BRRRR property value minimum?

Question

looking at a condo in a B/B- neighborhood. Asking $24,900 but fairly confident a $20k cash offer would close the deal. It's a 3 bed, 1 bath (1300 sq ft) plus attached 1 car garage. Needs about $10k to get ready to rent. Will be able to rent between $700-$800/mo.

My question is whether I'll be able to refinance? Comps in the area used to go around $50k, there is one listed for $46k but has been on the market for some time. The rest of the comps in a fairly large circumference have all been foreclosures around $25k-$35k. Assuming that's all it's worth, can you refinance for such a low amount? Is it even worth it?

Andrea Castor · Answer

I've experienced first hand the troubles on financing a condo as a rental period. When we bought our first property in 2009 we had to take a loan from family. We hated this idea but after talking to 12 local banks, it was our only option. Thankfully, we bought another condo in the same complex in 2012, banks eased up a bit and we were able to cash out refi, finance on both together saving on closing costs. We've learned the hard lessons of HOAs (letters about work trucks parking an 1") on the grass, sports "memorabilia" on the porch (it was a decorative plantar), etc.

For this condo we have requested a copy of bylaws. Asked to see their financials and trying to talk to property manager. We *think* it's the same as our other properties. My biggest worry is that there is a special assessment coming up we don't know about and for an exit strategy whether they qualify for FHA financing (our other condos don't so hurts resale). We still managed to double our money on one though (purchased $42k and sold for $88k 2.5 yrs later).

Jeff Bridges · Answer

With condos, they are much more limited in terms of appreciation potential, but they can make up for that with inexpensive acquisition cost and cashflow potential relative to a SFR. It's good you calculated your HOA expense in your evaluation and it still works for you.

I'll share my anecdote for my rental condo related to refinancing. I tried one with WF, and all was on track until they got back the association questionaire which had 15%+ deliquency rate and high investor owner rate, which they did not like, and it wouldn't meet fannie guidelines. Portofolio loan might have worked but I didnt have the resources at the time to connect with an institution that did one. I ultimately got a HELOC on the rental property for 75% and got at least 75% back out for reinvestment. Not BRRR but I wasnt stuck with it all parked in the property. Not all banks will do HELOC on investment rental units but some do. TD bank I heard might. I recommend trying to find someone to do portfolio for you and then HELOC as a backup if you really want to get money back out and its still worthwhile deal to you.

Finally, make sure you fully read bylaws and association regulations to make sure there are no rental restrictions. I've had trouble with those even after buying a condo that initially had no restrictions and the board got fed up with a couple of bad rental residents and tried to restrict renting to 40% or less.

Certainly you have less freedom between financing and rental restrictions when you buy into an association, so be mindful of these risks....

Andrea Castor · Answer

Well the husband finally got inside to take a closer look. Substaintial dog damage. Even at close to asking price and with $10k in total rehab (rental comps do not require high end finishes) and a low $750/mo rent, looking at a cap rate of 16%.

Percy N. · Answer

@Andrea Castor, some of these are close to the $50K mark, so you might be OK.

Alternative would be to get a blanket mortgage or better year a LOC from the commercial dept.

Andrea Castor · Answer

Yes, exit strategy could always be to sell, most likely with owner financing or rent to own type thing, but this is more something we plan to hold at least 5 yrs but more like 20-30 (we are 32). We are not new to rentals but new to renting in this area.

Only comps:

2 bed, 1 bath 910 sq ft $42,500 12/2015

2 bed, 1 bath 910 sq ft $36,000 10/2015

2 bed, 1 bath 910 sq ft $45,900 7/2015

3 bed, 1 bath 1222 sq ft $48,000 4/2015

HOA fees, I'll admit, I typically do not like. Our other two rentals also have HOAs ($150 including trash only, no pool/clubhouse, just snow/lawncare/etc. BUT, HOA is $165/mo again, doesn't include a pool, club house, tennis courts. But, even with HOA $165/mo and taxes $120/mo I still like this deal...

Brent Coombs · Answer

@Andrea Castor, one of your exit strategies could be to just sell it again.

Or, with the rehab done its new appraisal value should be ABOVE $50k, yes?!

What are the HOA Fees like? (Investors are often not fond of those)...

Andrea Castor · Answer

If I couldn't refi some of the cash out, would you still move forward with the deal? $20k + $10k isn't a deal breaker for us, but also lowers the cash I have on hand for buy and sell properties.