Potential BRRR on Two Family - First Deal

5 Replies

I found a two family property on Homepath--it's currently in the lockup period but asking price is $325k and it needs some work (TBD on $$). Similar two families are worth over $400k ARV. If rentable, it would gross about $3,200/mo. Here's my plan. If I can get it for $325k with 25% down (call it $85k) and put another $35k into it, I can the rent it for $3,200 and earn a decent cash flow with a total of $120k into it.

At that point I can refinance at a $415k value for a loan of about $312k--pulling $60k about $60k out after fees, and still cash flowing. 

My numbers are conservative but here are the areas where I'm unsure about. 

How do I finance this? Should I use a hard money lender for purchase and rehab, or just use conventional loans for purchase, my own cash for rehab, and conventional loan for the refinance? 

@Bob D.

Are you planning on holding the property?

You could do the 2 scenerios above. There is another option as well - A renovation product that will allow you to finance the rehab, but the renovation products are not for flipping. 

If you go the conventional route to purchase, you would have to wait the 6 months to cash out on the appraised value.

If you go the route of hard money - the fees are typically very high, but you would be able to rate and term refinance the property without a cashout prior to 6 months. 

The most cost effective route would be to get a conventional renovation product. It does limit you to a renovation of 35k, plus a 10% contingency reserve. The down payment required is 25% for a 2 unit investment property. 

@Bob D. , the cash flow of course is well into the negative while you live there, and my napkin calculations tell me the numbers will still be tight, even after you move out. (By the way, how will you fare yourself when you move out? Same procedure again? ie. Always be negatively cash flowing, but forcing yourself to move every couple of years anyway?)

Maybe it'll turn out to be a better Flip candidate, than BRRRR? My 2c...

@Brent Coombs I'm not planning on living there. I've run my calculations assuming three months to get the property rentable, and at that point we begin collecting $3,200 renting out both two bedroom units. Based on the BRRRR calculator on bigger pockets, the numbers work, unless the construction projects takes too long or goes way over budget.

I think a realistic expectation is that in one year we have the place rented with only $25k of our own money left into it, a value of $400+ with 25% equity, and cash flowing at least a few hundred per month. 

Quick Example: Use HML to fund purchase and rehab @ 85% of purchase, 100% of rehab.

Your loan would be $311,250. Let's use a conservative 12% interest and 4 points and say 6 months til your exit.

Your out-of-pocket is:
$48,750 - down payment.

$31,125 - Points and 6 months of payments.

Add in your title, transfer taxes, and insurance. You are somewhere between $85k-$95k out of pocket.

If you can complete the project and refinance out of the HML (without taking cash-out) within those 6 months you can save on some of that interest only payments. Your new loan would be for $311,250 - which is somewhere between $1500-$1900 depending on your interest rate.

That would be a good deal in my book. What you would be concerned about in the hard-money lender world is... lenders typically only fund 65-75% of the ARV. Your ARV would have to be from 415k-480k or above.

To get cash-out, it is typically said that you would have to hold for at least 6 months. Just adds a bit more financing expenditures (I/O payments are $3,112.50 @ 12%).

Originally posted by @Bob D. :

@Brent Coombs I'm not planning on living there. I've run my calculations assuming three months to get the property rentable, and at that point we begin collecting $3,200 renting out both two bedroom units. Based on the BRRRR calculator on bigger pockets, the numbers work, unless the construction projects takes too long or goes way over budget.

I think a realistic expectation is that in one year we have the place rented with only $25k of our own money left into it, a value of $400+ with 25% equity, and cash flowing at least a few hundred per month. 

Aah. I missed the part where you were waiting for owner-occupiers to miss out on getting funding themselves for it, so Investors could have a feeding frenzy instead. Boom!

It continually surprises me that at this price point, there are so many that would seem happy to pay $1,600/m rent for half a duplex, rather than go for their own mortgage of say $850/m, to own the same proportion. That is, providing that there does continue to remain enough folk out there to do so (for your sake)!

It's also at this price point that expenses per month should be able to show a significant reduction from the "50% Rule" (of thumb), right? [Which at cheaper prices, often is fairly accurate]. Which means, you probably have good reason not to need to pay a lot of attention to the "1% Rule" either (which this one doesn't quite meet), right? So, all in all, good for you!

Given those (conservative according to you) figures, you should buy every property there that you can get all-in for $360k that would easily appraise at $415k+. 

[But of course, $320k or less (per the "70-75% Rule") would be even better]. Cheers...

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