Deal Characteristics for Successful BRRRRs

20 Replies

Hey BP! I've been learning passively for awhile and am trying to find the right deal for my first BRRRR.

I'm analyzing a SFH wholesaled deal in a high quality neighborhood, which would be acquired for $100k, which is approximately 55% of ARV, and I was surprised that the deal wasn't cash flowing after theoretically BRRRR-ing the property.

Note that I include PITI, 10% vacancy, 10% PM, 1 month leasing fee, $50/mo for repairs/maintenance calls, and an item by item reserve for future CAPEX replacement, when I calculate monthly cash flow.

This brings me to my question: what are your screening criteria that you use for weeding out bad deals when you're looking to BRRRR?

Is it a rent to price ratio above x? Is it a combination of price % of ARV and final rent to price ratio? Or do you start by looking for assets that are below $75k? Etc.

I'm assuming that I should model the deal as 100% financed at the ARV at 5.5% interest, to test the asset's ability to cash flow w/o including the emphasis of my own equity (which I'm trying to extract, after all).

Thanks in advance!

for BRRRR I look first for ARV

my biggest goal is to have a property I can pull 100% of my funds out of, so I start with a house I know I can be all-in at 75% of ARV.

If this is possible, then I look to make sure it's in an area I want and we can get sufficient rents out of it.

When doing your interest rate calculation make sure you consider points. I trade the 5.25% rate for the 5.85% rate with more money in my pocket. This is a small but important difference, especially when buying a few a year or more.

Hi @Alexander Felice thanks so much for your reply!

Your target of being all-in at 75% of ARV definitely makes sense, and that is where this deal I'm referring to falls apart.

Regarding rehab costs, how do you make your back of the envelope estimate of what it takes to be all-in? Are you using an average PSF number based on your experience in a certain market? Applying a flat $ amount based on a quick scan through the photos? Or do you move right to identifying a specific scope of work and then looking at where that takes you?

You also made an interesting point re: potentially taking a point out of the deal. I hadn't thought of that for modeling an REI investment, which is funny since I just did exactly that (to a lesser degree) on my primary home purchase! Do you make an estimate of your hold period and calculate a breakeven? Or are you more looking at velocity of money and saying, this deal still pencils at 5.85% and I can use the point to help do another deal right away?

Originally posted by @Sean McCluskey :

Hi @Alexander Felice thanks so much for your reply!

Your target of being all-in at 75% of ARV definitely makes sense, and that is where this deal I'm referring to falls apart.

Regarding rehab costs, how do you make your back of the envelope estimate of what it takes to be all-in? Are you using an average PSF number based on your experience in a certain market? Applying a flat $ amount based on a quick scan through the photos? Or do you move right to identifying a specific scope of work and then looking at where that takes you?

My envelope estimates are usually VERY close because I know my market very well.

I know a lipstick rehab (paint, floors, some appliances, etc) is $10K

I know a roof is 5K

I know replacing the HVAC is 5K

in my town the city is adding sewer to lots of units over the next few years, so I have to build in that expense as well - 5K

Well that's 25K total, WORST case scenario. So if my deal works with a 25K rehab or less I move forward. I've bought more than one without my contractor seeing it, just from MLS pics and we still made a bunch of money.

Hey @Alexander Felice - does this mean you never really replace a kitchen or bath on your deals? Driveways, siding, soffits, plumbing, electric are all good enough to get that higher ARV appraisal w/o investment? Or does your $10K lipstick rehab include those types of items as well?

I guess I'm asking, to what level do we need to bring the overall quality level of the home in order to get that ARV on appraisal?

@Sean McCluskey Well hang on, you asked me what i do for quick and dirty estimates. If something needs a driveway, then i know i need to add ~3K. I often replace and add bathrooms, but what else to a kitchen is there besides paint, floors. And appliances? Im not flipping these houses to make them new, im turning them into rentals. So rarely do i need gut a whole kitchen, though i have. How you need to improve your property depends on what the nearby units look like and rent for, then be a 5%-10% better value. I cant say what that takes because itll be different for every unit.

@Sean McCluskey

The quality of rehab to get the ARV depends on the comps. It sounds like the comps in Alexander's market don't need a ton of work, like he said it is "lipstick" on a pig. Are you still going to be able to rent it for what you think you can if you don't do those things? If not, then maybe more needs to be done. If your house does not look like the comp houses then your house is not comparable to the others and won't appraise at the same value.

Howdy @Sean McCluskey

I also go for ARV first. My All-in goal is 70% of ARV. This allows for Rehab budget excesses and lower than expected appraisals. the Refinance loan is normally 75% LTV.

I do a rent analysis to see if the market rates will support my expected Loan payment. I must be able to raise rents after the rehab. Minimum Cash Flow is $150 per unit in multi families and $200 for SFR.

Then we do a quick look Rehab estimate for the initial analysis.  I don't have the experience that @Alexander Felice has so I complete a ruff SOW first. My rehabs have been between $20K to $50K so far. I mainly try to see what major components need attention. Then add to cover lip stick (I also use $10K). Plus 15% for the unknown. Once I have the property under contract I have it inspected and make appropriate adjustments to my Rehab budget and CapEx reserves. I only keep the properties for about 5 years. So everything not lasting past that is replaced/upgraded. Everything else in included in the CapEx reserves.

I use a standard $12K for Closing and Holding cost in my initial analysis.

Once I have all these numbers I work backwards to determine the offer price that works for me.

So the important numbers are ARV, Rent/price ratio, COCROI, and Cash Flow.

@Alexander Felice thanks, I wasn't trying to call you out, just wanted to get a better idea of the types of deals you were doing, and try to learn from your method so that I can start doing deals! 

Are you able to use the same contractor(s) on all of your deals? Or do you end up needing to bid things out each time?

@Dave Passey thanks for the comment. I guess I was approaching this as, "appraisers place valuations on having xyz and then grade xyz by a quality score, to assign their value". And I wasn't as focused on the direct comparisons with the surrounding comps.

To that point - how do appraisers know what the quality level of the nearby comps are? Do they mostly use homes that they have been able to see inside? Or are they swayed by curb appeal and listing photos?

@John Leavelle One thing that really sticks out at me in your post, is that you mention only keeping properties for about 5 years. And therefore, you aren't repairing/replacing things that would last at least 5 years. But then you mention reserving against those in Capital Reserves.

I'm hoping you can help me understand - are you saying that a roof with an estimated life of say 10 years, you would include a monthly capex reserve in your numbers, that would add up to the replacement cost of that roof in 10 years? And that reserve is included in your cash flow estimate? This is how I'm calculating my numbers, but I was doing it that way because I'm planning to buy and hold for a longer period of time. I know many people on BP who expected to hold for 5 years would be tempted not to include a roof accrual in their cash flow numbers. Do you do that to be conservative?

The first one is tough, you can walk through with a contractor to get a number but realize they may underestimate the costs "to get the job".  Once you get the first one done you will have an idea and feel more comfortable moving forward.  I've done a couple now and one was pretty extensive.  I helped out with some of the work and was at the house almost daily so I could get a better feel for time and cost of each part of the rehab.  This made doing the next one pretty easy, I have no concerns about it now. I can walk through and feel pretty comfortable estimating the cost myself.

Originally posted by @Sean McCluskey :

@Alexander Felice thanks, I wasn't trying to call you out, just wanted to get a better idea of the types of deals you were doing, and try to learn from your method so that I can start doing deals! 

Are you able to use the same contractor(s) on all of your deals? Or do you end up needing to bid things out each time?

no sweat, and I love getting called out so no harm regardless ;)

I found a good contractor on my ~3rd deal, and once you find a good contractor you marry them. I've done everything in my power to send this guy business and become his partner. Now we do everything together and his talents really let me go much faster and more confidently. Being able to buy a place, even I buy them blind on occasion, and having the utmost surety that my team can complete it timely and efficiently is a huge boon.

finding great people is the #1 thing you can do in this business

There is always mention of ARV, but to me the most important aspect is what you would pay for the property at the most as a rental. For instance if the property only makes a good rental at $150,000, then only refi it at 80% of $150,000 ($120,000), not say the $200,000 amount the property appraises for. This will allow you to operate the property effectively during good and bad times. Pulling all of your money out of a deal in order to buy another one is great, but investors that give it all back to the bank when the market shifts are the ones basing the refi amount on an appraisal, not on the math of the rental.

@Sean McCluskey

Sorry for the confusion. Everything I do is to be conservative. I repair/replace everything that will not last at least 5 years. So far I have replaced the roof on every property. But, if I did not I would include it in my CapEx reserves according to its remaining life expectancy. The same goes for all other major components and appliances. The idea is to build enough cash reserves to cover the property for 6 months of vacancy.

I've only been doing this for 4 years now. So far I have not used any of my CapEx reserves for any properties. Insurance covered one major expense and all others have been normal Maintenance /Repair Expenses.

After 5 years I plan to 1031 exchange to a larger property (small multi family or small Apartment). The reserves from the sold property will be transferred to my main Cash reserves account. The banks like this. Of course I start the whole BRRRR process again on the new property.

@Todd Dexheimer Thanks for the input, this is a very good point! Greed is good but pigs get slaughtered.  

It definitely sounds like a responsible strategy to only load on the debt that makes sense for that specific asset as a rental property - that way it can stand on its own in case of a down market or problems else where in the portfolio. I like it!

It must be tempting to take out extra and get into more deals though! Do you set your limit before getting the asset / before appraisal, to help avoid temptation during financing?

@John Leavelle thanks John, this makes total sense to me.

It's pretty encouraging that you have not needed to access any of your CapEx reserves yet, in 4 years of activity! I've been imagining large capital events happening more regularly than that, and I think that is definitely one of the things that has been holding me back from taking the plunge so far.

It sounds like you have 1-2 years left before moving into a MF - I'll have my fingers crossed for you to find the right deal!

Originally posted by @Sean McCluskey :

@Todd Dexheimer Thanks for the input, this is a very good point! Greed is good but pigs get slaughtered.  

It definitely sounds like a responsible strategy to only load on the debt that makes sense for that specific asset as a rental property - that way it can stand on its own in case of a down market or problems else where in the portfolio. I like it!

It must be tempting to take out extra and get into more deals though! Do you set your limit before getting the asset / before appraisal, to help avoid temptation during financing?

If you put your limit on financing the property prior to getting the appraisal, I think that would be a good idea. I’ve never done that, but I’m a very practical and conservative investor. I’ve never been tempted to take based on appraised value. 

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