[Calc Review] Help me analyze this deal - BRRRR attempt #1

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[Calc Review] Help me analyze this deal - BRRRR attempt #1

Ari Newman
Atlanta, GA · Member since 2018 · 93 posts · 33 votes

Hi,

I bought this tenant occupied property about two months ago. The current tenant is paying way below market rate and the house needs some updating. I intended to update the kitchen and bath, refinance and then rent it out. I paid cash using a HELOC on my primary residence. I've got a teaser rate of 3.25% until November and then it'll jump up to around 6.5% At this point, I'm all in for $103,500.

I've run the BRRR calc below, using vary conservative numbers for everything. If the projections are correct, the cash flow isn't where I'd like it to be but not the end of the world since I've purchased this property for my retirement portfolio.

View report (BRRRR)

I also ran the report as a quick flip using both the Flip Calc & Wholesale calc.

View report (flip) View report (wholesale)

Ultimately, the BRRR strategy will work best for me as I'd like to free up the cash to move on to the next project. However, I know that there will be opportunities to Wholesale or Quick Flip (& 1031 exchange) as the deal might not work well as a BRRRR. I'd love some feedback on my numbers (did I miss anything?) and overall strategy!

Thanks,

Ari

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Redgy Saint-Germain
Rental Property Investor · Boston, MA · Member since 2017 · 241 posts · 135 votes
8y

@Ari Newman

Since you've bought the property cash why not use " delayed financing"  to pull all your money out plus the rehab costs and continue investing with the same money.

Your ARV according to your sheet is 175k and your LTV at a conservative 70% with the delayed financing would pull 122.5K out of the deal. You would essentially have your 103k plus 19.5k for the rehab just 500$ shy of your 20k. This is an INFINITE return on your money :) and you don't have to wait 7 months. I have attached the link below check it out

https://www.biggerpockets.com/blogs/5110/42824-all-about-delayed-financing

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  • Bryan Devitt
    Contractor · Oxford, MA · Member since 2018 · 807 posts · 745 votes
    8y

    Bear with me, I am a newb and just getting into this but … The current tenants are on a lease? How much longer is their lease? Do you plan to just not renew in order to reno? I see that in the calculations you didn't plan for an increase in rent after the reno. What would market rate be once it is done?

    1Reply
  • Ari Newman
    OP
    Atlanta, GA · Member since 2018 · 93 posts · 33 votes
    8y

     Yes, the current lease expires end of July.  They're paying $675/month and I'm confident I can rent for $1100 after the rehab.  I'm pretty sure that's the figure I used in the calc.

    0Reply
  • Bryan Devitt
    Contractor · Oxford, MA · Member since 2018 · 807 posts · 745 votes
    8y

    OK, I thought the calc was using the current lease price.

    1Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    8y
    Originally posted by @Ari Newman:

     Yes, the current lease expires end of July.  They're paying $675/month and I'm confident I can rent for $1100 after the rehab.  I'm pretty sure that's the figure I used in the calc.

    There's plenty of "what if" questions that may affect your flip vs BRRRR decision. To name a few: What if it doesn't appraise as high as $175k? ie. What if the rebab budget blows out to say $45k? What if you can't find a renter to pay more than $1k/m?

    ie. What if your Lender won't then let you cash out all you put into it? And do you really want a negatively cash flowing investment, even if your Lender gives you your initial deposit back?

    [Note: $1,100/m is still less than the "1% Rule", which makes ongoing cash flow problematic]...

    1Reply
  • Ari Newman
    OP
    Atlanta, GA · Member since 2018 · 93 posts · 33 votes
    8y

    @Brent Coombs Yes, those are all questions that I've entertained and don't have definite answers too. The CMA my agent put together had some really good, local (3 doors down) comps that give me assurance on ARV. My background in construction gives me fairly high confidence on the Rehab numbers, but I also know about the typical overages. The appraisal part is unknown, and rents in the area (and demand) support a rate of $1100. All that being said, I don't want to speculate on cash flow and getting my cash back during a Refi. I'd like to figure out a way to keep this property and make the numbers work...

    0Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    8y
    Hope you get that killer appreciation because your cash flow is nonexistent . Dont mean to be critical but Why even do a lousy deal like that , I mean the deal has to stand on its own two legs or it’s no good . Banking on appreciation is a concerning REI strategy . To me personally 1% rule is not worth getting out of bed for and your not even getting that so I’m not sure how this will pan out .
    1Reply
  • Ari Newman
    OP
    Atlanta, GA · Member since 2018 · 93 posts · 33 votes
    8y

    @Dennis M.  I was eager to get started, was buying an off-market property below market rates and didn't have access to the BP calculator :)

    But seriously, I knew it wasn't the greatest deal ever but went in it banking on appreciation.  It seems like many investors in our market (in-town Atlanta) are buying cash-flow neutral deals and holding for appreciation.  Is this approach inherently flawed?  Does a property need to cash flow (if you aren't dependent on the cash NOW) in a hot market like Atlanta?

    0Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    8y
    Originally posted by @Ari Newman:

    @Dennis M.  I was eager to get started, was buying an off-market property below market rates and didn't have access to the BP calculator :)

    But seriously, I knew it wasn't the greatest deal ever but went in it banking on appreciation.  It seems like many investors in our market (in-town Atlanta) are buying cash-flow neutral deals and holding for appreciation.  Is this approach inherently flawed?  Does a property need to cash flow (if you aren't dependent on the cash NOW) in a hot market like Atlanta?

    Don’t let me discourage you . Even though I would not buy on the appreciation factor without cash flow ,there are many that do and many investors who made millions doing it . 

    1Reply
  • Victor S.
    WorldWide · Member since 2016 · 1k+ posts · 1k+ votes
    8y
    Originally posted by @Dennis M.:

    Hope you get that killer appreciation because your cash flow is nonexistent . Dont mean to be critical but Why even do a lousy deal like that , I mean the deal has to stand on its own two legs or it's no good . Banking on appreciation is a concerning REI strategy . To me personally 1% rule is not worth getting out of bed for and your not even getting that so I'm not sure how this will pan out .

     If (big if)  his numbers are correct, he'll be $0 in the deal with 20-25% equity and minimal cash flow. Not really that bad at all, unless the market tanks hardcore. Your capex/vac/repairs is pretty high, so if you lower that to 15-20%, that should provide that minimal cash flow, unless the place does require quite a bit of capex/repairs after your reno. Not a bad deal at all, imho. 

    1Reply
  • Ari Newman
    OP
    Atlanta, GA · Member since 2018 · 93 posts · 33 votes
    8y

    @Victor S.  I'm hoping my numbers are correct, and I always tend to lean towards the conservative side in all my estimates.  I appreciate you & everyone else's feedback!  It's really helpful to get lots of different opinions on the same set of hard data.

    0Reply
  • Redgy Saint-Germain
    Rental Property Investor · Boston, MA · Member since 2017 · 241 posts · 135 votes
    8y

    @Ari Newman

    Since you've bought the property cash why not use " delayed financing"  to pull all your money out plus the rehab costs and continue investing with the same money.

    Your ARV according to your sheet is 175k and your LTV at a conservative 70% with the delayed financing would pull 122.5K out of the deal. You would essentially have your 103k plus 19.5k for the rehab just 500$ shy of your 20k. This is an INFINITE return on your money :) and you don't have to wait 7 months. I have attached the link below check it out

    https://www.biggerpockets.com/blogs/5110/42824-all-about-delayed-financing

    2Reply
  • Ari Newman
    OP
    Atlanta, GA · Member since 2018 · 93 posts · 33 votes
    8y

    hi @Redgy Saint-Germain. Thanks for your input and the link on Delayed-financing. I read it but don't understand entirely...What's the difference between Delayed-financing and the 1st two Rs in the BRRRR strategy? Are you talking about tax savings?

    0Reply
  • Redgy Saint-Germain
    Rental Property Investor · Boston, MA · Member since 2017 · 241 posts · 135 votes
    8y

    @Ari Newman 

    No its not about tax savings. The biggest hurdle when it comes to refinance is " time". Most banks wont refinance your deal unless you've own it for 6+ months ( your money is also stuck in the deal also for 6 months). With delayed refinance you're able to refinance after 4 weeks and pull your money out therefore you can buy more properties in a short period of time to scale quickly. More properties equals more cashflow with the same 103k :)

    2Reply
  • Rick Baggenstoss
    Developer · Decatur, GA · Member since 2011 · 1k+ posts · 1k+ votes
    8y

    The analysis looks good, but it's conservative.  The most conservative assumption is the income growth.  Many projections have rents increasing by 5%/yr in the Atlanta area.  If you're buying in an area that's seeing some momentum, then you're paying a premium for the momentum in order to gain appreciation and stronger income growth.   I think if your deal is ok even with conservative numbers, then it's a good to great deal.  Only time will tell.  

    What would make it a great deal is 0% cash in, some equity and some cash flow.  In an area with Atlanta's outlook, you need to keep all of those you can.   

    Houses are capital projects (long-term assets) and should be evaluated short-term but with an emphasis on long-term.  Seasoned investors will tell you all their deals look great after 5 - 10 years.  Most will also tell you they wished they never sold a house.  

    Lastly, your maintenance and capex expenses need to be tweaked.  If you're buying new water heater, hvac, rewiring,  .... , then all your maintenance money is being spent during the rehab.  In the few years afterwards, maintenance/capex goes down dramatically. 

    Good luck!

    1Reply
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