First Purchase looking at a cash offer - financing strategies

[Zach Gallagher]

So I apologize upfront if this is the wrong section to post to, but it seems most fitting.

We came across an off market deal for 3/2.5 townhome, they are asking 189k cash. ARV is estimated 260k. Repairs seem to be cosmetic only, paint, carpet, counters, etc.

Rent is estimated at 1900/month once its updated and there is an HOA of 480 a month which includes trash, water, sewage, landscape, amenities and cable. My initial thoughts is to just bill back the whole or partial HOA fee to the tenant.

We have +/- 130k saved, and we also have access to our HELOC somewhere around 250k.

Where I'm lost is trying to run numbers on the rental trying to figure a cash/HELOC ratio. Or should we just be looking at using the HELOC only since its OPM and keep our cash for another deal?

Then once the place is fixed and rented, we could refinance immediately since its not a mortgage correct? And once you refinance, your monthly P&I payment will go up making your return less?

The world of BRRRR is all new to me. I've read a few of the bigger pockets books, and we have had a single family rental for about 6 years.

Any insight or thoughts would be greatly appreciated for the newbie!

[Nicholas L.]

@Zach Gallagher

you can't just "bill the HOA to the tenant" - if $1900 is the market rent, then $1900 is the market rent. no one will pay $1900 + HOA.

i don't think this is a BRRRR deal, nor do i think this will cash flow with a $480 a month HOA payment.

i think PITI + HOA + vacancy + repairs = negative monthly cash flow

but go ahead and post the complete numbers if you want.

[Hamp Lee III]

If the numbers work with the rehab and maybe a lower purchase price, maybe a fix and flip will be better than trying to hold the property because of the monthly HOA.

Using your own cash will seemingly deplete much of your savings and HELOC if you go that route. Maybe consider a HML or private loan.

Just my two cents…

But this property may not be the one for you…and if that’s the case, know there will be an even better deal later.

I wish you all the best.

[Andrew Postell]

@Zach Gallagher 100% agree with the above post on the HOA. That is an ENORMOUS monthly amount for a property at this value. I have properties in HOA's at that same value and they are around $200 per month.  Something is up if they are needing that much each month.  There's no way to make up that large of a difference in that expense.

I would also caution anyone borrowing 100% of the Value. So it's good that you seem to be buying at a discount. We want our purchase price + rehab to be at 75% of the ARV on the property. If I can execute at that amount then I'm coming out of pocket very little. Then I don't need to access my HELOC. That's what we want with the BRRRR Method.

Hope this make sense how I am describing it but feel free to post anything additional.  Thanks!

[Zach Gallagher]

Thanks for the advice guys. With the numbers I was running, I was getting negative returns, which is what led me to post here. Thinking maybe I was doing something wrong with cash/HELOC combo or something.

Just seems like its not that good of a deal in the end!

[Zane Cress]

You should delve into the financials of the HOA if you undertake this. This feels like a lot of delayed maintenance or a very large project is going on that caused them to raise dues this high on a low value property. If they are providing trash, water, and cable I could see the expenses being a little higher. Cable isn't cheap and could easily be 20% of that HOA cost, I wonder if it's internet as well or if the tenant needs to pay separately for that.

Regardless, if you did a cash out refi at 80% LTV based on ARV with a rate of 8% (that might be high but we should be conservative looking into the future) I see you around $1700+/month on the mortgage. Add in HOA and it's a loss each month. Plus you have to pay back the Heloc and it's interest rate.

[Michelle Bateman]

It sounds like you were doing your due diligence and just needed a few extra opinions! I agree with most, avoid HOAs if possible! What market are you in?

[Mike Klarman]

Ok, keep in mind a few things:

First, if you pick this up on a bridge loan let's say:

you'd put up 20% of the purchase and get all that money needed for cosmetics which sounds like 25k?

So you'd only put 45k (including fees) into the deal for the acquisition and improvement of, now when work is done you can get it rented and do a 75% refi based on 260k ARV: 195k. You pay off the bridge loan and probably pocket 10k after fees but now the townhouse is in a 30 years DSCR and you're all set.

If you pick it up in cash you need to wait 6 months before refinancing, and the ones that will do a cashout refi on a cash purchase prior to 6 months will make you pay for it in the rates.  In option one you can refi after 3 months, on all cash 6 months.

You can also do a delayed purchase which means you pay cash and then do the bridge loan after.  It's kind of a refi cashout with rehab included.

If you have 130k to really invest, then there are strategies that can get you to a 3 million dollar portfolio cash flowing 1% per month at 3k/month.  I tell people if they have 75k I can get them started on the journey, you have double.

Feel free to reach out if you'd like to discuss.