All Forum Posts by: Joseph Collins

Unless the project comes in way under budget, you didn't buy the property cheap enough in my opinion. ie, there's not enough spread between the purchase+repair costs and the ARV. The short term loan terms are also risky as it's almost certain those interest rates will increase. Hope it all goes smoothly and works out for you.

If you're going by traditional formulas, you overpaid for the property. (70% rule for Flip, 80% rule for BRRRR) However, that doesn't mean it's a deal that won't work for you. When you entered the deal, what were your goals? I know lenders who will do 75% LTV refi, make sure to shop around. I think you have some serious number crunching to do.

My reason for purchasing wasn't super calculated. The contractor I worked with started buying homes in the same area he was repairing rental properties, including my own. I asked him to let me know the next time he saw a property he thought was a good purchase. He recommended this one. My thought process was a) I could get something under valued due to Ida damage and b) even if I didn't know what to do with it right away, it would be an asset and I'd have a few months to decide what to do while I was getting it repaired. What I didn't even think about when I started the purchase process was how much the repairs would be. So I was a little taken aback at the 80 - 90K estimate but by then it was too late to get out of everything without making a big mess. The contractor's feedback was that the house is worth $280 (and he turned out to be correct), I could get it for $150K do repairs for about $85 and then sell. He was specifically thinking in terms of flipping.

My general (albiet inexperienced) impression is that if I'm looking to rent it and can do so, as long as I can get rents in excess of any monthly outlays of these loans, pre or post financing, then I'm staying ahead potentially indefinitely--this assuming I refinance into a single set rate. I believe interest rates are going up this year, but even if they go up to say 6% on a loan, that would come out to $1200 per month (and then I'd add insurance which may be high due to the flooding; so lets say 3K per year - so $250 a month + 3K per year in taxes) - if I rent it I'd need to budget for vacancy and repairs, tenants would pay for utilities, lawn care, it'd be about $1700 a month in costs for me minus let's say $2500, cashflowing around $800 per month.

From the math you provided and the two loans your repaying, you have a slim profit margin for a flip and you might be a little upside down if you choose to refinance and rent it out, depending on your monthly payments plus loan payments. It’s okay if cash flow isn’t ideal but do you expect appreciation in that market?

In the short term I'm not sure. It's in an area that was largely devistated by hurricane Ida so renting is getting unusually high rates right now as there are still not a lot of rentals available. I'm not sure how to gauge if the majority of residents plan to stay. I think a lot of them are still shell shocked and trying to get insurance money and repairs done to their regular homes and businesses.

I’d say to get your rent number more narrowed down now. $2000-$2500 is a big spread that a lender won’t be satisfied with. Figure out the real number. If you think you can get $2500, put in the upgrades necessary for that as long as they’re in budget. 

It's hard to get a good rental figure because nothing has rented in this specific area since 2018. It's a nice area for regular home owners, large homes, large yards and about a mile off from main thoroughfares. Back in 2018 the rentals ranged from $1700 to $2000 a month. So I am guestimating since inflation has gone up a good bit since then and because right now rental rates are up about 13% post Ida.  I'm counting on regular inflation from 2018 to 2022 and then the unusual 13% jump in rental rates due to Ida enabling (at least in the short term) the ability to get around $2500 for rent.

Use the calculator on this site to run both scenarios and be honest about your numbers. Does your construction loan come with a prepayment penalty? 

No prepayment penalty. I'll run the numbers using the link. Thank you.

Refinance: If you refinance for 70% that’s $196K or 75% is $210K, both scenarios are well under what you owe ($150K “heloc” + $90K rehab loan) I decided to use $90K as your Reno budget to stay in the high side of your estimate. So you’ll still be paying 3% of your heloc each month and will owe the full $150K (or other balance) at the end of those 10 years. I know you say your only $5200 out of pocket right now but that Heloc is still your money, just in equity form.

Very true. And having it tied up does restrict me a bit in terms of opportunity cost, but I wasn't really planning to buy anything else after this. I already have 3 doors and was hoping to make this be the final one if I keep it as rental. If I was able to make $30 - $40K as a flip, then I wanted to use that money to either pay down existing mortgages or invest in the market and just keep working toward my exit (aka early retirement) strategy.

Potential Flip numbers: $280K sale price - $150K heloc - $90k rehab loan - $20K (or more in closing costs/realtor fees) - $5218 monthly holding costs = roughly $15K profit. 

Bright side of these scenarios is you don’t have to repay the heloc and can use that money plus your profit for your new project. No good or bad deal, just what works for you!

Call a few realtors and specifically ask for someone who works with investors.  Another option is call a property management company.  Some of them have people who are realtors and would have a better idea of what to look for and how much places would get in rent.  

@Joseph Collins

I would seek out whole sellers like New Western.

My answer is accurate to your question.  I'm thinking you're not following the logic here.  The reason why you're NOT cash flowing positive, or as I referred to it as an "illusion", can be seen in the generic (but real world) example below. ( I have to assume the numbers here for negative CF if you put 20% down would be negative):

Assumptions

1 - Property PA = $100k
2 - 20% DP = $20k; debt for 30 years = $430/m...$5800/y +/-; CF = $300/m....$3600/y
3 - 25% DP = $25k; debt for 30 years = $400/m...$4800/y +/-; CF = $330/m....$4000/y
....Note:  This means you just spent $5000 to get $400/year, so it will take you 12.5 years to recover that extra cost.  If you stayed with the 20%, it will take you just over 5 years to recover the entire DP.

What if the property has negative CF at 20% DP:
1 - 20% DP = $20k; debt $5800/y; Negative CF = -50/m...-$400/y
2 - 25% DP = $25k; debt $4800/y; Cash Flow = $3600/y

...Note:  Negative CF is just bad.  It means every month/year you  are just adding to your cost for the property.  If you went to the higher DP (25%), you would increase your CF to $3600/year, but you would still be behind for 7 years, until you recovered all of your cost.  All you did was pay all your negative CF for 7 years up front.  Another way to see this is you spent $5k to get $40/month back...and you aren't making a profit until you've recovered ALL of your cost (cash...out of pocket).

Negative CF is not good.  Buying it up front isn't any better, maybe worse since you lose the potential of those extra funds if they were used on a different positive CF property.

It doesn't sound like you are getting the best response from agents and can do better. Braden Smith is a good one in GNO and is an investor himself and very knowledgeable. I also think you can get a lot of this information yourself. The Northshore REIA is staring in person again next week and I would attend that to meet some people. I know your market isn't the north shore but you will find plenty of south shore people and local knowledge. You are already going in the right direction so think you just need a few more local connections to push you forward.

@Joseph Collins

Jon V is correct on CF. Adding to your DP dilutes your ROI in most cases. I have a nice spreadsheet that will illustrate this for you. PM me if you want a copy. Happy to share.

No.  Don't buy cash flow.  That increase in cash flow due to a higher DP% and lower mortgage % is an illusion...and working backwards.  When you buy a property, the only cost to you is what comes out of your pocket...which should be just the DP.  The goal is to recover all of your cost as soon as you can, because you don't start to make a profit until you do.  If you have negative CF, all that does is add to your cost, but you lose any and all returns so you end up going backwards as the property just keeps costing you more for every month you hold it with negative CF.  Here's where the illusion comes in.  When you increase your DP to counter the NCF, all you're doing is paying all that NCF up front.

As to the rest of your questions, most of them (if not all) have the answers buried in the questions...hidden in plain sight.  If you go back and read what you wrote, you'll see the answers are right there.  If you can't see them, PM me and I'll walk you through them.