Seller counter-offered. Help Analyzing this BRRRR Deal!

48 Replies

Strategy: Buy & Hold, Live in for 2 years, remodel it while living in it, then move out.

I've been all excited since I "found a gem" but now after running number over and over and over again I break-even only if I manage it myself after moving out.

The property needs the following:
- Flooring - Currently it has a stinky-smudgy carpet

- Cabinets - Old, falling apart, discolored stain

- Countertops - Currently it has laminate jagged up counters

- Outside-Inside Paint - Stucco needs to be painted on the outside. Inside is dirty, discolored walls.

- Bathrooms - Super dirty bathtub, toilets.

Single Family Home Purchase Price: $355,000 

FHA: 3.5%

Mortgage: $2200

Rent: $2400

Comps Avg: $370,000-$440,000

Rehab Cost: $20,000

Is it a good Deal or Bad deal? 

Before moving ahead and accept the counteroffer I wanted to be sure that I'm getting myself into something that its worth it. 

This would be my 1st BRRRR, so I'm a bit nervous before jumping in.

@Alfonso Aramburo Zepeda How does the mortgage payment compare to what you are paying for rent now? If your rent is higher, I'd be tempted to go for it, but keeping in mind that you could sell it in two years if the price is right. If your current rent is lower than what your mortgage payments would be and the after reno value is on the lower end of the numbers you provided, I'd keep looking.

You're looking at paint, floors, kitchen cabinets and counters.  For the bathrooms, you say they are dirty, so those can be cleaned.

You are pretty much renting for appreciation or debt pay down with those numbers. If you are rehabbing with cash, it will take a long time to see your money.

Personally I would pass unless there is a high probability of better rents once you move in two years

@Alfonso Aramburo Zepeda if you're looking for cashflow, this isnt the right property. The purchase price, combined with the low downpayment, will make it impossible to have positive cashflow unless you can get significantly more I rent that you have proposed.

How do you plan on BRRRRing in this situation? For a BRRRR, you would be refinancing at some point for a higher amount to reflect the forced appreciation through rehab. You dont want to do that here....

@Jason D.

After looking at different ideas to convert areas into rooms there is 1 room that can the turned into another bedroom and then the garage could be turned into a 1 bed 1 bath “ mother in law” attached house with its separate entrance.

I believe the costs involved would be just too high for the ROI after all.

Would the numbers work for you at the $350k amount? If not, just be glad your offer wasn't accepted. You're not that far apart in price so you may be able to get it for your original offer if you decide that you would still want it for that.

A couple more questions... Is the ARV you provided for the property as is with the needed repairs made or is that after adding rooms and other significant work?

Can you do some or most of the work yourself or with the help of friends?

If the ARV is for the current layout of the property and you do the repairs/upgrades yourself, it may be worth spending some additional thinking on. Is your market rising, stable or likely to go down in the next 2-3 years?

Originally posted by @Alfonso Aramburo Zepeda :

@Luke Reninger

I was thinking on turning the garage into a 1 bed 1 bath room and rent it out, but that would add up at least another 10K if I do most of the work myself...

Too much work for the equity gain I suppose then.

Well, what would that rent for? I think that could potentially be a great return on investment if you can get it permitted as an ADU or however they would classify it.

 

@Alfonso Aramburo Zepeda First thing that pops out here is the rent to purchase price ratio as well as the purchase price itself. 

One thing I'd want to bring to your attention when you do move out and try to do refinance, the interest rates are going to way higher than 3.5% of the FHA, and the interest rates for investment properties will wipe out any cashflow and may lead you into the negative real

You never want to be paying additional rent with the tenant for your mortgage. Not a nice feeling...😟

Really your initial intuition was right, as when you start to run numbers over and over again you particularly want to listen to your gut and RUN 🤗

It is real easy to blow $20K improvements before you not even there. I will itemize and redo the rehab. cost. I imagine the materials will be over $20K. 

@John Teachout
The ARV value with repairs, not including the added room would be $370,000-$390,000 With the added room I'm estimating up to $490,000 if it's a permitted ADU (and have never done that yet...). If I could get that room permitted I would be cashflowing at least $400 USD, thing is I'm not sure if that's even possible or if the investment its worth it. That's the paradigm right there. I would do most of the repairs myself except for converting that room.

The market is more likely to go down within the next 2-3 years from what I'm seeing. Prices are way too high, increased 20% in the last 9 months, market more likely to get corrected soon. Historically California properties appreciates a lot, I just don't want to bet on that.

@Ola Dantis

That's why I was thinking on forcing value by adding bedrooms, etc. Then I would refinance within a year to remove the Mortgage Insurance and reduce the monthly payment. It is true that interest rates are very low now (maybe as low as they will be in a long while) and possibly will be higher within a year. So the smartest thing to do if it increases 1 point is to keep the FHA loan...That's why the purchase price/deal analysis has to be right. I think there are too many variables in place to make it work.

Originally posted by @Sam Shueh :

It is real easy to blow $20K improvements before you not even there. I will itemize and redo the rehab. cost. I imagine the materials will be over $20K. 

I was thinking vinyl flooring, I would be tearing apart the current carpet. Solid Surface on the countertops (built by myself as that's my full-time job...), cabinets would be built by me & a colleague of mine. I've painted before so I would do the work myself.

Following my estimate:

1800 sq ft floor - Wood look Vynil floor $2000 USD
70 sq ft Corian/Solid Surface - $1200 USD 
Cabinets Hardware- $200 USD
Refacing Cabinets- $3000
Paint Outside - $800
Paint Inside - $400
Total+35% unexpected repairs- $10,000

@Alfonso Aramburo Zepeda admittedly I did not read the replies to this original post, but this is not a brrrr deal. Numbers are no where close. If ARV is $390K as you said, you need to be all in, including rehab, at around $290K to pull your money back out. This house is way too expensive to brrrr at that ARV. Additionally, the rent is too low to cover expenses and PITI for a loan of that size. Sorry to be a downer, just shooting you straight man.

Sounds like a good deal... in Southern California.

Where is this property located? I don’t know if I would convert the garage. A huge reason people rent a house over an apartment is the garage space and the yard space.... remove those and you’ve shrunk you’re potential tenant pool by a lot. I would go for it. Give it five years and you’ll be glad you did. Plus you’ll be living there for 2.... rents will rise over that time period. Appreciation could be a factor.... time will tell.

Originally posted by @Cole Raiford :

@Alfonso Aramburo Zepeda admittedly I did not read the replies to this original post, but this is not a brrrr deal. Numbers are no where close. If ARV is $390K as you said, you need to be all in, including rehab, at around $290K to pull your money back out. This house is way too expensive to brrrr at that ARV. Additionally, the rent is too low to cover expenses and PITI for a loan of that size. Sorry to be a downer, just shooting you straight man.

That is the most conservative number, the optimist number would be $440,000 per the comps. 15-20% under market value, and yes, not 30% under market value which would be more desirable. After months of looking I haven’t seen yet those numbers in my area without having to pay big amounts of cash.