All Forum Posts by: John Leavelle

Howdy @Bill Zarzecki

To answer your question, yes, you can use the HELOC for a down payment. Just remember to include that additional payment in your calculations. The repayment will be a shorter schedule than your mortgage payment. Suggest at lest 12 months. HELOC s can be used over and over.

Howdy @Stephen Neto

Using minimum (optimistic) percentages for expense estimates can be an expensive learning experience. I believe in being conservative when evaluating investment opportunities. Do not put low numbers for expenses just to make it look good. If you do not have actual verifiable data start from a conservative point by using the 50% rule for cash flow. It will kept you from making bad decision more often than not. As far as the individual expenses go (excluding utilities) I start with 8.34% or $187.65 (one month rent) for Vacancy. This is a reserve holding. You may or may not need the money. If you do then you are covered up to one full month of all units being Vacant. If none occur, great, you made more income that year. You did not show anything for CapEx. I start with 10% or $225 for this until I have the property inspected. I want to know what the current condition and life expectancy is of all major components and appliances is. I can then decide what needs to be included in a Rehab estimate and what can be deferred. I then adjust my CapEx reserve requirement to meet this deferral. The Repairs estimate (5%) may or may not be OK. Again it depends on the age and condition of the property and quality of tenants. I strongly recommend you include Property Management in your analysis. Even if you are planning to self manage. This is for two reasons. First your time is worth something isn't it? Second, if you do not include it now it is hard to add PM Services later (as you indicated) without significantly reducing your cash flow. 10% or $225 is common for PM. If you make these changes to your analysis you will probably fine it may not cash flow as well as you expect. I did not include Miscellaneous expenses that do occur that can easily add up to another 5%. Lawn care/snow removal, pest management, Legal, accounting, other admin costs, to name a few.

I am not trying to discourage you from pursuing this property.  Just be sure to keep your eyes open and do your due diligence.  

Howdy @Peter Grange

Do you already have financing arranged?  This should be considered a commercial deal and require that type of financing.  Meaning 25% down and possibly a balloon payment in 5 to 10 years.  Financing for Mobile/Manufactured homes is a little different than standard homes.  Recommend you double check your financing.

You say you walked the property but how old are the units?  Did you inspect the roofs, Hot water tanks, plumbing, septic system, etc...  There are many things that can wear out sooner than you think.  Is the septic in code compliance?  This might be considered a Mobile home park even though it is not identified that way.  Be sure to do your due diligence. 

Howdy @Lisa C.

You really need to provide more information about the deal.  What type property is it?  Multi Family?  What kind of Financing are you using?  3% is extremely low.  Expenses seem a little low (Optimistic).

@Anthony Heatley

I am not saying it is impossible to include points in a HML. Some will do it. Just not the normal process. If you can find one that will good for you. Be sure to verify what the actual terms are. Do not assume anything. If you receive information stating you can include the points in the loan then I stand corrected.

Every rental market is different.  Some rents include all or part utilities.  Others have tenants pay all utilities.  Again, this is something you have to verify for each property.  If the information is not provided by the Seller or their agent you can check with local utility companies.  I would not try to estimate utility costs without something to go on.

Don't get me wrong. The BP calculators are great tools for us to use. However, the BRRRR calculator has no explanation of where Holding costs come from or where you need to input them. They are not displayed in your printed report are they. They do show up in the Calculator Report you see on-line under the Rehab Period Tab. But only as a total. No breakdown or explanation. I have seen Holding cost up to $10,000. That is a lot of money to over look. As you stated "You do not understand Holding costs". If the calculator does not walk you through them how will you know what you don't know?

I provided a list of types of costs that can be included in your Holding cost in #3 of my previous post.  If the property is vacant while you Rehab it you will need to turn utilities on to test and use them.  Who is going to pay for them?  You are!  You will still have other monthly expenses you will be responsible for until you have tenants to help pay them.  These are your Holding costs.  If you have a 4-Plex and it takes longer to fill it than you expected any negative cash flow will be considered Holding costs.  Why?  Because it is still considered an expense.  If you have any questions regarding Holding cost please ask.

Howdy @Brian Kwan

Remember, you are talking about repaying the HELOC and Cash Flow. What about the other loan to purchase the property? You would be actually paying on 2 loans. Refinancing should reduce the overall payment and not increase it.

@Dakota Hicks

If you go the Seller Finance route you do not pay PMI. That is an institutional requirement. However, you would be more inclined to meet the Sellers price.

You are correct assuming that the lower your Down payment is the better the CoCROI will be.

Yes, PMI goes away once you refinance.

I replace the roof on almost all my BRRRR deals with a metal roof. Remember I look for distressed properties. So it's not an issue for me yet. I re-inspect each property every year to stay on top of CapEx needs. So the likely hood of a buyer wanting a major component to be replaced should be rare.

Howdy @Rocky Santa Cruz

12% + CoCROI is normally a good target for most Buy and Hold investments. However, the goal of the BRRRR strategy is to recover 100% of your cash invested. That means a target of "Infinite " CoCROI. 12% means you left a significant amount of cash in the deal.

We want all of our cash back so we can invest it in the next property.

The reality is we end up leaving some cash in some of the deals for one reason or another.  We may want to lower the Refinance loan amount to improve Cash Flow.  The new appraisal may be lower than expected and you are not able to pull all your cash out.  If you complete your analysis and due diligence correctly you should be successful achieving that goal more times than not.

Howdy @Logan A Tyler

Your report is incomplete and has the wrong type of financing.

1.  This is considered a commercial investment property (5+ units).  Therefore, the financing changes.  You should be putting 25% down.  The interest rate will probably be over 5%.  The amortization length will be more like 20 to 25 years(maybe less).  You will have a balloon payment due in 5 to 7 years. Check with a commercial lender to verify actual terms.

2. Your Cash Flow analysis is severely lacking expenses. Insurance, utilities, CapEx, Maintenance, Vacancy, Property Management to name the most common items.

3. How did you arrive at the Purchase price and ARV? Commercial properties are valued using Cap Rate and income methods. What is the Seller showing for Cap Rate? What is the typical Cap Rate in the area?

4. What condition is the property in? You did not include anything for Rehab or CapEx. Are the units brand new?

Howdy @Anthony Heatley

I see no one has responded to your post. Let me say first that I do nothing but BRRRR deals currently. However, I do not use the BP calculator. I have a few issues with it. Here's what I see:

1. The information you provided for the HML is incorrect. The loan amount is $80,000. Not $82,195. The $2,195 in points is the fee you must pay up front and separate from the loan. Your Monthly P&I is really Interest only payments at $800 ($80,000 x 12% = $9,600 / 12 months) per month. Not the $821.95 you are showing.

2. Good to see you included all Closing costs (Acquisition, HML Points, and Refinance Closing Fees).

3. Holding costs is where many people mess up with their calculations. Holding costs can 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. So your Holding costs ($3,127.60) is automatically transferred from the HML P&I payment and information you included in your Cash Flow analysis (insurance and taxes).

P&I $821.95 +

Insurance $70 +

Tax $150.58

= $1042.53 x 3 months Rehab 

= $3,127.59

You did not include any utilities in your Rehab budget I’m sure.  This area is where I have issues with this calculator.

4.  According to my math you still have cash in the deal.  This does not include the missing utilities during the Holding period.

Purchase price $52,000 +

Rehab estimate $28,000 +

Purchase Closing costs $4,600 +

HML Points $2,195 +

Refinance Closing Fees $3,000 +

Holding costs $3,127.59 =

$92,922.59 -

Refinance loan $91,000 =

$1,922.59 Cash remaining in the property 

Again, my problem with this calculator!

5. Cash Flow analysis: Using the 50% Rule is a good start in your analysis. Because you don't know what you don't know. It is much better over estimating expenses than under. Unless you have detailed accurate data from the current owner. That being said here's my 2 cents on your individual expenses. I always use a minimum of 8.34% (one month rent) for Vacancy reserves. If the average vacancy rate for the area is 5% or less, great. You are covered. However, if you have a vacancy that ends up lasting a month (or longer) your cash flow disappears in a hurry. Remember, the money is in reserve. It is not actually spent unless you need it. Your CapEx and Repairs amounts are okay. I always initially start off with 10% CapEx. Once the property is under contract I have it inspected to determine the current condition and life expectancy of all major components and appliances. From that report and in coordination with my GC we decide what to include in the Rehab and what can be deferred. I then adjust my CapEx reserves requirement accordingly. You did not include Property Management as an expense. You should always include it as part of your analysis even if you plan to self manage. If you plan to grow your portfolio you may eventually want a PM Service. If you did not include it in your original analysis it will be difficult adding it later and remain positive cash flow.