All Forum Posts by: Andrew Eherts

@Rodrigo Barreiro Pujol it's a pleasure to help. Perhaps getting a feel from an appraiser as to what carries value is a good bet. I am not sure if you'd be able to bring them out to every deal you do, but having some guiding principles is where I would start. This will help you intentionally plan out the rehab so you only spend money on what gives you a 1x or higher return on value compared to your cost. 

@Rodrigo Barreiro Pujol this is where knowing an appraiser can come in handy. Or knowing roughly what the value components in the market are (how much is a bedroom worth, a bathroom, certain countertops, etc). An appraiser would be able to give you an idea on all of these. For a BRRRR investor starting out, they could be as invaluable as your deal finder because you will know "Okay, this will appraise X if I do A, B, and C."

These are things you pick up on over time, and you can also get a rough idea by looking at renovated comps if there are any. Do houses that get top dollar have certain features? Try to include them if they are financially feasible to do so.

Keep in mind the diminishing returns to a renovation. Values in residential markets are based primarily on what is selling around you and at what price. If you are going for a nicer, higher end rental, try not to overdevelop the property relative to the area. As a hypothetical example, those quartz countertops you shell out for may not actually add as much value as you want them to. 

Remember the bank does not care what an agent thinks the property is worth, because agent's work in price not value. That is the appraiser's domain. 

@Rodrigo Barreiro Pujol not confusing at all! You are correct, the bank will cash you out 70-80% of your after repair value. That is where the hard money can make things a bit more complicated, because not only are you planning your cash out amount but you also have to pay those carrying costs from the hard money lender. 

In your above example, you'd have to come up with that $10k and the carrying costs. Your carrying costs are calculated monthly as the interest rate divided by 12, so that is added for each month you carry the loan. 

You may not cash out 100%, and that's okay! You're "no money down" would turn into "a little money down". Owning a fully financed, newly renovated and rented property valued at $150k for only the $10k needed to take out the hard money lender is not a bad place to be in.

Hi @Rodrigo Barreiro Pujol. I have not seen the deal, but I can give you a couple items of caution from my experience in private equity and unconventional financing strategies. I am sure there is more others can add, but this is all I can come up with right now. 

Don't let the below deter you--private hard money can be a great way to get around the banks for projects that carry a bit more risk (like a BRRRR).

Hard money is going to come with carrying costs, and this is often used in flipping because of the quick turnaround. On a BRRRR, you have the full rehab (1-3 months-ish depending on the scope of work) and the seasoning period most banks require before financing (6 months or so). I always expect to budget for a minimum of 8 months of carrying interest that either needs to be extinguished with the cash out or paid along the way depending on the terms. Just be sure to account for it!

Also, try your best to make certain your underwriting and rehab budget are rock solid. Backing up your rehab budget with itemized bids would the best way to isolate yourself from risks associated with ballooning costs, as they can get out of hand. You'd hate to run out of money because of an unforeseen issue. 

Hi @Robert Madison I did some research into this. They aren't referring to interest rates (thank the Lord... my heart dropped). This is actually a tightening of underwriting standards, and the restriction you mentioned is in terms of the lender's portfolio. In essence, regardless of what a lender's investment property deployment was, it now has to be 7% or less of their lending pool. 

That implies that the market for loans is going to get competitive. Are they expecting a crash? It depends on what part of the country you are looking at. From a pure price index standpoint, some are picking up momentum while others are peaking--the exact place in the cycle is different for each metro. 

If you were worried about interest rates jumping 2-3x, rest assured. That would grind investment activity to a halt, which equals very bad news for national savings and GDP growth. They are slowly hiking rates from these artificial lows, but this will be 25 or 50 basis points over the span of quarters.

Welcome to the community! I am pretty new like yourself. 

Like @Taylor L. said, the syndication space is where you can see the most deals happen on the smaller private equity side. There might be syndicators in your area, since Raleigh is a pretty big market. Are there any meet ups out there? I know the pandemic has put a hold on a lot of networking capabilities. There are companies like Nighthawk Equity run (Michael Blank) that will actually partner with you to raise capital, but you have to bring them a deal and be a part of their "deal desk." I believe there is a membership fee that comes with that.

Commercial property is a serious business, and investors are typically very well-read. The biggest hurdle is getting people to trust you enough to put their money up for your deal. For that, you'll need a track record. But to get your track record, you need capital. It's the chicken and the egg type of thing. 

Hi Peter!

You raise some pretty nuanced questions. Comparing real estate returns to the stock market is pretty tough unless you adjust them to reflect risk adjusted returns. Historically, real estate is less volatile than the stock market, and you get more return per unit of risk you take (depending on what you invest in!). That's not a number that can be calculated easily though...

CoC is better related to coupon or dividend investments. Try getting a bond that pays 6%+ these days! I'd say it's a win, but what is a "good" return is relative to your goals. EPS is also very low as Price/Earnings keeps skyrocketing. 15% annualized is pretty nice--does that include a sale?

My current criteria is a 15% internal rate of return and a 6-9% CoC, which accounts for the time-value of money. It looks pretty similar to what you have underwritten in your post.

I'd be happy to connect and walk you through some things in DMs. The only time you really need a full model is if you are projecting cash flows into the future, so the sale options will just require a few calculations. The refinance strategy might need some number crunching, and I built a BRRRR model that can be modified to fit this scenario. I kind of put these sheets together as the need arises.

There is a ton of value in constructing these from the ground up, in my opinion. That way when you analyze a deal, you aren't scratching your head if things look wonky.

@Jen Hoang OOOPS! Then I am going to second Andrew Syrios above on the ARV.

I would say it is all in the comps and the appraiser. If the whole neighborhood is chop full of recent comp sales with new water heaters/furnaces, it may be prudent to do so. It might even command higher rents for you after the refinance, and it would surely lower the maintenance expenses from the get go.

One of the things appraisers look at is what is called functional obsolescence. Lots of things go into that decision (energy costs from older vs. newer, possibility of needing a replacement soon, and et cetera).

Just for my information, is it common for a home in San Diego not to have AC? I know it's more temperate than LA, but it seems like that would be a given for the So Cal market.