Help me analyze this BRRRR deal!
Good Morning BP Fam!
This will be my first BRRRR property, but I was wanting to get some feedback. I met an agent randomly who is also an investor. He showed me a 2 BR 1 BA house in Beacon Hill, San Antonio. PP 196K, saying it needs ~50K rehab, ARV 375K (to me this is high but someone please vouch), average rent ~$1500-1600 per month. I would convert it to a 2 BR 2 BA. Would this be more of a BRRRR or if it doesn't rent out, maybe I could do a fix and flip? What are my possible exit strategies if it doesn't work out? (This is fear kicking in). Deal or no deal? What are your thoughts? Thank you! <3
@Kimberly Kim Sounds like an good start and kudos to you for questioning the ARV! Some agents (not all) will try to sell novice investors with numbers. It's an easy trap to get caught in. I'd be asking for a comparable market analysis before estimating the ARV. Narrow that search to properties sold in the last 4-6 months. Really have to dive into the neighborhood and look at the photos because now the details and price matter. Honestly anything in 2021/spring 2022 isn't comparable. It wasn't a balanced market. It was craziness.
I'd afford a flip deal right now. Flipping in this environment is tricky. Unless you have experience with distressed properties, remodeling, and working with contractors just avoid the strategy. It's easy to break even or loose money. I suppose if the remodel timeline penciled out into spring 2023 (better selling) you could try it. The Feds are in control and if rates stay high or increase the chances you sell for top $$$ drops. The numbers provided are pretty close for a rental but again it depends on your investment goals. Maybe it doesn't cash-flow (today) but in 2-3 years it does. Then the strategy becomes positive and you gain PM experience.
Rant; some flipped properties are already getting caught and sitting for months on end but you won't hear about it. Nobody talks about loosing money. That's just my opinion.
This probably won't cash flow since your rent is so far below the 1% rule. I imagine property taxes are also over $1,000 and that your rate is over 6%...
Generally, and unless your rate is near-zero and taxes are very low, you'll need to have monthly rents greater than or equal to 1% of your purchase price.
I wouldn't be flipping in a high rate environment when we will be seeing a continued decrease in buyer demand and purchasing power. I'd personally wait and earn until the market capitulates and get into some long term holds. I think flipping is counter productive.
@Kimberly Kim as others have mentioned, the increasing rates (and decreasing values) make flipping and BRRR'ing exponentially more difficult right now...I'm fairly experienced with RE investing, but I personally wouldn't attempt a flip or BRRRR at this time unless the numbers were just absolutely bulletproof...and I wouldn't recommend a flip or BRRRR to any newbies right now because the viability of future refis and future values is a huge unknown at this time (and there are many indicators that rates will be higher, and values lower in the near future)...
I'm not familiar with ARVs in your area, but your instinct that 375k may be too high could be correct...Where is that ARV number coming from? If it's based on comps from sales of a few months ago, then that ARV number may almost be meaningless now--the market is COMPLETELY different now. Specifically, a house that would have sold for, or appraised for 375k a few months ago probably won't sell or appraise for that much now, or in a few months/years from now. In most markets, inventory, DOM, and price reductions have increased exponentially in the last 6+ months, and will likely continue to increase as rates continue increase. Because of this, basing your ARV on comps of sales from a few months ago can give you an inaccurately high ARV! Your ARV should be based on worst case assumptions about the future market (and in some areas, the future market will likely be substantially lower than it is today).
As for renting it out, I'm not familiar with the rents in your area, so you'll want to do your own thorough market analysis of that...however, at face value, it sounds like it would not perform well...For instance, if you bought it with an owner occupant mortgage at 5% down at 6.7% interest, and had an additional 50k of debt for the rehab, the monthly debt service would likely exceed your rent income if the rent is around 1600/mo (but that's just rough math--obviously, you should run your own numbers).
Overall, it sounds like a questionable deal at face value...
Does that mean you shouldn't invest in real estate? Absolutely not--there are lots of opportunities cropping up in many markets! Moreover, there are lots of strategies that have a better chance of success than flipping/BRRRing right now--in particular, I'd suggest looking into house hacking. So, I'd suggest keep analyzing properties, read up on more recession-resistant & lower-risk strategies (like house hacking), get your financing/payment method lined up, find a top notch investor-friendly agent, and view as many properties as possible...keep grinding and eventually, opportunities will reveal themselves.
Good luck out there!
@Jaron Walling Yes, I don't want to fall for the trap with all the high numbers. He hasn't really given me any other comps so I have to do my due diligence and analyze them, but since it's so variable, like you said.. it may not be comparable. Esp with me being new, I don't want to do fix and flips. That's not my lane, but I am more into BRRRR strategy for long-term rentals. Thank you for your insight.
@Account Closed I was also thinking about that and how it doesn't meet the 1% rule. The PP is negotiable, maybe not necessarily to down 160K but I think I was more sold on his estimated ARV. Property taxes here are high.. around $7000 for that property. Thank you for your feedback.
@Leo R. Thank you for your knowledge. The numbers are not bulletproof. I think it's more of my desire to have some skin in the game rather than playing from the side lines and being in the "analyzing" phase, although very important. The comp he sent me (sold for 360K) was sold 5 months ago! Yes, I agree.. totally different now. Overall consensus sounds like no deal! I so appreciate the insight.
You forsure can't BRRR that and cashflow. To BRRR do a multi unit or a single family that is so cheap it cashflow positive after refi it.
@Kimberly Kim With that stated this deal is looking fairly slim. If you're not interested in a risky flip (good choice) and it won't cash-flow what advantages does this property bring you?? It's sorta of BRRR'ish deal but only advantage is value-add equity. Maybe a cash offer for $15k less sweetens the deal. Then you could cash-out refinance more by increasing it's value. I'd challenge the $50K remodel budget as well. Once you get you're hands on it and start making phone call you'll find ways to save money. Either way you're hiring contractors, swinging hammers, rolling paint, and remodeling this property.
Quote from @Kimberly Kim:
Good Morning BP Fam!
This will be my first BRRRR property, but I was wanting to get some feedback. I met an agent randomly who is also an investor. He showed me a 2 BR 1 BA house in Beacon Hill, San Antonio. PP 196K, saying it needs ~50K rehab, ARV 375K (to me this is high but someone please vouch), average rent ~$1500-1600 per month. I would convert it to a 2 BR 2 BA. Would this be more of a BRRRR or if it doesn't rent out, maybe I could do a fix and flip? What are my possible exit strategies if it doesn't work out? (This is fear kicking in). Deal or no deal? What are your thoughts? Thank you! <3
Based on the resale value and the rents you can achieve with this property, it seems this will be an appreciation play since a refi would make you go cash flow negative. You would want atleast achieve 2.75k to 3.25k minimum in monthly rent for something valued at 375k. I would flip it but make sure your numbers are conservative.
@Henry Lazerow That's the hope and goal! What would have made the deal more ideal for it to be a BRRRR in your opinion?
@Jaron Walling Haha experience, and equity I guess. Yes, I agree. A MUCHHH lower PP would have helped. And realistically, I was thinking $70K for rehabs. But for now.. too big of a project for me! Time to look for more.
@Ricardo Hidalgo Got it. Thank you for those numbers. I don't see those rent numbers happening in the area at all so it's a no-go.
#3 BRRRR - Buy, Rehab, Rent, Refinance, Repeat Contributor
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#3 BRRRR - Buy, Rehab, Rent, Refinance, Repeat Contributor
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Get a second opinion on ARV
I don't like 2 beds. Limited exit strategies and less desirable for rental and sale. Pass IMO.
