All Forum Posts by: Kevin Mahoney

@Kevin Mahoney Here are my underwriting factors (I think that is what you are actually driving at, as interest rates are just one figure in the calculation for returns).  I aim to purchase C+/B properties that are $90-150K, and will rent for $900+ (ideally $1100+).  

1. I try to be all in at less than 80% ARV. Ideally, 70% ARV. However, I am willing to leave $5-10K in a deal if everything else is holding and my capital is well-preserved.

2. Cash on cash - 15%+ for BRRRR. Ideally 20%+.

3. Cashflow - $150/door.  Ideally, $200.

4. DSCR - 1.25 (this is a non-negotiable me)

5. Rehab - <$30K.  This is a rule of thumb that keeps me mostly in the cosmetic / mechanical realm and timelines under 4 weeks.

6. HOAs - None

7. Taxes - <$120/mth

8. Owner-occupied > 70%

9.  Schools - Rating of 5+ with parent rating of 4+ stars. 

I have other building parameters, but this is the gist of my underwriting parameters.

These parameters are pretty achievable in the markets you are looking at outside of Chigaco.  Chicago fundamentally has some financial issues and incredibly high taxes.  However, there is the Chicagoland area right across the border in Indiana... I'd look there.

Not necessarily a rule of thumb, but one note on the execution side of things, know who you are going to go for the refinance before you get involved in the deal. I know a lot of the banks in the CT area required a 1 year seasoning period before they would allow a refi to happen. Your holding costs will be pretty significant if you thought you were planning to hold for 4 months but then have to hold for 12. 

Not sure if that requirement has changed, but definitely something to look into. 

@Kevin Mahoney, @Samuel Pavlovcik, Loan interest rates ~10-12%, refinance rates ~5%. I've used commercial loans, which is why my rate is around 5%. You should be able to get a residential rate for low 4%. 

Obviously when you refinance your cash flow decreases by the amount of your mortgage payment. The rule of thumb to think about is, can you earn higher than ~5% (interest rate) on the money you are able to pull-out in the refinance? The idea is that you take the loan from the refinance (e.g. $80k) and buy another BRRRR ("Repeat").

If you don't "Repeat" the process, then you just have a BRRR... BRRRR > BRRR

When it comes to BRRRR a key play is to find a value add. By that I mean add a bathroom enclose a car port. The idea is you are looking to increase the value of the property by 25-30% above the money you put in. Ideally, if you can fund the project in cash, your numbers will be much stronger. The hard money is going to cost you upwards of 10% of the money borrowed. I do some in cash and need to borrow if I want to scale. I regularly buy the property for cash and take out money to cover the cost of the building and reno money. This frees up money to buy the next property. There should probably be another letter in BRRRR to represent buy for cash then take hard money.

10-12% is common 

6 month project

1-2 pts funding 

1/2 - 1 point junk fees 

@Kevin Mahoney

The BRRRR strategy is a great method to build equity in a project. By rehabbing the investment you are forcing the equity. You have to run your numbers and calculate your interest rate into your numbers. I'm generally around 5%, but I use commercial lending versus residential. I don't have to worry about how many, DTI, credit score much, though they do run it.

My first BRRRR a few years ago.

Purchase $85,000. 
Rehab $15,000.  
Appraisal $125,000. 
Money stuck in $5000. 
Cash Flow $450. 
Less than one year all money out and CoC return infinite.

You must be able to project the value after repair (ARV). This is similar to flipping. I don't use the 70% or the 1% rule as these are guides only and they don't work every time. Use actual numbers and calculate whether the investment is a good one. I have completed about a dozen BRRRR's it works.