Potential BRRRR (or Flip)

12 Replies

Hi everyone! I just picked up a shell property in a booming area in Philadelphia. Original plan was to flip it, then started considering renting because of the area but now, I think the original plan of flipping might be the best route. I want to get feedback on my analysis and thought process on the two options. 

  • Purchase Price with closing: $130,000
  • Rehab: ~$80,000
  • Total all in cash: $210,000
  • ARV: $270,000 on average (low-end would be 250k and high-end would be $300k but a house just a block away appraised for $325k recently with lower finishing than what I am planning)

If we flipped the property:

  • Closing costs: $21,600
  • Net: $36,900

If we refinance and then rent:

  • Rent: $1400 (but could be $1600 based on other comps)
  • Tax: $100
  • Insurance: $200
  • All utilities: tenant responsibility
  • Property Management (10%): $140 (we would self-manage but I like to build this number in my calculations)
  • Vacancy (5%): $70
  • Repairs (5%): $70
  • CapEx (5%): $70
  • Net: $750

With only a net of $750, pulling out our cash via refinance the property would put us in a negative cashflow. Our loan payments would be roughly $1100+  a 30-year mortgage with a 5.5% rate. 

Are there any flaws in my numbers? Anything I should be considering? Anything I am missing? I feel like we'd walk away with more money by flipping. Open to all feedback. 

@Neel Patel

Your numbers for repairs and CapEx are a little low. Even the best tenants will break things.

Food for thought...

If you are going to rent it out, your rehab numbers would be lower since you wouldn't be putting in the best finishes (for the same reasons as above).

Doing a flip will kill you on taxes and eat into your profits due to the short term gains. A rental allows you to tap equity and repeat. You get to write off depreciation every year. And when you sell it down the road you can do a 1031 exchange to avoid taxes on gains while you roll it into somewhere else.

Howdy @Neel Patel

Did you include Holding Costs in your Rehab estimate?  If not that will increase your All-in amount.

What are you using for your Refinance loan amount? LTV %?

Your rental income will have to be significantly more to provide positive cash flow (closer to $2000).  Or the purchase price and/or Refinance Amount must be lower.

I agree with @Christopher Phillips on some of your expense amounts (including Vacancy).

$1,400 or even $1,600 rent from $210k cash isn't the highest and best use of capital so this is definitely a flip.

@Christopher Phillips and @John Leavelle : what should I be accounting for in repairs and capex? 10%? I did 5% capex since everything will be new in the property.

My original thought was to refinance out the bulk of the cash put in, $175k to $200k with roughly a 5% interest rate (or more by the time I can refinance). I'm moving away from rental towards flipping because I would not cash flow. The highest I could possibly push the rent would be maybe to $1600ish but that would be the absolute high-end. 

I have accounted for about $1500-$2000 in holding costs. I forget to put that in my original post.

I already have the property so a lower purchase price is out of the question, unfortunately. 

@Neel Patel I missed the key word there "Shell".  However, I still would do a complete analysis of the life expectancy of all your major components and appliances.  Adjust to a more accurate reserve number.  I recently built a new 4-Plex and have a higher number that is ruffly 7%.  Just because you hold that amount in reserve does not mean you end up spending it.  It is just a conservative practice.  5% for Repairs may be ok since your property is virtually new.   It will come down to the quality of tenants.

@Neel Patel definitely not a rental with those numbers. Even as a flip its tight so watch that rehab budget. Your selling closing costs are too low, philly has a 3% transfer tax. What neighborhood is it in?
Originally posted by @John Leavelle :

@Neel Patel I missed the key word there "Shell".  However, I still would do a complete analysis of the life expectancy of all your major components and appliances.  Adjust to a more accurate reserve number.  I recently built a new 4-Plex and have a higher number that is ruffly 7%.  Just because you hold that amount in reserve does not mean you end up spending it.  It is just a conservative practice.  5% for Repairs may be ok since your property is virtually new.   It will come down to the quality of tenants.

 Thanks John! Complete agree with you on the quality of tenants. I've gone ahead an adjusted my numbers. I rather be conservative upfront.

Originally posted by @Jason D. :
@Neel Patel definitely not a rental with those numbers. Even as a flip its tight so watch that rehab budget. Your selling closing costs are too low, philly has a 3% transfer tax. What neighborhood is it in?

 I've adjusted my closing costs to 4% and 6% for agent fees. The property is in Brewerytown on the 1500 block on N. Newkirk.

@Neel Patel I am pretty sure I had the property available for cheaper. Hope you are on our wholesale list. I personally think your rehab cost is too low or your ARV is too high, but that is not really the question that we are talking about. If you rent and finance you will do great on you appraisal, but have you calculated you DSCR? Will a bank lend you that much money? Or are you putting in your personal name and using your income to cover it and getting a mortgage through Fannie/Freddie. I think those are the questions of real concern if you choose to keep and rent.

Originally posted by @Irfan Raza :

@Neel Patel I am pretty sure I had the property available for cheaper. Hope you are on our wholesale list. I personally think your rehab cost is too low or your ARV is too high, but that is not really the question that we are talking about. If you rent and finance you will do great on you appraisal, but have you calculated you DSCR? Will a bank lend you that much money? Or are you putting in your personal name and using your income to cover it and getting a mortgage through Fannie/Freddie. I think those are the questions of real concern if you choose to keep and rent.

 Sent you message. 

We have decided to flip the property once the rehab is complete.