go to me.

Howdy @Brandy Downing

I have to agree with @David Cruice . Your analysis is missing critical expenses (CapEx, Maintenance, Property Management, and others). Therefore, it is not a realistic outcome. Look at the 50% rule for Cash Flow analysis. It is probably closer than your estimates. Do not fudge numbers to make a deal look good. Stay conservative to keep you from getting into hot water down the road.

Howdy @Pedro Hardy

I believe you need to redo your BRRRR report for us to provide a decent critic. Here are a few questions to consider before posting a new report.

1.  What is the correct Purchase Closing estimate?

2.  What is the Refinance Closing cost/fee?  Will it be paid separate or included in the loan?

3.  Have you ever completed a Rehab?  $20,000 in 2 months is possible, but, I would allow for delays or problems that always pop up.  Min 3 months.

4. 2 Months to refinance? How? Who? Most conventional lenders will want a minimum of 6 months "seasoning" and up to 12 months. That means 2 things. Your HML loan seasoned and rental occupancy seasoning. There are exceptions (Delayed financing), but, not the norm. Strongly recommend you get pre-qualified for the Refinancing before purchasing a property. Know before you Go!

5. Is your Acquisition loan from a HML? The number are kind of different. Points amount is less than 1%. Most HML use 1 - 3% of loan amount for Points. Do they require you to cover a down payment? 5%? Why did you not include amortization? All loans have a length. The average HML loan 12 months. Your P&I payment for this loan reflects a 12 month term.

6.  The COCROI is corrupted by the Closing cost error.  The COCROI after refinancing should be infinite or extremely high.

7. Your Cash Flow analysis is lacking numerous key expense categories (Vacancy, CapEx, Maintenance, Property Management, etc.) All should be included. In lieu of the absence of these look at the 50% rule Cash Flow on page 2. This will give a more reasonable (conservative) analysis. Also you did not include any owner paid utility costs. Make sure these are included if required.

Howdy @Brady Hess

Are the expense amounts what the seller provided?  Or your estimates?  I agree the rents are a little too low considering you would be paying most of the utilities.  However, did you investigate if this is common in the area?  What are the market rental rates for similar units?  Cap Rate needs to be higher for me to risk anything on this investment.

Howdy @Dennis L Lewis Jr

I think the first thing you need to do is establish a good ARV/Market Value of the Duplex/land. The Mobile Home you can use the tax assessment for value. Cash offer only will be hard for you to meet. The only thing I would suggest is asking for Owner Financing. I doubt they will go for it.

Howdy @Devin Stott

You show a $199K List Price and $285K ARV. But what is your projected Purchase price? The same as List? This is important to distinguish. Let me show you why:

Purchase Price = $199K

Rehab Estimate = $50K

Closing and Holding Costs = $12K (My estimate)

Total Cost of Project = $261K

ARV = $285K

HML Financing = ??

Cash = $30K

HELOC = $30K

Refinance Loan Amount = $213.75K (75% LTV) or $228K (80% LTV)

With the amounts you provided the HML amount will be ruffly $201K. Your HELOC will cover $30K of Rehab. All remaining costs (Rehab, HML points, Closing and Holding) will be covered by your cash). Now lets use the Refi loan. You payoff the HML loan first $228 Refi loan (80%L LTV) - $201K HML = $27K. You must next payoff the HELOC. $30K - $27K = $3K remaining on HELOC. You now have 2 loans you must pay on.

Your Purchase price is to high for this deal!

Your Cash Flow analysis is way to optimistic. 25% for expenses is not very realistic. I would double that amount for analysis and budgeting purposes. If you actually achieve 25%. Great! More cash in your pocket. I strongly recommend you stay conservative so you do not end up losing your shirt. You did not include CapEx or Property Management in your analysis. Vacancy is lower than what I would use. I like 8.34% (one month rent). CapEx and Vacancy are important reserves to maintain (they are there if you need them). Even if you plan to self manage it is recommended you include PM in your analysis. If you plan to grow your portfolio you may want a PM Service in the future. If it is not included now it is hard to add later. I also believe your time is worth something (even if you plan not to pay yourself).

It is my opinion this is not a good deal as you have presented it. It would have to be an offer price of around $166K to work for me at 80% LTV.

Howdy @Karl Krauskopf

I'm not sure your numbers are overly conservative. Your Vacancy and CapEx are lower than I would start with. You say the first unit is rent ready. Is it currently occupied? Is either unit currently occupied? If not how are you justifying 3% for Vacancy? You are contemplating converting basement into additional living area's. How much inconvenience will this cause any tenants living there while construction is going on? If they are currently vacant I would try to include that in my initial Rehab budget. You should be able to demand higher rent sooner. My point is with vacancy I never go below 8.34% (one month rent) for analysis and budgeting. If you achieve 3% market rate or none at all. Great, more money in your pocket. However, if you have a full month or more of vacancy for some reason you will be better prepared to handle it. CapEx is an important cash reserve to maintain. Be sure to have the property inspected to determine the current condition and life expectancy of all major components and appliances. Once that is determined adjust your CapEx reserve requirement to meet the deferred maintenance timeline. Stay conservative and be prepared for the unexpected. It always happens.

Howdy @David de Luna

I know nothing about your area or market. This is just a general review of your analysis.

Your financing does not look right.  You say you will be living down the street, however, the financing looks like owner occupy type financing (15% down).  Be sure you will not be required to live in the property initially for one year.

Also based on your information it looks to me your are being overly optimistic regarding your expenses. Did every major component and appliance get replaced during the latest renovation? I highly doubt it. Therefore, some items still may have a deferred replacement timeline. Even new has a certain life expectancy. I always recommend staying conservative when you start your analysis. As you gain more validated information, like during due diligence or formal property inspections, you can adjust your numbers accordingly. Specifically your CapEx reserves. It is always better to have to money saved in case to need it rather than need it and not have it. This additionally applies to your Vacancy and Repairs reserves. Tenants are Month to Month. That means they could move out at any time. Okay, you say it's a high demand area. Great! But, what if there is more clean-up and repairs needed than you anticipated and the unit has to stay vacant for a full month? You did not hold out enough to cover the vacancy and probably not enough for the repairs. So that all comes out of your pocket and not the business budget.

The last thing is Property Management.  I understand you plan on self managing.  Many investors do.  Personally I think my time in running a business is worth something.  What is your long term investment goals?  Do you plan to expand your portfolio?  Is it possible you may want a PM Service in the future?  If so you may find it hard to find the money to support that if you did not include it in your initial analysis.  Include it now so you know it it is a possibility later.  It is my opinion that if a property will not support PM and still provide acceptable cash flow it may not be as good as you think.  However, many investors are happy going the same route you are with the slim margins for errors.

Take a look at the 50% rule for Cash Flow (-$68.88).  That is a red flag to me.  The real number may be somewhere between this and your optimistic number ($459.79).  It is good you plan to raise rents to market rates.  Just be cautious.  The closer you get to the market rates you may find vacancy may also rise.

Good investing.