Help Me Analyze My First Deal

13 Replies

Hey all,

I'm a new investor looking to kick things off using the BRRRR strategy in Lubbock, TX. I'm new to analyzing deals, so I was hoping to get a sanity check on a deal that's come my way.

This is an off MLS property currently owned by another BP member/investor/RE Agent/GC. She was planning to flip this herself, but thought it might be a good fit for me. The property was originally a 3/2 with garage, but the garage has now been converted to make the property a 4/2. The current owner believes it should probably just be converted back to a 3/2, but I'm interested in seeing if we can go to a 4/3 to increase appraisal price and STR gross potential.

Purchase price: $75k

Estimated rehab: $30k

ARV: $120k

Obviously, using the BRRRR method, the hope would be for purchase and rehab expenses to come to $90k, rather than $105k.

I'm torn on this deal for a few reasons:

1.  This is a long distance deal.  It would be a huge benefit to do this deal with a partner who is an investor, has her RE license, and is also a GC.  I have seen some of her listings and properties she's done in the past and they're right in line with my expectations.

2. I have watched the webinars, read the book, listened to the podcasts, etc... and I know that walking into a deal expecting an all in price at 87% of ARV rather than 75% or so of ARV isn't considered "buying right."

3.  Those same webinars, books, podcasts, etc... talk about the first deals "not mattering" beyond getting your portfolio started and learning.

Should I jump on a deal that looks fairly turn key on the outside that will leave ~$11k of initial investment in the deal to get things started or should I be patient and wait for something that appears to have better margins?

Shifting gears a bit. I have a friend/partner who is interested in being my "tenant" at these properties and using them for short term rentals. The idea is pretty simple: He'll pay me 1% of ARV with occupancy beginning immediately after remodel, and he'll get to keep what he nets beyond the 1% using AirBnB to manage STRs. I like the idea because it reduces my overhead expenses (no vacancy, no PM), provides cash flow to my partner, and allows me to refinance having a year long lease locked up.

Has anyone ever done this?  Any pitfalls that I'm not paying attention to?

Thank you all in advance for your time and any insight, wisdom, or feedback you can provide!

Uh, No. I wouldn't do it. Investing $105K, assuming everything comes in exactly as estimated, for a $120K property? No margin. Long distance? Who will oversee the rehab? Partnerships? A fantastic way to get screwed when people don't actually do what they said they would do. Your first deal, or inexperienced? Yeah, definitely not doing this. There are deals in your town that need less work that you can easily drive to everyday and do some of the work yourself. Why doesn't the RE agent/GC buy this deal if it is good? 

@Anthony Dooley - thank you for the feedback.

Unfortunately, I can’t play in my local market. I live in Castle Rock, CO and there isn’t a single deal here or within a few hours of me that I could purchase cash. At least nothing I could purchase cash that anyone would want to rent, really.

As I mentioned, the RE Agent/investor/GC did purchase the property to do herself. My guess is that, because she’s a GC, she budgeted about 50% of the estimated rehab since she would be doing it at her cost. She would be interested in selling it to me because I’m assuming she’d be making some money on the sale and, if I used her as the GC, she’d be making the GC’s margins on the project.

The property is in my wife’s hometown about 8 hours away. While I wouldn’t oversee the entire project, I would stop in at major milestones.

As a BRRRR property this doesn't make a whole lot of sense.. there just isn't enough margin to make it worth while and get your capital back out with a refinance. But as a buy and hold rental your numbers look pretty solid. $217 of monthly cashflow, 30% cash on cash return, and 11% cap rate. I like those numbers but you're going to be leaving money in this deal if you do it. I buy and hold and I don't mind leaving money in a deal so I'd be tempted by something like this. But if your goal is to reuse this capital or grow it and compound it for the next deal, a core principle of BRRRR then this could end up slowing you down.

Do you have a mission statement for what you plan to invest in and why? If not write one, and look to see if this deal meets that criteria or not. I think you’re asking good questions and I don’t think it’s a bad deal, it just won’t align to everyone’s investment strategy. 

@Sam Griebenow If it wasn't in your wife's hometown, you wouldn't have even looked at this deal. What you didn't say is how much it would rent for. Before you tell me, it would need to rent for $1500 per month for me to even analyze it, but that is me. Do what you want, but ask yourself, " will this get me to where I want to be in 10 years?" If so, maybe it is ok for you. BTW, you don't have to buy all cash on a deal for it to make sense. I agree, Castle Rock doesn't have anything that will produce cash flow. Only appreciation, which is speculative.

@Anthony Dooley - Correct. I am specifically looking for deals in Lubbock as it’s “close”, will eventually be closer, it’s a market we frequent and would be able to produce some additional opportunities out of. Like you said, there’s nothing in Castle Rock that I could hope to cash flow and I don’t want to bank on appreciation, though it has served me well in our primary residence.

So, regardless of whether it’s this deal or another, it will still be a long distance deal.

Could you provide some additional insight as to why you would draw a line at $1,500 for the minimum rent on this particular deal? What would make it a deal worth pursuing in your opinion? Lower purchase price? Higher ARV? If this isn't the deal, I'd like to know what the right one will look like.

@Sam Griebenow I simply used a 15% Gross rent multiplier to your $120K ARV. For me, that would be the least amount of ROI that I would even look at because I can get that pretty easy in my market. I am telling you what I would do. Your minimum ROI may be 8%, I don't know. Amarillo is closer than Lubbock, right? What would make it more appealing to me is more cash flow. You would be investing $105K, so how much do you expect from your money?

@Sam Griebenow

Hi sam,

I would highly recommend not flipping houses long distance. Especially when you are getting started in the business. Also, the better you get at saying no, the better deals you will find. This is one to say no to. There are too many things that could go wrong with this. It's not worth it.

The BP member/Agent would be the only one making money on this deal. 

Keep in mind , your analysis must be perfect as there is no margin for error. Keep in mind that I am closing in on 30 years of doing this and have done many in the surrounding areas of Lubbock, deals never turn out smoothly even for me.  Being new to this AND living out of the area is a recipe for disaster. 

I want to keep it short.  I have flipped 3 houses in my time and have seen success in all.  I moved to Lubbock just two months ago and grew up here in the West Texas Area.  Would love a conversation, at least, I have the motivation to help anything that makes sense.  The deal in a sense does sound shaky but maybe more can come from it as I live here and can help in the needs that are needed.

Hey @Sam Griebenow  I am a PM here in Lubbock. I saw the taxes are about $112/m that seems pretty low for Lubbock, meaning its assessed value is probably around $65K? Which part of Lubbock is this property in? Have you been in the neighborhood personally? Are you sure you can rent it for $1200/m? 

I believe Lubbock is a great town to invest in RE, I have one SFR (buy and hold) myself and planning to get more but just be cautious because there are some areas that can look really good on paper but the reality is different.