Madison Wisconsin looking for guidance doing the BRRR strategy

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Madison Wisconsin looking for guidance doing the BRRR strategy

Lee L.
Member since 2021 · 12 posts · 2 votes

Hi, I found a place, got a pre approval, have an agent showing me the place, know what it's previously rented for, done my market research for what it could rent for.

Questions are:
Is the refinance loan always  70% of re-appraised value or is it 80% for Madison/Wisconsin?  
Is a deal typically not worth doing if you can't get an appraisal / refinancing goal to completely pay back your out of pocket cash and initial loan? hoping to see real examples of Madison Wisconsin. I'm currently looking at 725-727 Vernon ave  and 113-115 Georgiana circle  Madison Wisconsin and could use some assistance going through the examples.  From what I'm seeing I'll have to put down 25% down payment (this is normal for rental real estate apparently)  on a 315,000 dollar house that's about 80k so the initial loan is about 240k    lets say i get the value of the property to re-appraise for 375,000 and i take out a 70% refinance loan that is about 260k  that nets me 40-50k cash, but i could foresee cash on cash return of +250-400 dollars from income.  

The mere fact i wouldn't be able to pay off the initial loan + cash loan would indicate to me this would be a no go deal, but I think there is something I'm forgetting to do? Is there a shortcut to understanding what deals to pursue? what i should be looking for in 2-4 unit properties?

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  • Lee L.
    OP
    Member since 2021 · 12 posts · 2 votes
    4y

    a negative 40-50k cash. 

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  • Marcus Auerbach
    Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    4y

    Where would the increas ein value come from? Vernon looks move in ready and I did not see you mention a repair budget. Refi LTV is usually 75%.

    I have been doing BRRRR's for over a decade in Milwaukee and it has gotten very difficult in the last years to recycle cash; I left a substantial amount of money in every single project over the last 2 years. I knew that when I signed the deals and to me personally it is still worth it because the properties are now compeltely updated and ready for the next couple decades.

    So while the market makes it very difficult to create enough delta between initial purchase price and ARV to pay for 50-70k remodel expenses and create 25% equity, the current market does provide for tailwind via general appreciation, something we have not had in the past.

    When you are looking to BRRRR a duplex you will look for a property that needs substantial work and will therefore sell for a big discount. At a 400k ARV you will have to buy for under 250k. The best way to make the numbers work is to limit the work to cleaning, paint and carpet and avoid expensive projects like roof, windows, replacing plumbing and electrical systems, driveway etc - as these take huge amounts of capital, but will typically not drive up the ARV by much. You can still choose to do so, so you are not just deferring the cost to a couple years later, but know that this will eat into your equity.

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  • Peter Falk
    Real Estate Broker · Madison, WI · Member since 2015 · 118 posts · 60 votes
    4y

    Yes, I agree that any needed maintenance work is just needed and expected (roof, mechanicals, etc) and not substantially change any values, so to focus on what may attract good tenants and higher rents (adding a deck or dishwasher, etc.).  I didn't look at these specific properties, but just strongly agreeing with the earlier comment as well.

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  • Lee L.
    OP
    Member since 2021 · 12 posts · 2 votes
    4y

    I think i found out the answer to my main question. 

    You shouldnt offer more than 70% then what you can get the property to apraise for - extra expenses. 

    so for that 725 property that is starting at 315, and the highest apraisal value for this neighborhood with similiar building types are going for 400k. I shouldnt offer more than 270k for that property. 

    Are there exceptions to the 70% (75% LTV) rule?

    Thank you for that 75% LTV number.
    I went and looked at both properties on Saturday. The vernon property like you said was pretty much move in ready.  the 4 bdr side had good looking appliances, updated modern kitchen and recently redone laminate flooring that looked nice.
    The bones of the property were pretty they had 2 bedrooms in the basement so the foundation is good, and no leaks anywhere. The roof was less then 10 years old.  The only way I could add value to that place is to finish the basement to add more sqft to the property.

    the 727 place, had the updated floors, but the kitchen hadn't been touched appliances were pretty old (this side didn't have washer/dryer appliances, could use new fridge / dishwasher.) The basement was virtually untouched and I could see doing on that side what they did on the other side. Add some bedrooms. The yard was fenced in secluded. There was a detached garage that would have been worth renting out to one of the tenants. But I don't know with those improvements if we could have gotten it up to 425. the as is CMA my realtor did on the property came up to 339,000. and it was listed at 315, I'm interested to see what the bids were on the property. I didn't want to dump all of my cash into it as a down payment of 25% when I didn't think I could refinance it in 6 months and get that back out of it.

    I appreciate you looking at my question for what they were, a new person just trying to learn the ropes with a real life example.

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