What factors contribute most to the ARV when doing a BRRRR?

Revere, MA · Member since 2018 · 8 posts · 2 votes

I'm looking into doing my first deal. I have nothing to put down for a down payment and average credit. My plan is to run the numbers on a deal for a BRRRR and find a lender for the down payment and pay the loan back through refinancing.

What factors contribute to the most to the ARV? (e.g. plumbing, roof, granite counter tops, wooden floors... etc etc)

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Jen R.

Investor · Tallmadge, OH · Member since 2015 · 258 posts · 275 votes

If you don’t have a down payment, how will you fund the repairs? Investing in RE with no cash reserves is dangerous - what if the market drops and you can’t refinance or sell as quickly as you hoped?

To determine ARV on a single family, you will have to look at comparable sales in your market.

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Jen R.
Investor · Tallmadge, OH · Member since 2015 · 258 posts · 275 votes
7y
If you don’t have a down payment, how will you fund the repairs? Investing in RE with no cash reserves is dangerous - what if the market drops and you can’t refinance or sell as quickly as you hoped?
To determine ARV on a single family, you will have to look at comparable sales in your market.
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Kenneth GarrettPro Member
Investor · Florida Panhandle/Illinois · Member since 2016 · 4k+ posts · 3k+ votes
7y
@Steven Slivinski
The best bang for your buck when evaluating the method of increasing your ARV is the same as a flip. Kitchens and backs. The property should be clean. No peeing paint. Provide the appraiser with all of the improvements you have made. Look at comps in the neighborhood or within 1/2 mile. Look at solds. Listings are ok but the fact is the only factual comps are properties that are sold. Use similar comps; number of bedrooms/baths, stories, style of house, age, quality of schools/district, etc.
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John Warren
Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
7y
@Steven Slivinski this is an incredibly market specific question as it really all depends on the comparable sales for 2-4 units. I would recommend that you focus just as much on finding your team as you do on finding a deal. If you have an excellent real estate agent, your agent should be able to make introductions to the right lender/lenders to help you pull off a BRRR. Just keep in mind that it is pretty tough to do much if you are going to use an FHA loan as the property has to be in pretty good condition generally to qualify.
Most of my investors here in the Chicago western suburbs use the 5% down conventional loan, which is my personal favorite loan for the BRRRR strategy. Because it is conventional, it allows them to pick up more beat up properties that are better for the quick turn around. Also, it is less expensive in terms of PMI, so once you own the property if you end up not wanting to refinance you will be happier in the long term.
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Steven Slivinski
OP
Revere, MA · Member since 2018 · 8 posts · 2 votes
7y
@Jen R. I was considering finding a deal, pitching that to an interested lender then using their money as a down payment, which would be paid back with interest in the refinancing.
Those are some REALLY good points about the risks when aiming to refinance though thank you for your input. I’m still very new to this so these answers are very helpful!
How would most investors anticipate the future market conditions when doing this kind of deal? (beyond buy low sell high)
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Steven Slivinski
OP
Revere, MA · Member since 2018 · 8 posts · 2 votes
7y
@Kenneth Garrett what factors would you consider for a flip in terms of what to fix up for highest ARV potential?
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Steven Slivinski
OP
Revere, MA · Member since 2018 · 8 posts · 2 votes
7y
@John Warren those are some good points I will see if Massachusetts has something similar to the 5% conventional loan you have over there. Wouldn’t I need good credit for that type of loan tho???? I’m pretty much starting from little to no money for a down payment and have average credit.
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Matt P.
Investor · Columbus, OH · Member since 2015 · 625 posts · 601 votes
7y
@Steven Slivinski If your very new to this like you say and don't have any money like you say you should be very hesitant to take a private loan from friends or family. IMO the number one thing you need when getting a refi loan is the comps to support your ARV. Just bring the house up to average condition for the neighborhood and have comps to support your ARV and you should be golden. No need to add granite countertops or stuff like that unless that's what the neighborhood comps have.
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Steve Bracero
Real Estate Agent · Westboro, MA · Member since 2016 · 1k+ posts · 471 votes
7y
@Steven Slivinski
I think you also need to know which areas you are interested in.. Study and learn which areas you like.
Also , to understand the ARV of the property as well-
The type of materials/ finishes you will need will depend on the town/city you are investing in
Financing is critical
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Steven Slivinski
OP
Revere, MA · Member since 2018 · 8 posts · 2 votes
7y
@Matt P. @Steve Bracero Thank you for your input. That's very true that looking at the comps of an area will be a good measure when prospecting the ARV, but I was just curious more specifically with the physical features to fix up in general... the features that tend to hold the most weight in calculating ARV if that makes sense.
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Paul Bergagna
Member since 2018 · 42 posts · 31 votes
7y
Your ARV is based on similar properties in your market. First are budgeting for any major deferred maintenance, paint and spruce up the landscaping for good curb appeal.
Second, pull the most recent sold comps and look at the features that they have. Do they have hardwoods or carpet? Look at the level of finishes in the kitchens and baths. What kind of appliances do they have?
You really need to do some legwork to see what you're competing with. Network with some local RE salespeople for advice - after all they'll be selling it for you.
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Jim D.
Investor · United States · Member since 2015 · 415 posts · 487 votes
7y
In my experience, retail buyers AND appraisers overvalue nice kitchen and bathrooms, and undervalue less visible items like plumbing, electrical, age of roof, windows, etc. I have spent a lot of money upgrading old plumbing, but know that no appraiser takes in into consideration when they do their 10 minutes walk through the property.
You'll find the best spread on properties that already have good bones and layouts, but are really ugly or dated cosmetically.
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Gareth Fisher
Manheim, PA · Member since 2016 · 131 posts · 138 votes
7y
Originally posted by @Steven Slivinski:

I'm looking into doing my first deal. I have nothing to put down for a down payment and average credit. My plan is to run the numbers on a deal for a BRRRR and find a lender for the down payment and pay the loan back through refinancing.
What factors contribute to the most to the ARV? (e.g. plumbing, roof, granite counter tops, wooden floors... etc etc)
Why would you want to take on upward of 80k of debt when your cash on hand is limited?
What happens if it doesn't appraise for the amount that you though it would and you can't payback full the amount?
What happens when you realize there is a bunch of hidden old wiring and the project goes two months late, and 10k over budget?
I would start smaller build up your cash reserves.
Assuming you do have cash reserves, and just don't want to use them. Which is wise.
Many hard lenders will loan the full amount of the purchase prices as long as it is under 70-80 percent of the LTV.
So you acquisition the property with very little cash out of pocket. Not that I recommend this but you could also open an unsercured LOC to fund the down payment for a property. However keep in mind you now have 2 payments not one.
If its your first deal, I always recommend starting smaller, flip a few cars, a few rvs, a few cell phones. Beating a market is beating a market. Managing a budget, is managing a budget, finding a deal is finding a deal. The principles are the same. BOL. Im sure you will figure it out!!
1 Reply
Wes Johnson
Developer · Dallas, TX · Member since 2015 · 84 posts · 79 votes
7y
@Steven Slivinski
Location is the highest factor. Period
1 Reply
Charles Kao
Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes
7y
@Steven Slivinski I'll address the adding value part but give you disclaimer you are potentially going to hurt if you don't execute your plan well because you need funds and knowledge to rehab. Adding square footage through finishing basement, attic or egress add most value for the buck, then adding a bathroom or converting a half to full. After that bathroom/kitchen remodel and painting are the next three and last new flooring and carpet. Its rare my flips don't get all or most. Things to save money on here and there are painting yourself if you can do it well, light fixtures, GFCI (you need one but not every outlet because you can tie them in with each other), tearout. For your kitchen know your market. If you are already pushing top of market granite and quartz may not be best choice.
1 Reply
Michael Noto
Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
7y
@Steven Slivinski The BRRRR strategy is very risky to do when you do not have reserves. I recommend saving some more money before getting started. The front end purchase, the back end refinance and the hard money costs can be capital intensive depending on specifics.
1 Reply
Michael DohertyBusiness Member
Real Estate Agent · West Hartford, CT · Member since 2016 · 449 posts · 476 votes
7y
@Steven Slivinski I think you should get the first 'B' in the BRRRR method figured out first. I could be wrong but I think you will have a very hard time finding a bank that will lend to you with no liquid cash to bring to the table.... no skin the the game some might say.
2 Reply
Steven Slivinski
OP
Revere, MA · Member since 2018 · 8 posts · 2 votes
7y
@Gareth Fisher @Michael Noto @Michael Doherty Are there better strategies to consider for a first deal when I have little of my own cash reserves? BRRRR stood out to me right away because it seemed like a way to pay back a lender within a reasonable time frame without having to liquidate the deal at the end as in a flip. Although I would need two loans here for my situation. Thoughts?
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Michael DohertyBusiness Member
Real Estate Agent · West Hartford, CT · Member since 2016 · 449 posts · 476 votes
7y
@Steven Slivinski Most banks will want to see liquid assets in your account for at least 3 months. Your best bet is private money/family money then season the cash while searching for properties that fit the BRRRR model. If you choose to use hard money, they may not care about the seasoning too much but you will still need to have some sort of down payment.
1 Reply
Jen R.
Investor · Tallmadge, OH · Member since 2015 · 258 posts · 275 votes
7y
Have you considered house hacking? It's really an ideal way to break into real estate for someone with little experience. Look into buying a duplex with an owner occupant FHA loan, which will allow a lower down payment. You will still want to have cash reserves saved up for repairs and maintenance, but the goal would be to live as close to "free" as possible (with your tenants paying your mortgage), and eventually move out and rent both sides. As mentioned, BRRRR is difficult and risky without cash and good credit.
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Garrett Pearson
Addison, IL · Member since 2018 · 72 posts · 24 votes
7y
@John Warren "Most of my investors here in the Chicago western suburbs use the 5% down conventional loan, which is my personal favorite loan for the BRRRR strategy. Because it is conventional, it allows them to pick up more beat up properties that are better for the quick turn around. Also, it is less expensive in terms of PMI, so once you own the property if you end up not wanting to refinance you will be happier in the long term."
Investors are able to get 5% down conventional loans? or does it have to be their 1st property and not designated as an investment property?
0 Reply
Matthew Irish-JonesBusiness Member
Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
7y
@Steven Slivinski. I don't think this strategy can work without the down payment. Most lenders will not allow you to get a HML without the down payment.
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Gareth Fisher
Manheim, PA · Member since 2016 · 131 posts · 138 votes
7y
Originally posted by @Steven Slivinski:

@Gareth Fisher @Michael Noto @Michael Doherty Are there better strategies to consider for a first deal when I have little of my own cash reserves? BRRRR stood out to me right away because it seemed like a way to pay back a lender within a reasonable time frame without having to liquidate the deal at the end as in a flip. Although I would need two loans here for my situation. Thoughts?
Jmo but there are a ton of markets to make money in. Flipping cars,cell phones , RVs
Also keep in mind that rentals are a wealth building tool, not an income growing tool.
Rei strategies that work well for generating income would be flips,air bnbs, real estate sales, wholesaling, or other businesses associated with real estate. Plenty of things you can do start generating cash, get re license and due sales. If that's not thing and your more of a numbers guy you could start a property management business or a property maintenance business if your more hands on. Plenty of opportunities out side of over leveraging.
I agree with others house hacking is a great way to start with minimal risk.
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John Warren
Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
7y
@Garrett Pearson they are house hacking, so they intend to occupy for the required amount of time.
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John Warren
Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
7y
@Steven Slivinski you would need to talk to a lender that knows how to use the low down payment loans to build your portfolio. In addition to the home possible loan, you can also use a 3.5% down payment with the FHA loan for up to 4 units. I recently had a client who closed a deal in Cicero with less than $500 out of pocket using this type of loan product!
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Colleen F.Pro Member
Investor · Narragansett, RI · Member since 2013 · 8k+ posts · 4k+ votes
7y
Your best bet living in MA with the price of housing here is an Owner Occupied loan with low down payment. Live in it for two years. Maybe get some roommates for extra cash or turn part of it into airbnb. But first spend some time reading and learning and building a reserve to do the reno. The risk without reserves is you lose more when you have to dump a house because you can't afford the reno. You can save money by doing some things yourself but you always open the walls and find something like electric or heat that isn't a DIY.
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