Hello BP world,
Im analyzing my first potential buy. the property is off-market 2 family home with a possible 3rd unit on top. The house wholesale price is 299k. Estimated rehab is between 140k-175k,ARV 470k-500k. It has a active oil tank as well. I decided to run my numbers to see if this makes sense. rental income, if all floors are occupied is $5050/MO but the mortgage and expenses are $4300 a month not including money aside for repairs, vacancy etc. on the initial testing,monthly cash flow would be $250ish. 299k just won't work, I came back to the wholesale guy and he said the owner owes 235k and wants 45k on top of that and they won't entertain under 280k.I did the 65% rule and even with that I was over budget 100k. I changed the Purchase price to 240k and the CoC ROI before the refinance is 4.4% with $740 monthly cash flow, purchase cap rate at 13.3%. After the refinance is when the deal looks sweet with 17.6% CoC ROI and over 1k/MO cash flow. Two questions, should you do a deal when the initial rental period ROI is low but the refinance after makes up for it ? and is this just a deal to walk away from because even at 235k with an estimated 140-175k to go into it, the 65% rule wouldn't work. let me know your thoughts
4300 a month for mortgage and expenses seems high, if you want to break that down i can dig into it further. Are you trying to BRRR this deal, if so what is the most amount of money you want to leave in the deal?
Generally, your projections are based on numbers after repositioning (refi). A general rule is to not factor in rental income during the rehab period. At least one of the units will need to be vacant to renovate, and the combo of new ownership, ongoing renovations and raising rents can usually drive the other tenant away. Its best to budget 0% occupancy in your holding costs until reposition.
If you are counting on rental income to cover expenses during the renovation, you are asking for a bad situation. I dont know all your details, but 170K is a major renovation, newby or not. If you are going to tackle that, make sure you have plenty of cushion in case something goes wrong. If you go over budget or over schedule, you better either have reserves set aside or a plan to cover the negative cash flow. Think worst case scenario - Both tenants move out after closing, so no income coming in. Renovations goes 30K over budget and takes 8 months. if you can hold on during this, it could well be worth it. but you dont want to lose the property if you cant hold.
Dont mean to scare you aware, could be a good deal. By the way, I had a very similar situation (went over budget and over time), but was able to push through and it all worked out in the end, and turned into a great property.
@Zach Westerfield Thank you Zach! this is a BRRR deal, isn't much equity left in the deal if i'm buying it for anything over 240k, itll be valued at median price 477k. supposedly this is a cash flow opportunity as said by the wholesaler, the house is currently vacant. I am looking to go the hard money route. I'm sure it has to be a way I can do hard money and be able to hang on to the property as I get tenants by using their money to pay monthly expenses as well? this is definitely a big project the first to floors need to be renovated and the 3rd floor needs a total gut renovation. they said 140k renovation but I put it up to 170k and even 200k in my calculation just for room. If this deal is based on the refi on the back end then its a great investment, I just feel I did the calculations and all the signs say its a bad deal on the front end if that makes sense lol
@Daniel Hemmings do you have a hard money lender lined up? I wouldn’t count on tenants to cover those payments. Instead, I would factor in the cost of the hard money and add that to the amount borrowed up front.
Ok great will do. I am still on the lookout for a reasonable hard money lender that has good rates, if you have any suggestions or strategies please let me know.
I am ridiculously new at this but this does not seem look a good deal to me. As I understand brrrring, the idea is to renovate for 10,000 and have the value go up by 20,000 or 30,000. If that concept is the goal then you are only getting the money you are putting into it. There is not gained value right? You might as well spend the 477 on a house that doesn't need work, and then you wont be paying a hard money lender interest that whole time.