FIRST BRRRR OFFER - DO I HAVE EVERYTHING COVERED?

Question

Hello all!

I am working on putting an offer in on my first potential BRRRR - here are the #'s so far, I have an offer going in today! I have budgeted a bit on the low side for rent and also the ARV for added cushioning. The rehab costs is from a licensed contractor. Seller is asking for $50K, but there is no way it would work at that $ in my rookie opinion, so I would be offering $40k.

ARV: $119K

PURCHASE PRICE: $40k

REHAB COST: 46K

TAXES: 3K ANNUAL

HOLDING COSTS: $5200 (included: inspection - $500, septic inspection - $750, taxes for 5 months for seasoning - $1250, INSURANCE $300, UTILITIES $1,000, ATTORNY/ CLOSING FEE - $1400)

REFI COSTS

70 % ARV 83,3000 REFI AMOUNT

CLOSING COSTS $4,000

REHAB TIMEFRAME: 8 WEEKS

SEASONING PERIOD 5 MONTHS

RENT: $1,200

MONTHLY EXPENSES: $1,007 (TAXES: $250, VACANCY: $60, CAPEX: $120, P&I: $442, REPAIRS: $60, INSURANCE: $75)

REFI INTEREST RATE 4.5%

TOTAL CASH INVESTED: $11,900

This is my first real opportunity, but the numbers seem very tight and  wanted to see others opinions. Also, if I am missing anything, FEEL FREE TO COMMENT!

Kenneth Garrett · Answer

@Jake Drappi

You’ll have some money stuck in, but I like that your being conservative.  Do you have the 40K, where is that coming from?  Seasoning is 5 months.  Is that from purchase or after rehab?  Typically it is 6 months or longer after your purchase.  Have you spoken to a lender on the refinance and are sure you are good there?  Many have gotten stuck with lenders reducing LTV to 65% or less.  Does the rehab budget account for extras?  One thing you can generally count on, the rehab takes longer then expected and it always ends up costing more. There is always something that comes up (surprises).  Depending on your rehab you should have very little repair calls after rehab.  You’ve fixed everything or at least most everything.  Property taxes may increase after the rehab has been done.  A year or two down the road.  You are under $200 in cash flow based on your numbers.  If your conservative numbers are accurate then maybe your at $225-$250 cash flow.  I think it’s an ok deal.  Your money stuck in with take about 4 years to recoup.  I like to recoup my money in the first 12 months. Just my thoughts.

Good Luck.

Kenneth Garrett · Answer

@Jake Drappi

Have you run your own rental numbers?  Always, always run your own rental numbers even if your realtor is your friend.  You need to confirm the rental market.  I generally use 10% for extras.  I think 10% is reasonable with a 40K rehab.  If it were a 20K rehab I might use 15%-20%.  If the rent is $1350 and you’re ok with it then your return of your money will be faster, less then 3 years.  Make sure you have confirmed the ARV as well.  Run your own numbers.  I’ve had realtors use comps that were not good comps.  Always analyze the numbers.  Comps should be similar to your property.  3 bedroom 1 bath 1 story same neighborhood is best; within a 1/2 mile of your property, same schools etc.

Jake Drappi · Answer

@Kenneth Garrett Thanks for your input.  I have rerun my own numbers and it looks to be solid, but there are almost no comps that I see that are very similar to the one I would be doing, as the square footage is relatively tiny (698 square ft) and it is on a bit smaller of a lot.  Also, there were not many recent sales within a half mile, so I am having a hard time nailing down comps.

Jake Drappi · Answer

Hi Kenneth,

Thank you for your response.  I would be using my own cash to fund the purchase and rehab on this.  The lender I spoke with stated they could give me up to 75% LTV, but I will def have to check if the seasoning period starts when the purchase is made or when the rehab is complete.  Is there a safe % to use to cover additional expenses on the rehab overage?   I could also lower the repair expense, as you mentioned, there should be little repairs needed for the first say 10 years?  And the realtor I am working with stated the rent should be around $1350, but I did want to be conservative on that piece as well.

Maybe I should lower my offer price on this to $30K and send them a detail breakdown of all the expenses to validate my offer?