Help analyzing a BRRR townhome

5 Replies

Hi BP Community, I found what I thought was a great deal because it seems to be a "1.5%" deal in the Houston Heights area (highly desirable), but after further calculations it's not making much sense. I believe I'm running my numbers correctly, but would love some input.

Purchase price: $99,000.00

ARV: $150,000.00

Improvements: $2,000.00 (home is rent ready, but needs fridge, dishwasher, and a cleaning)

Closing cost: $5,000.00

Mortgage: $531.00

Property tax: $320

Insurance: $85

Vacancy: 5%

Maintenance & repairs: 5%

Cap ex: 5% (I'd generally do 10%, but this is a townhome)

PM: 0%

HOA: $300

Potential rent: $1500-$1600

Potential monthly cash flow: $40

Cash-on-cash return: 9.5%

Total Equity: $50,000.00

Here's the deal. I'm expecting high equity on this property, so did something I generally don't do - I factored in 0% PM, which probably isn't a good idea, but I plan on managing myself for the first year or two, and depending on the market, will either increase rent or sell. The equity looks great, which is why I'm still hoping the numbers will work and maybe I missed something. My first time analyzing a condo/townhome, and it seems the HOA eats up all the cash flow, so now sure if I'm just not finding the right property for it to work or if I'm missing something.

*note – this property is in Houston Heights, which is highly desirable, BUT it has also flooded during the previous 3 "500-year floods" that Houston has endured.

Bite the bullet regarding the first 2 years of cash flow, (with anticipated high equity) or move along? Thanks in advance for any input!

Condos are tough for cash flow and $40 a month is pretty tight, especially when you only have 5% vacancy. And those taxes look a bit low. That being said, the equity looks great. Maybe you should consider flipping this one?

Thank you Andrew. I found it on the MLS, and its still active as of today. My humble opinion is that the retail buyers are afraid of the next flood and the investor isn't able to make the numbers work.

Hi Kristi,

Any time I have an analysis that includes an HOA, I act as if it's part of the mortgage and thus the purchase price when analyzing for the 1% rule. $300 a month in a 30 year mortgage payment equates to around $60,000 of home value (depends on the interest rates). So for me, this property hits the 1% rule (not 1.5) IF you can rent it for $1,600 a month.

You didn't include a down payment in your numbers, which makes this harder to analyze. Your cash flow and cash-on-cash numbers yield a cash basis of around $5000; $531 is the monthly payment for $99,000 at %5 for 30 years; so I assume you were only counting closing costs as your cash out of pocket. Is that correct? Do you have a lender who is going to allow you to put no money down? Is it seller financing? And what happened to the $2000 for appliances, etc.?

Also, flood insurance is a must given Houston's weather patterns lately (even though the "Heights" are so named because they are above the flood plain). Is that included in addition to your regular policy?

My opinion based on the numbers provided is that this isn't a good deal by my calculations. But I also feel some crucial info is missing in order to assess equity. Square footage is important. Is there a balcony? Access to a pool? Other added value features? I'm skeptical that only $2000 in repairs is going to boost your ARV to $150k (which is, admittedly, still low for the Heights). If you can BRRRR the property, raise rent to $1800 (is there room for another bedroom?) take out $35k in equity and reinvest in another property, then it's a great means to an end. Otherwise, perhaps look elsewhere.

Nathan, my original thought was to pay cash and refinance after about 6-12 months to pull the equity out. All of the other properties in the neighborhood are listed between $150-$200k, with about 200 sq ft difference. (One property sold for 168k right before the flood, and one is pending at 150k). Since last year's flood, the owner has renovated the property and is pretty much rent ready (tile floors, granite in the kitchen and bath, etc, so not much else for me to do), but missing some kitchen appliances. (It's a small townhome, less than 1k sq ft). Value add – yes balcony, and the neighborhood has 2 swimming pools). Talking with the seller's agent, it seems the owner is in her 70s, living in a different city, and after the 3rd flood, just wants to offload the property. I tried to make a lower offer, but it seems the agent/friend is driving the deal, so can't really speak to the seller directly. When we went to view the property, there were 4 other homes still undergoing renovations after the flood, so that may be why retail buyers aren’t looking to buy (yet) and numbers don't work for investors. 

It seems I've left off a few items. I'm still learning to analyze deals and hopefully will get better at it soon. Perhaps I got excited about the possibility of purchasing property in a highly desirable area for less than 100k, I was trying to see if I can make it work somehow, but looks like my best option is to let this one go and move along. Thank you very much for the input.