Is this even close to correct?

Question

Ok guys I need help to see if I'm doing this correctly. Looking for all input, please. Here is a property in Atlanta, Ga that I used the BP Brrr calculator. After reviewing the reports please let me know the pros and cons. I'm also thinking I used the wrong calculator. Thanks in advance for your input.Review here

Jimmy Kennedy · Answer

Thanks Dan. You make some very important points. I will keep working on my new numbers.

Dan Mahoney · Answer

@Jimmy Kennedy I think you realize that your analysis had a few problems.  But I want to add a couple points from a local's perspective while you go back through your analysis.

First, you need to check out the neighborhood where this property is.  If you spent a couple hours walking around there, you'd see that while there are some signs of revitalization, Vine City is an economically depressed neighborhood with many blighted properties like this one.  Right off the bat, I would say that paying $60k for an uninhabitable building in Vine City should be out of the question.

Second, you can't take the seller's optimistic estimate of $3,200/month rent potential at face value.  $800/month seems high for a one bedroom apartment in an ugly concrete block box in a challenging Atlanta neighborhood, even if newly renovated.  I'd say $800/month is closer to what you would get for a nicely renovated single-family house in this neighborhood.  For these 1BR apartments, you'd be lucky to get $600 per unit, and it might be closer to $500, depending on how nicely you renovated the building.

Third, you aren't going to find good comps for ARV because you won't be able to find apples to apples.  The best comp might be the quad next door which sold for $52k a year ago, but you won't know the condition it sold in (hint - it was probably in MUCH better shape than the one you are looking at).  If you can't do valuation based on comps you have to use income.  So your income better be accurate.

TLDR - if you buy this thing for $60k you will regret it.

Jimmy Kennedy · Answer

Ok I based my ARV on the purchase price and the Reno price. I estimated high being that it is a four unit meaning 4 kitchens, 4 bedrooms, 4 baths, and 4 individual apartments.  I will say this is a rough estimate being that I have not seen the inside of the home. With the information available to you guys now, what are your thoughts, and can you please edit the analysis and share you guy's results with me. Yes thanks for pointing out my rookie mistakes. Loving BP RIGHT NOW! I will edit and see what you guys thoughts are. Thank again

John Leavelle · Answer

Howdy @Jimmy Kennedy

Here are key points that you need to understand with BRRRR.  You must develop your ARV using currently sold comps.  Your all-in costs (purchase price, Rehab costs, Closing and Holding costs) should be no more than 70% of ARV.  Because the Cash-out Refinance loan will be 70 - 80% LTV based on the lenders appraisal.  Any costs over 70% of ARV means you are less likely to get all your cash out.

Your numbers:

Purchase price $59,000

Rehab $100,000

Time for Rehab 6 months

Closing costs $2,000

Holding costs $9,540 (plus insurance, utilities)

Your total all-in costs $170,540

ARV $159,000 ???? Where did you get this number?  It should be based recently sold comps.

If the lenders appraisal equals your ARV then your Refinance loan would probably be 75% LTV or $119,250

You used 70% ($111,300) which is a good conservative idea.

You have 2 major problems with your analysis.  You must be able to pay off the first loan of $159,000 with the Refinance loan of $111,300.  Obviously that is not going to happen.  Secondly, for the same reason you will not be able to get any cash out.

In order for this deal to work the Rehab costs must be almost half of what you are estimating.    As @Walter Roby jr is asking where did you get your Rehab estimate? What did you base your ARV on?  These are both critical numbers for you to do the BRRRR strategy.

Jimmy Kennedy · Answer

Found this one on Zillow, has 4-1/1 units I believe. It is classified as a multifamily home. The repair estimate I calculated $40-$50 sqft for the 2200sqft space complete gut. What are your thoughts? Can you edit on your end and share what you come up with? I would appreciate it greatly.

Walter Roby jr · Answer

What kind of property is this? How many beds/bath? Where did you get the 100k rehab quote? Doesn't seem like there is enough room in the deal with that purchase price and rehab.