So I own several rentals and they're all cash flowing nicely. Now I'm ready for my first BRRR. When I started I didn't know about Bigger Pockets but now that I do, I've got myself in knots trying to analyze deals on the calculators. But I'm having an issue with one deal in particular bc it doesn't make the 2% rule and now I'm nervous. Normally, I just multiply my rental income by 12, minus yearly expenses and divide by the total price of the house. Which would put me at 14% and I'm happy with anything over 12%. But like I said, I use the BRRR calculator and now I'm not so sure I know what I'm doing.
The property is 67,500.
Total budget: 79,550.00.
ARV: conservatively 105,000.00
Is this a good deal?
thanks in advance for taking the time.
Is the 2% rule your requirement. If you run it through the BRRRR calculator and it cash flows $300 at least then I would move ahead. Have you contacted your refinance lender to make sure there are no issues with refinancing or if they changed the percentage of 80% LTV to 70%, 65%. Confirm they haven't changed there process.
Thank you so much for the quick reply. The 2% rule isn’t normally what I care about, but I feel like- omg should I be caring about that!? That why I was nervous using the calculators bc it was using that metric.
I guess I'm just confused bc if it's a BRRR and I'm not using my own money, and the return is infinite then how is it not a good deal.
But you’re right, I need to find out about the refi bc that will make all the difference.
Thank you 🙏🏼
Here is how I approach the BRRRR strategy. If I can recoup all my money within 24 months my return becomes infinite after that 2 years. That's a 50% CoC return. I essentially have a property that didn't cost me anything. Yes I have a mortgage, but I also have equity. My first BRRRR I was able to recoup all of my out of pocket expenses in 12 months. Knowing all of your numbers are essential. ARV, rehab amount, market rent, refinance terms and approval are critical. I did not mention purchase price because if the other numbers fall in place the purchase amount will take care of itself. BRRRR is a package deal. All those pieces must be part of your plan. If it works it works.
Thank you so much 🙏🏼
@Emily Wilson Litzinger From what you shared (I didn't see your opex there), the numbers look promising. Feel free to post the link to the report for more granular feedback.
Thanks so much for replying!
I listening to your podcast right now, and this property sounds a lot like your first BRRR. Deal
10k on rehab
Worth about 105-110k.
Rents for 1275$
Property tax is 2,500$ a year ( I know its a lot. Baltimore city is no joke) and then my manager fee is 5% a month. No other fees.) cash flow is a little low.
But I heard you asked you lender to refi before you got it the property. (Did I understand that correctly) I’m assuming that’s the I route I need to go. I just had no idea you could ask to refi before you even get into it 🤔
In general 2% rule properties are in bad neighborhoods in Baltimore city and are bad investments. Pretty sure thats how it is most places. If the arv is indeed 105k it shouldn't be too bad. Id focus on the arv for the neighborhood first not the 2% rule as arvs too low will become a problem later with tenants or they will if you do 4 or 5 and wreck profits as the law of averages starts to take effect.
Id bump your management fee up to 7 or 8% minimum and factor in half that number for leasing if you factor it into a monthly amount. I would be careful with managing the brrrr from distance. I would show up at the place without notice to see when my contractor is there during business hours if thats possible. Also get an inspection by a good home inspector at the end and before final contractor payment make him fix what the inspector finds wrong. If the brrrr reno is bad factor a whole bunch of rework budget that will crush cash flow for a year or so.
Thanks for the great advice.
I’m from Baltimore so I’m very familiar with the areas. This particular property is in Dundalk near Morgan state. I only buy in the east side and usually never in the city. (Although this is technically the city, its not a bad area)
Our contractors are usually ppl we have known for years or I do the work myself ☺️
I’m there every weekend bc my dad lives there and he can pop over to check on it.
But my new issue is that bc I'm calling my bank to refi another property I have, Wells Fargo is awful and it's going to cost so much to refi. The bank seems to be my issue now. I'm thinking I'll have to try a credit union to try the BRRR method.
Ppl say BRRR and they make it sound so easy. The bank is scaring me.
The rent wise it is fine.
BRRR wise it is almost fine, if it does not appraised as much as you think, then you might leave 7-10 k in the house which is not the goal, but your cash flow would be okay, so I think you can tolerate it.
@Emily Wilson Litzinger Too funny! I agree, bump up your PM fee to 7-8% (I'm curious... with 5% are they charging for maintenance calls? How are they making their money? Be careful here). Also add in a construction overrun of 10-15% for this small budget (you are bound to run into something). Additionally, I don't see where you are setting aside vacancy, maintenance, capex reserves, or hold costs.
Last point, if you aren't already, get comfortable using the calculators so you can share info quickly and concisely with others. Also, you will get to see how the different numbers work with each other, and you are less likely to miss any items for your underwriting :)
My property manager takes the first months rent, and then 5% of the rent for the duration she deals with the property. She does not charge for maintenance calls. My dad owns lots of properties and has used her for years. I’ve been using her with my other properties for about 7-8 months and so far so good. She’s also found us great tenants so I’m happy.
I did not set aside additional costs bc I withheld 6 months of rent for things that might pop up. Vacancy, capex etc.
I did this with my other properties and so I have a little chunk of rainy day money. This will probably not work when I have more than 5 but for now it’s just what I’ve been doing.
Wow, writing all this out I feel like I’m flying by the seat of my pants. But like you’re interview said- get some systems in place!
Most lenders will allow you to refi @75% (LTV). In this case your ARV is $105,000, so you have
$78,750 to work with if you calculated your number conservatively. I usually take this number and work backwards.
Subtract all expenses from $78,750. If you break even and leave zero money in the deal, then I consider it a good deal.
Just make sure the property cash flows after the the refinance.
5% is really cheap but since the take 1 month leasing probably every couple years you can see how its really more than that. If you have good work done and you get your contractor to fix larger maintenance issues I can see why she might not upcharge there but be careful. A decent property manager should be making a decent wage not minimum wage or too close to it. If it gets to the point they are spending 3 days per month at your place to oversee maintenance repair work do not expect just to pay them 5% a month. 10k reno seems cosmetic with no excess capex frontloaded. That rate says they will do the bare minimum and have tenants do stuff like grass cutting and air filter changes. I recommend doing the grass cutting to ensure no city fines which can lead to liens if forgotten about. Filters if applicable are good as well along with tune up checks.
I would just remind you that you get what you pay for. Leasing seems more than fair but the rest is really cheap.
Having the rainy day fund is wise. Budgetting capex should be included.
Try Revere for the refi or another local bank.
I've seen a lot of examples @Tim Jacob 's points regarding grass and filters and budget management. It's easy for the tenant to say they will change the filter and never do it which will hurt the owner in the long term. You can get a filter delivery service like SecondNature and when the filter shows up at the tenants door hope they install it.