Interesting Subject Property, Suffering From Analysis Paralysis

10 Replies

Hello BP Members! Thank you for clicking through. My fiance and I are considering purchasing a newly built duplex in Houston. Its 2200 square feet, one unit on top, one unit on bottom. Both are 3/1's. Identical layouts. The duplex began being built in 2014, is unfinished and needs almost everything done on the inside minus plumbing and electricity. Floors, walls, appliances, drywall, a/c, etc. The exterior is nearly complete. 

Currently, the only method of purchase we've sought out is a hard money loan. I wish we could leverage a conventional loan but given the state of the units, we won't be approved. We really wanted too house hack this place. As far as money, most of our savings is tied up in stocks (AAPL). All of it has been accrued through an employee purchase program and purchased at discounts of 10-15% or through RSU's. Our plan is to liquidate SOME of this stock in order fund our first real estate investments. Technically we could fund this entire project ourselves but that seems silly. 

FWIW, there weren't tons of comparable data to reference. We only found a couple of MFH's sold recently in the area so conservatively speaking we're looking at $85 SP/SF. I should also state that the owner is a couple years delinquent on his taxes. On to the numbers...

Link to photos: https://app.box.com/s/6foj92rbaxy0kifb2n59x5o0jyxm92b4

Subject Property LP: $160,000

Purchase Price: $115,000

Rehab: $40,000

Total Funds Needed: $155,000

ARV: $187,000

Total Rent: $2000

Tax Rate: 2.54%, currently about $3,000 annually (assuming a spike after refi?)

HML Fees: 12% interest, 6 months term, 3 points at closing. They'll fund %75 of ARV.

Loan Amount: $140,250

Cash Needed To Close (including fees and closing costs): $23213.75, closing costs are estimated around $8,500 and includes a $750 processing fee. There is an additional $500 application fee.

Additional expenses: Insurance, $120?. 5% vacancy, 5% repairs, 5% cap ex, 0 mgmt fee, basing everything off of recommended percentages in the BP calculators. Since everything will be new, I assume costs are on the lower end.

Monthly Loan Payments are just a tad over $1,400.

Given this info, I've tried using the BP calculators and am a bit unsure of how to plug numbers in. Specifically as it relates to the HML portion. So, I figured I'd take it to the forum and get a feeler.

My first thoughts are that it doesn't seem we build a lot of equity in this deal, at least not right off the bat. Actually, I'm wondering if we even hit the 20% mark resulting in potential for paying PMI. Second, the monthly cash flow seems to be good. But I'm not confident with my numbers. Also, I'm trying to figure out exactly how much it costs us to borrow money. Is it as simple as adding all fees incurred during HML, refi, and holding costs?

Any help is appreciated. Analysis paralysis is a real thing. 

@David Seale Ask your HML to give you a HUD showing the costs each month for their money. Mine even gave me a payment booklet. Do you really want to spend $40k in rehab for a property only worth 187k? I agree the equity is thin, and even with a cash-out refi, is there enough there to make it worth your while?

In my rentals I factor in the rent at 10 months, save 1 month for taxes and insurance and then 1 month for repairs. So can you pay a note and expenses with 10 months worth of rent? That is really the question I would ask. 

In the end, go with your gut. It will never let you down, there will always be another deal....best of luck with your investment.

@Jack Bobeck Thanks for the reply. Follow up question for you, what if the ARV turns out to be much higher than we though? For example, I mentioned using $85 per sq ft to find our ARV in the original post. However, we did see another property go for about 100 per sq ft. If that's the case, would it be worth going through the HML vetting process and paying the application fee to find out if the ARV could be upwards of $220000. If it turned out to be the case, then equity jumps up a lot.

Hi @David Seale ! Just a quick note as I'm not familiar with your market and what the ARV could be. I'm basing this entirely off of yours:

Purchase price of $115K + $10,000 closing costs + $2,000/mo holding costs (if financing with HML includes taxes, insurance, loan costs) + $40,000 rehab budget = $175,000 invested

At $187,000 ARV, your profit margin is razor thin at only $12,000 and that's assuming your HML will even finance something with that low profit. There's not enough equity in the property to refinance out of the HML. Usually you need to have 20%~25% equity leftover if you're going to be holding this as a rental.

This is based on the ARV of the property and using a $/sf method is not the best way to figure out what its selling for. For two-families, you still need to use the sales-comparison approach to determine an appropriate ARV.

@David Seale - @Matt Lefebvre brings up some good points. ARV is subjective too, one appraiser may value it at X and then another at Y. If free in your area, see if a friend, a Realtor, can do a CMA for you on your property, based on comps and similar properties. Or you could run the appraisal on your own, $500 later, to get an idea of the value. Its cheap compared to the costs to close an HML note. Best of luck to you.

Hello @David Seale ,

I have a calculator that I use to quickly calculate all the loan numbers. While your equity position may be tight, your cash flow looks fine... if you can rent it for 2k/month. Shoot me over your email and I'll send you my excel calculator.

Originally posted by @Matt Lefebvre :

At $187,000 ARV, your profit margin is razor thin at only $12,000 and that's assuming your HML will even finance something with that low profit. There's not enough equity in the property to refinance out of the HML. Usually you need to have 20%~25% equity leftover if you're going to be holding this as a rental.

Originally posted by @Kerry Boyle:

Hello @David Seale,

I have a calculator that I use to quickly calculate all the loan numbers. While your equity position may be tight, your cash flow looks fine... if you can rent it for 2k/month. Shoot me over your email and I'll send you my excel calculator.

So, given our desire to have long term passive income, is the main reason I should care about equity so that I can fund more deals in the future? As a new investor, my immediate thoughts are "Im getting positive cash flow and I invested about $30k of my own money. It'll pay itself off over time so that's cool with me!"

Also, Matt, Jack, to your points, typically deals won't get off the ground from the get-go if the HML feels they can't or won't be able to fund it on their end, right?

Howdy @David Seale

Have you considered using a FHA 203K loan versus the Hard Money Loan? That would allow you to House Hack and avoid dealing with getting out of the HML.

Originally posted by @John Leavelle :

Howdy @David Seale

Have you considered using a FHA 203K loan versus the Hard Money Loan? That would allow you to House Hack and avoid dealing with getting out of the HML.

Howdy John! Nice to meet a fellow Texan. I have considered it, but swiftly turned away at the thought of such a long drawn out closing as well as rehab timeframe. I've also been under the possibly incorrect impression that 203k's are not favorable situations for the seller. Care to shed any light on your opinions regarding the 203k process? Now that I'm thinking about it, I cant put together why I wouldn't want to give it a shot. 

Originally posted by @David Seale :
Originally posted by @John Leavelle:

Howdy @David Seale

Have you considered using a FHA 203K loan versus the Hard Money Loan? That would allow you to House Hack and avoid dealing with getting out of the HML.

Howdy John! Nice to meet a fellow Texan. I have considered it, but swiftly turned away at the thought of such a long drawn out closing as well as rehab timeframe. I've also been under the possibly incorrect impression that 203k's are not favorable situations for the seller. Care to shed any light on your opinions regarding the 203k process? Now that I'm thinking about it, I cant put together why I wouldn't want to give it a shot. 

I may have missed something, but wasn't your original interest in this deal because you also wanted to live there? 

ie. Your cash flow would not be good, while you did so! [How long would you want to stay? And, what then?]

So, maybe you're now only looking at this as a pure investment?

In which case, that's the reason why a 203k Loan wouldn't work for you - because you do have to live there a year.

And that's the reason also that you can't really afford to be wrong about its ARV!

$85/ft? $100/ft? More? Less? Basically, I suggest that if experienced Flippers haven't already snapped this one up, that should tell you something. So (as always), I reckon it will pay to get the analysis right! Good luck...

@David Seale

Yes, FHA loan process is more red tape. But, you also do not have to deal with the HML. You would incur PMI unless you put 20% down. Not sure why Rehab timeframe is an issue. Are you expecting longer than 6 months? What kind of Seller favorable terms are you looking for? Do they owe on a construction loan? It seems to me they would be desperate to unload this property. It is definitely not worth the asking price. You may be over paying at $115K. If you decide to go the HML/Refinance route use the BRRRR calculator to analyze the deal. It is a BRRRR deal.

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