Need advice - Soon to be realtor and investor

[Ethan Ung]

I'm a fresh out of college 22 year old who has about 130k in savings and zero living expenses due to parents. I'm going to become a real estate agent soon and in the same stride I'll be trying out the BRRRR strategy. My main focus has been the Strawberry Mansion area due to a plethora of distressed properties that look like they need relatively high ROI rehabs; paint, new flooring, kitchen, bath, etc. but not too distressed where there is a need to do a full-gut, at least that's what I can see from the pictures on Zillow (I know it's not too reliable). The Pro Forma for the deals I saw was a purchase price of $70-80k, estimated rehab of $28k (strictly using the pictures so this could vary wildly), ARV of $200k, max DSCR loan of 132k based on a 1.20 DSCR, gross anual rent $21k, NOI $13.29k, and a net annual cash flow of $2,215. I was wondering if I could get any advice from people who've done the BRRRR and investors in the Strawberry Mansion area.

[Stuart Udis]

@Ethan Ung Unfortunately it's not as easy to make money in real estate as your excel pro-forma may suggest. If you are buying for $70-$80K, more than likely the plumbing, electrical and HVAC need complete overhauls. In Philly, just the cost of all new MEP's with licensed subcontractors who can pull permits on a small house will cost you $28K. I wanted to point this out because you clearly have done your research and know the numbers that are looked at when cash out financing is sought, but many in your shoes go about the process completely wrong. 

BRRRR has morphed into doing the minimum repairs necessary to appease an appraiser to obtain the desired value. Maybe you get away without replacing the knob and tube wiring or the systems that are at or near the end of their useful life and the home looks nice with the new kitchen and newly tiled bathroom. The tenant likes what they see, and moves in with the desired lease terms because of the homes appearance but the home is not really worth $200K.

If you were to list the home for sale instead of renting the home, a home inspector will call out all of the defects. Not to mention the most likely buyer for a $200K home in Philadelphia is an FHA buyer. Not only will you receive a repair addendum that will read like a novel, but expect the buyer to seek a 5-6% seller assist. Alternatively, if you do go down the BRRRR path and lease the home, once your tenant moves in, you will start fielding the maintenance calls immediately and most investors start with band aid fixes and quickly realize there's no cash flow and the equity the appraisal suggests is completely eaten up if they were to make all of the necessary repairs.This is the trap you want to avoid and is the exact playbook why so many get involved with the BRRRR process beleiving they are creating small fortunes that are never realized.

The other comment you made about there being a plethora of distressed properties in the area should serve as a red flag. Zero barrier/high inventory neighborhoods are not where you want to be investing.