How to fix this BRRRR when my ARV is less than planned

[Connor Thomas]

I recently bought my first BRRRR and am trying to figure out what I should do next as I feel like I am a bit in a bind. Part of it is a learning process and I have learned a lot for future deals. Another part may be me getting a little nervous. I was thinking the house would rent for 1200-1350 but it seems now the range is 1000-1200 with 1200 being the highest for the area so may be hard to get. I was estimating the ARV at 160-165k which I don't know what it will be for sure but I'm a little worried it might be less which throws a wrench in things as well.

I bought a two bedroom one bath house in Indy for 70k which was 10k under asking. Renovation is 46k and is being done now and roughly 4 weeks from being done. I purchased it with a HELOC so higher interest debt until I can cash out refi. Plus any miscellaneous payments such as interest, inspections, etc.

At this point I think I need to finish the renovations regardless. It’s looking like this will cash flow neg just with est mortgage payments plus insurance and taxes of $1100ish (after renovation), property management of $120. 

The house is a simple two bed one bath with a garage and a fenced in backyard. The renovations are going to be higher end and the house is pretty simple with a detached garage but no closets in the house. 

I feel like I wanted to really start growing my portfolio  but feel like I may have jumped the gun. What recommendations might I consider? Let me know if you have any questions 

[Dan H.]

I have made a lot of money doing brrrrs but I think the current market is challenging. The issue is in my market, and most other markets, the property is cash flow negative after the as high as possible LTV Refi t extract the added value. This is the primary reason your property has is not a good brrrr.

If piti is $1100 and rents range from $1000 to $1200, conservative underwriting would use the lower of the rent range, we have $1100 rent - $1000 PITI - $120 PM - $50 (vacancy) - $300 maintenance/cap ex - $50 misc (tax man, asset protection, book keeping, utilities that are not tenant responsibility such as for a slab leak, etc) is about negative $420/month.

Rents will raise and property value will increase over the long term. The issue is this negative initial cash flow increases the amount invested which will impact ROI forever.

I do not do flips, but if I purchased this property I would be flipping it rather than suffering that level of monthly negative cash flow on that cheap a property.

Regardless if you rent or sell, add a closet to each bedroom.  It is cheap to add a closet.

Good luck