[Calc Review] Help me analyze this deal - Did I Do This Right?

14 Replies

Hello BiggerPockets Friends! 

I just went PRO this week and decided to take advantage of all the great BRRR tools provided. I ran this report under the context of getting a hard money loan and following the BRRR strategy. If you guys could help critique and call out anything that you saw that didnt make sense, it would really help my process on fine tuning the numbers. Thank you!

View report

*This link comes directly from our calculators, based on information input by the member who posted.

Zachary Sit, Real Estate Agent in California (#02017063)

Hey, @Zachary Sit

On first glance it looks like you're flipping this one with hard money.

How many units? On Robert Kiyosaki's Cashflow game we would always ask when it was someone's turn to pick a card: "Small deal or big deal?" We learned quickly that the work on a small deal was the same compared to the big deasl but with much greater returns.

If the market rents and future demographics pan out, why not buy and hold for cashflow, refi for a higher equity position and/or exit for appreciation in a few years? Use the BRRRR calculator to compare strategies. Use more OPM to gain more CoC and ROI.

Your numbers look okay, even though a few assumptions are hard to judge from our side, in terms of your DIY input and time to get it done. I just felt like I should nudge you to consider doing various calculations to compare if a deal might be ripe for your entry to passive oncome.

Originally posted by @Ken Breeze :

Hey, @Zachary Sit

On first glance it looks like you're flipping this one with hard money.

How many units? On Robert Kiyosaki's Cashflow game we would always ask when it was someone's turn to pick a card: "Small deal or big deal?" We learned quickly that the work on a small deal was the same compared to the big deasl but with much greater returns.

If the market rents and future demographics pan out, why not buy and hold for cashflow, refi for a higher equity position and/or exit for appreciation in a few years? Use the BRRRR calculator to compare strategies. Use more OPM to gain more CoC and ROI.

Your numbers look okay, even though a few assumptions are hard to judge from our side, in terms of your DIY input and time to get it done. I just felt like I should nudge you to consider doing various calculations to compare if a deal might be ripe for your entry to passive oncome.

Thank you for the input! Yes, this triplex would be financed via hard money, BRRRR'ed and will be utilized for a buy and hold for passive income. As of right now, all the properties that I'm looking for will need work. (Listen to enough of the BP podcasts and the smell of cat pee starts to sound like a good thing) Adjusting the ARV is a bit tricky since this is deal 1 and I wasn't sure.

Thanks for the tip of running the deal again to see if it's truly ripe.  Cheers Ken!

Zachary Sit, Real Estate Agent in California (#02017063)

So the forced appreciation looks poor, which means what???
Either you are just in a terrible/terrific market where 100k homes can get 2k rent or something isn’t quite right.

Are you sure you can get 2k in rent?

Are you just being conservative with you ARV ( good for you!)

Any way seems like a terrific BRRRR and a lousy flip!

Robert Foley, Contractor in NM (#383808)
(303) 941-1500

@Zachary Sit , as a stand-alone deal, the numbers look good for a decent return. But, it's not a BRRRR deal! ie. Based on the $100k ARV, your $30k will be left in the deal for the foreseeable future! ie. How can you Repeat the deal with your same $30k, later?

ie. If you can get a deal like this for less than $100k all-in, you should be looking for ones that already show sold comps (ARV) of $140k+! Good luck...

[@Robert Foley, no, "seems like a lousy BRRRR and a lousy flip", but, ok for a good CoC return!]

Howdy @Zachary Sit

This is not a good "BRRRR " deal. The objective is to be able to reuse the cash invested over and over again. If you cannot withdrawal your cash using the Refinance loan, then, you cannot reuse it for the next property. Your Refinance loan amount is less than the Hard Money loan. How do you expect to get any of your cash back?

Here are some other comments:

1. Your Purchase price $70K) is to high based on your ARV ($100K). You must determine the Refinance loan amount (you show $70K so I assume a 70% LTV). This amount becomes your All-in Cost Target. From that subtract your Rehab estimate, Closing costs, and Holding costs to determine your MAO (Maximum Allowable Offer).

2.  I would plan for more than 2 months of Rehab time.  There are always delays and problems that pop up.  If they occur then you are covered.  If they don’t you save money.  Time is money in this strategy.  If you do not plan for the right amount of time it can cost you more money.

3.  1 month for Refinance time is not realistic.  Most conventional Refinance Lenders will require 6 to 12 months seasoning prior to Refinancing.

4.  Did you include Holding costs in your Rehab budget?  These include (but not limited to) loan payments, taxes, insurance, utilities, etc...   They occur during the Rehab phase up until the property is fully rented.  There is no separate entry for this in the BP calculator.  However, it is an extremely important cost to account for.

5.  If you are using a Hard Money loan it should be amortized over x number of years (typically 30 years). They also normally have a time limit when the loan is due (6 months or 1 year).  Additionally, you usually have to at least make interest only payments until the loan is due or paid off.

6.  The Refinance loan will normally have closing costs/Fees associated with it.  They may be included with the overall loan amount.

7.  Total Cash Invested = 0.  This is not possible based on all the comments above.  Primary the Refinance loan amount is less than the original Acquisition loan amount.   So how could you pull any of your cash out?

8.  You have not accounted for insurance in your cash flow analysis.

9.  How do the current rents compare with local Rental Market rates?  Is there room to increase the rent?

Originally posted by @Robert Foley :

So the forced appreciation looks poor, which means what???
Either you are just in a terrible/terrific market where 100k homes can get 2k rent or something isn’t quite right.

Are you sure you can get 2k in rent?

Are you just being conservative with you ARV ( good for you!)

Any way seems like a terrific BRRRR and a lousy flip!

@Robert Foley, According to rentometer and a craiglist search of comparable rents in the area, 2k in rent is possible since it is triplex. In the area, 2k in rent for an SFR would be a dream. In the case of the ARV, it definitely is a conservative number but not the end of the world since it is a buy and hold.

Thank you for the input!

Zachary Sit, Real Estate Agent in California (#02017063)
Originally posted by @Brent Coombs :

@Zachary Sit, as a stand-alone deal, the numbers look good for a decent return. But, it's not a BRRRR deal! ie. Based on the $100k ARV, your $30k will be left in the deal for the foreseeable future! ie. How can you Repeat the deal with your same $30k, later?

ie. If you can get a deal like this for less than $100k all-in, you should be looking for ones that already show sold comps (ARV) of $140k+! Good luck...

@Brent Coombs Thank you for the input. The issue of the $30k being left in the deal came up in a another post. Could you please share how I would get that $30k out of this deal to leverage into another deal?

Zachary Sit, Real Estate Agent in California (#02017063)

@John Leavelle Thanks for taking the time to write such a detailed reply. 

I appreciate you noting the error of the HML vs the refi'ed amount. At the time I didnt realize that the refi'ed loan would be the ARV. Thanks for pointing that out!

2. Thats a good point, the area I'm looking into has a harsh winter and I wasn't sure how rehabbing + placing a tenant would take. 

3. As far as the refinance of 1 month, I believe that you can refinance with a commercial loan without any seasoning of the loan? In your experience, has that worked for you?

4. No I did not, thank you for bringing that up. 

7. Yes, based on the comments above, this is something I definitely missed. 

9. Rents are competitive based on the unit being a triplex. I checked the rentometer rates VS what was posted on craigslist. 

Thank you very much again! I'll definitely be keeping all these tips in mind for the next analysis I run.

Is there a rule of thumb for estimating rehab costs? I know there's a lot of room for variance, but can you estimated based on percentage?

Zachary Sit, Real Estate Agent in California (#02017063)

@Zachary Sit , your all-in (including rehab and holding) cost needs to be no more than 70% of a Lenders subsequent (sold comps) Appraisal. [Then, 70% LTV means: you get your $30k back!]

So in this case for example, to get all your $30k back, the ARV would have needed to be $140k+, or, the purchase and rehab shouldn't exceed $70k. 

[ie. BRRRR deals can be hard to find! Also takes a good eye for realistic value-adding potential.]

@Brent Coombs Ah, I see. This triplex may not be the cash flow machine it once appeared to be. How did you come to an ARV of $140+?

Zachary Sit, Real Estate Agent in California (#02017063)
Originally posted by @Zachary Sit :

@Brent Coombs Ah, I see. This triplex may not be the cash flow machine it once appeared to be. How did you come to an ARV of $140+?

My comments didn't disparage the "cash flow" aspect of such a buy. My "$140k+" comment relates to Lenders' willingness to (probably) only lend you 70% of their appraisal; so if they appraise it lower than $140k, they will not lend you the full $100k that it might have cost you!

[ie. $140k x 70% = $98k. To borrow exactly $100k at 70% LTV, my "143% Rule" applies.]

@Zachary Sit

Just to be clear. The Refinance loan is not the After Repair Value (ARV). The ARV is hopefully the same as the appraisal Market Value. The Refinance loan amount is based on the Lenders Loan-to-Value (LTV) percentage used for underwriting the loan. It is typically 70% to 80% of the appraised Market Value. In your example the ARV/Market Value is $100K. A LTV of 70% gives you $70K for the Refinance loan amount.

This is why I believe the most important part of these type of deals is knowing the ARV or Market Value.

That is also what @Brent Coombs is inferring. For this deal to work the ARV/Market Value would need to be closer to $140K. But, if your ARV is correct then the Purchase must be much lower to make it work.

Regarding seasoning requirements for commercial Refinance loan you are correct.  They typically do not have these.  However, they normally base the value on income versus comparable properties (as Residential Loans are).  Since you would have recently purchased the property and may still be Rehabbing it I doubt you will be able to Refinance it that quickly and get your cash out.  You should talk to a Commercial Lender to find out their requirements.  All lenders are not the same.  Shop around and you may find one that meets your particular needs.

Estimating Rehab costs is not simple.  Every Market is a little different as well as each type of property being different.  My recommendation is for you to get J Scott’s “The Book on Estimating Rehab Costs “ available here on BP.  He goes step by step and breaks down everything you need to know.  Secondly, have a General Contractor walk the property with you to give you an estimate.  Be sure to compensate them for their time.  Another option is to have an experienced investor or Realtor go with you.

Hope this helps.

@John Leavelle , [I would have said: "The Refinance loan is (a percentage of) the After Repair Value (ARV)"]. You introduced the concept of a Lender giving out as much as 80% market value, but I've seen other posts/threads where, even if the Lender says they'll lend 80%, their appraisal suddenly gets more conservative, so the borrower may end up with about the same as what another Lender calls 70% LTV anyway (and with worse terms to boot)! ie. Unless the Investor is conservative with the numbers from the outset, they may end up leaving a lot of their own money in the deal after Refi, despite all their knowledge about the "theory" of BRRRR. Cheers...

@Brent Coombs

Totally agree. That's why it's important to establish good relationships with lenders to avoid that risk. I personally have never had the 80% LTV. The possibility of a lower appraisal is why I shoot for 70% All-in.

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