BRRRR Calculator/Analysis Rookie Questions

4 Replies

Hey BPers, 

I'm increasing my BRRRR deal analysis as prospective deals come across my desk and I'm trying to sort of streamline/systemize things to analyze deals faster. Trying to take Brandon Turner's advice by analyzing AT LEAST 1 deal per day, hopefully more. Anyways, I'm a rookie and I've got some questions that are probably silly but I'd truly appreciate some experienced BRRRR folks help:

Question 1: On page 2 (purchase info) of the BRRRR calculator, it asks for "purchase closing costs" - the help pop up talks about how it's typically $1500-$2500, Brandon puts in $3000 while analyzing a deal on a YouTube video, and I'm trying to understand/figure out what I should be putting in this box. To be honest I'm not sure what these fees would be?? I understand that my hard money lender is going to have his/her fees and points, but those go in the next section below... What purchase closing cost fees am I accounting for here?

Question 2: Estimate Repair cost: Let me start out by saying that I'm reading J Scott's books (haven't finished yet), watching BP videos, etc etc; I know repair costs are going to vary GREATLY by area, contractor, property, and so much more.  With that being said, do you all out there use any sort of 'back of the napkin' estimates before you've gotten your contractor over there to see the property in person?  By going through photos, in my mind I sort of initially judge the properties based on the following 5 categories - 

  • Light Cosmetic
  • $10/sq ft
    • Heavy Cosmetic
  • $15/sq ft
    • Gut Job
  • $20/sq ft
    • Heavy Gut Job
  • $25/sq ft
    • Total Disaster
  • $30/sq ft
  • I'm not asking for a definite answer here, because again these are all going to vary greatly, but I'm curious what other people are using for their quick 'back of the napkin' per/sq ft estimated repair costs to compare...  Am I way off?  How do you all do your quick numbers here?

    Question 3: Monthly Insurance on Fixed Landlord expenses:  

    - What do you all do here?  Throw the same number down every time?  Actually call up an insurance person or take the time to get a quote?  Do some sort of a quick calculation?  I thought Sq Ft of the property multiplied by .05 might be a decent quick monthly back of the napkin estimate.  So 1700 sq ft home x's .05 would be $85/month.  

    I'm sure I'll have more questions later....but most of the other inputs on the calculator I feel decent about.  

    Thank you BP!  Happy New Year and happy investing.  Go make yourself a bunch of money :)

    Dave

    Howdy @David Schulwitz

    1. It can be confusing. There are a wide variety of possible fees and charges that can be included in the closing costs. There is no one set number. It also depends on how you intend to purchase the property. Cash, Private/Hard Money Loan, Conventional Loan, and USDA/FHA/VA Loan all have different requirements. Here are 2 links that can give you a better idea of possible fees.

    https://mymortgageinsider.com/how-much-are-closing...

    http://www.mylenemerlo.com/blog/closing-costs-for-...

    Some closing costs can be covered by the seller (up to $2,000 I believe).  Realtor commissions are not on either of these two links but are part of the closing costs.  That's because in normal transactions commissions are paid by the Seller to their Listing Agent/Broker who in turn pays the Buyer's Agent commission split.  But, that doesn't mean you will never pay any as a Buyer.

    2.  It is good that you are reading J Scott's book.  That is one of the best sources to learn from.  I use his checklist when I do my Walk-thru's with my GC.  There is a file here on BP created by Andy Bankston that includes both J Scott's Worksheet and Home Depot SKU's combined.  https://www.biggerpockets.com/files/user/RoadRacer...

    If you are planning to do estimates sight un-scene using square footage I would suggest your increase your amounts. It is very difficult to work that way (I've tried). You have to consider finish quality in your estimates. One thing you must remember. Most properties that require minor cosmetic repairs do not make good BRRRR deals. I will explain later. Your objective is to be able to purchase at a decent discount and be able to force appreciation to the expected ARV. Sellers do not typically discount much based on cosmetic needs. As far as back of the napkin estimates I rarely do that based on pictures. Most properties I look at need a minimum of $15K and up to $35K so far. Roof, HVAC, and Kitchens get you up their quick.

    3.  For insurance estimates I do both.  If the property is similar to one of my existing properties I will use the same number initially.  If it's a different type or totally different area I will get a quote.  Don't create your own method ... get a quote.  

    Additional Comments.

    I do not use the BP calculator.  It is a good tool but it does not include a key item you need to account for.  That is Holding Costs!  This one area many forget or are not aware of.  I need to know what my All-in costs are.  That includes Purchase Price, Rehab Estimate, Holding Costs (includes but not limited to loan interest payments, insurance, Utilities, and HOA fees that occur during the Rehab period up to the point the prperty is fully rented), and Closing Costs (Purchase closing and Refinance closing).  Three out of four are in the calculator but Holding costs are not.   That could mean a difference of $10K in your calculation.

    The reason I say cosmetic jobs do not typically make good BRRRR deals is it is hard to purchase at a significant discount (or justify it).  I look for distressed properties that I can justify the discount because of the condition.  I also look for List prices that are well below ARV.  Speaking of ARV.  That is the first and most critical part of this strategy.  You must be able to develop a reasonable ARV based on currently sold comps.  Once I determine the ARV I work my way backwards to arrive at my MAO (Maximum Allowable Offer).  ARV x 70% Rule - Rehab - Holding costs - Closing costs = Offer Price.  Example:  $100,000 ARV x 70% = $70,000 - $25,000 Rehab - $6,000 Holding costs - $6,000 Closing costs = $33,000 Offer Price.  If the List price is $80K the Seller will probably laugh at me.  So I move on.  If the List price is $50K then it might be close enough for them to jump.

    Why do I use the 70% rule?  When you get your Cash-out Refinance loan the lender will provide an amount that is 70% - 80% LTV based on a current appraisal.  Typically it is 75%.  If I want to get all my cash back my ARV needs to be as close as possible to the new appraisal.  My All-in costs must not exceed to LTV %.  Since it is possible I could only get 70% that is what I shoot for.  If it is 75% I have a 5% buffer encase my Rehab cost go over (which happens) or the appraisal comes back lower than my ARV.  

    Hope this helps.

    Renovation costs can only be guessed at without seeing the property. The best I can do from photos is eliminate some places based on appearing to need way too much reno for the asking price. Also, I do as much of the reno as I can myself.

    Regarding closing costs, it's good to have the seller pay for as much of these as your lender will allow, even if you pay a bit more for the property. This will help conserve your cash.

    @Jacob Calbillo

    Go to the BP search bar. Type in "Estimating ARV", hit enter. When the list comes up refine the search by clicking on "Blog". You should get a list of roughly 24 posts, by more experienced investors than I, from the last few years. Starting reading them and you will get a very good idea on how to do it.

    Additionally, use your Realtor.  They will have access to a more complete set of recent sells.