Rental Property Investor · Hummelstown, PA · Member since 2015 · 638 posts · 653 votes
How do you determine a good price to pay for BRRRR property? I know the rental analysis methods (determine NOI, cap rate, COC) and I know the typical flip equation (ARV minus repairs X 70%). Is it kind of a blend of the two? I was thinking use rental analysis to determine ARV, then treat it as a flip, so subtract repairs then multiply by 70%.
Then I started going cross eyed.🙄
The property is a 3 unit, currently fully rented, but looks like it needs about $15k in cosmetic and mechanical work. I want to get seller help for most if not all of the repair cost, and work through the repairs/rehab as units turn over. Good news is, it will cash flow from day 1.
"Rental analysis to determine ARV"? Nope. Comps only!
"Treat it as a flip, so subtract repairs then multiply by 70%"? Yep! EQUITY!
That will work when it comes to Refi! Go for it! All the best...
What @Brent Coombs said.
Let me add this to it though. You can analyze for rent too. Here's how:
1 - 70% (or 75%, depends on what the loan % of ARV would be) times the ARV (sales comp based). This dictates the max cost (buy + rehab + etc...)
2 - Take the Rental Comps and subtract the following (/month): Taxes, Insurance, P. Manager, misc costs/M = Gross Cash Flow/month
3 - Subtract your minimum Cash Flow Desired per Month. This gives you the maximum monthly payment you can have on this property.
4 - Take your maximum loan (see #1 above) and calculate your monthly payment based on your available terms.
4 - If your Maximum MP (see #3 above) is lower than the actual MP (see #4 above), you're good to go. If not, then you need to offer less. Offer whatever your maximum allowable is based on not going over the monthly payment that would generate the desired CF/M.
Thanks for the tips everybody! Follow up question/confirmation: I'm thinking my initial offer to get it under contract will be 70% ARV. Then get an inspection and quotes on all repairs/rehabs. Then go thru second negotiation to get seller help towards repairs.
I think one of the keys will be to be very transparent from the beginning that I'll be asking for seller help on repairs down the line.
Has anybody else used this approach? Any advice on this?
Thanks for the tips everybody! Follow up question/confirmation: I'm thinking my initial offer to get it under contract will be 70% ARV. Then get an inspection and quotes on all repairs/rehabs. Then go thru second negotiation to get seller help towards repairs.
I think one of the keys will be to be very transparent from the beginning that I'll be asking for seller help on repairs down the line.
Has anybody else used this approach? Any advice on this?
I always like to use this strategy. First tie down the property then give them a report of the major repair works. Focus on major repairs like the Foundation and Structure work/repair. The best results would be if you had a Contractor estimate you on the repairs. This is much more credited then it coming from some one that is not a contractor. It can also work with out using a contractor but expect much lower reduction.
Hope this helps, it has help he and my friends on reducing the sale price.
I have a similar question,,, I’m looking at houses and wonder if anyone has a purchase price range that seems to work well??? I’ve ran numbers on houses from the 50k to 75k initial purchase price but wondering if buying something more expensive is the better way to go as the “percentage” of repair cost goes down. ( example it cost about the same for new an HVAC system or shower tile)
That might work Dave, but in general the rents go up at a rate less than the purchase price does, so that strategy may result in more equity but less cash flow.