All Forum Posts by: Dan H.

Quote from @Axel Scaggs:

Quote from @Dan H.:

Quote from @Axel Scaggs:

I'm currently under contract for a 2/1 duplex and the appraisal came in earlier today. Unfortunately, it's put me at a razor thin 1.0 DSCR. The average rents in the area are far above the market rent the appraiser assigned. Unfortunately the current tenants of the property pay even less; $300 below the low appraisal and have been in the unit for over a decade. The overall value of the property appraised at $50k over what I am under contract to pay, which is good, but I'm assuming has little impact on the deal going through the DSCR underwriting.

So, the three comps the appraiser provided seem inadequate to me. Two of the three comps are 1/1s, while my target property is a 2/1 on each side. Their comps are also right next to each-other and have the same owner. The 1/1s rent for $995 and the final market rent he assigned for my target 2/1 duplex is $1000 a month, just $5 more. Comp #3 he provided is closer at $1175 a month, but is still drastically less than anything else on the market and isn’t even active. Is it strange that two of the three comps are not even the same number of bedrooms as mine? There is a big difference in market rent for a 1/1 vs a 2/1, unless you take their opinion, which then I guess it’s 5 bucks.

I looked at active listings on Zillow and there were five good, 2/1 duplex comps within 1 mile that rented for $1350-1700. Additionally, there were 5 1 bedroom duplexes that went for $1050-1400. I complied these and wrote a brief summary that my broker suggested we submit Monday. I know they used CoreLogic for their data, not sure how they feel about Zillow rental listings. Has anyone here experienced anything like this and had any luck appealing?

I am taking a different approach in that I am going to attempt to justify the appraiser’s rent valuation and you may find some truth in the response.

Start with any competent appraiser recognizes that a 2/1 rents for more than $5/month more than a 1/1 even in low rent markets.   So why would he have the adjustment of only $5/month?  I believe the answer is in this statement “Unfortunately the current tenants of the property pay even less; $300 below the low appraisal and have been in the unit for over a decade.”.  It is very unlikely that a unit that has had a tenant in place for over a decade is in similar condition to units that are currently being listed for rent.   Add to that fact that the tenant is only paying $700 ($300 less than the $1k given).  Seeing Texas does not have rent control, I think you could have easily got a $700/month rent valuation as that is the rent that you are getting.   If the unit was worth a higher rent price, why is it only getting $700?   It is likely because raising the rent could result in a vacancy and a large tenant turn over cost.   Tenant vacates and tenant turn over is $10k with 3 months of vacancy (unit turnover, time to obtain replacement tenant, time for tenant to provide current LL proper notice)

Just like not closed sales should not be used to establish property value, listed rents should not be used to obtain market rent.  

You can attempt to appeal the appraisal but I suspect the comps you used on the rent to be in a different state of condition than your units and your chance of successful appeal is low.

Good luck

Thanks for your input! My issue is that the lender does not accept current rents regardless, only estimated market rent. I can't really guess as to what the prior landlord was doing by keeping the rent as low as it was. It could have been a multitude of reasons, but I don't think that would be something that should factor into the category of fair market rent. However, I do think it is common sense that the rent should be higher, if ALL active listing within 1 miles are over $1400 per unit. Even when using 1 bedroom duplexes, the lowest active listing was $1150 per month and significantly smaller.

 > I do think it is common sense that the rent should be higher, if ALL active listing within 1 miles are over $1400 per unit

You think that but 1) you want to ignore the current rent operator (the previous owner) was charging this amount.  It sets the best comp there is.  It is little difference than if the property next door sold last week for $50k less than other comps.   It is a top comp (near, recent, etc) regardless of the motivation of the seller. 2) units that are up for rent have been tenant flipped and are typically in good shape.  Any carpet usually replaced, walls painted, repairs made to everything.  Your units have 10+ years of occupancy.  I expect the tenant flips will be expensive and take significant time.  I expect in the units’ current condition you would get far below market rent. I had a unit turnover late last year that needed a unit flip not a tenant turnover.  We had a family that offered to rent it for $700/month less than rehab market rent in its current condition which would eliminate vacancy and the costs of the unit rehab.  We turned it down because we do rehabs often and benefit from the value add. The rehab cost $40k and placing the tenant took a total of 2.5 months (about half on rehab and half acquiring replacement tenant and having them move in).  market rent prior to the unit rehab was probably fairly close to $700 less than the rent comps. That is what someone was willing to pay to rent that unit.

Condition has a role in determine fair market rent and I suspect is why your rent appraisal came in low.  I guarantee the appraiser knows that an extra BR typically gets more than $5/month in rent.  Does your appraisal have a current condition entry?   What does it list the current condition?  Note fair is actually bad, bad is horrendous.  

Good luck

Quote from @Axel Scaggs:

I'm currently under contract for a 2/1 duplex and the appraisal came in earlier today. Unfortunately, it's put me at a razor thin 1.0 DSCR. The average rents in the area are far above the market rent the appraiser assigned. Unfortunately the current tenants of the property pay even less; $300 below the low appraisal and have been in the unit for over a decade. The overall value of the property appraised at $50k over what I am under contract to pay, which is good, but I'm assuming has little impact on the deal going through the DSCR underwriting.

So, the three comps the appraiser provided seem inadequate to me. Two of the three comps are 1/1s, while my target property is a 2/1 on each side. Their comps are also right next to each-other and have the same owner. The 1/1s rent for $995 and the final market rent he assigned for my target 2/1 duplex is $1000 a month, just $5 more. Comp #3 he provided is closer at $1175 a month, but is still drastically less than anything else on the market and isn’t even active. Is it strange that two of the three comps are not even the same number of bedrooms as mine? There is a big difference in market rent for a 1/1 vs a 2/1, unless you take their opinion, which then I guess it’s 5 bucks.

I looked at active listings on Zillow and there were five good, 2/1 duplex comps within 1 mile that rented for $1350-1700. Additionally, there were 5 1 bedroom duplexes that went for $1050-1400. I complied these and wrote a brief summary that my broker suggested we submit Monday. I know they used CoreLogic for their data, not sure how they feel about Zillow rental listings. Has anyone here experienced anything like this and had any luck appealing?

I am taking a different approach in that I am going to attempt to justify the appraiser’s rent valuation and you may find some truth in the response.

Start with any competent appraiser recognizes that a 2/1 rents for more than $5/month more than a 1/1 even in low rent markets.   So why would he have the adjustment of only $5/month?  I believe the answer is in this statement “Unfortunately the current tenants of the property pay even less; $300 below the low appraisal and have been in the unit for over a decade.”.  It is very unlikely that a unit that has had a tenant in place for over a decade is in similar condition to units that are currently being listed for rent.   Add to that fact that the tenant is only paying $700 ($300 less than the $1k given).  Seeing Texas does not have rent control, I think you could have easily got a $700/month rent valuation as that is the rent that you are getting.   If the unit was worth a higher rent price, why is it only getting $700?   It is likely because raising the rent could result in a vacancy and a large tenant turn over cost.   Tenant vacates and tenant turn over is $10k with 3 months of vacancy (unit turnover, time to obtain replacement tenant, time for tenant to provide current LL proper notice)

Just like not closed sales should not be used to establish property value, listed rents should not be used to obtain market rent.  

You can attempt to appeal the appraisal but I suspect the comps you used on the rent to be in a different state of condition than your units and your chance of successful appeal is low.

Good luck

What does your lease state?  Does it state that you can show the unit to perspective tenants?   If it does, it does not matter that tenant will not let you in.  Does your lease prohibit changes to the unit such as lock changes?   The tenant should not be able to change the unit outside of hanging pictures, etc.

My lease allows me to show a unit to perspective buyers or tenants.   I have never used this provision but if I wanted to, I would not ask the tenant for permission but tell him when I would be showing the property.   If it is locked, the lock would be drilled out.  Regardless, the cost of placing my locks on the unit would be charged to the tenant.

As for not paying the rent, we always issue a pay or quit even if the tenant is vacating soon (what happens if they do not vacate?).   It will not help with collection but on LL reference I can state honestly that they received a pay or quit for missed rent.   Did you perform a thorough tenant screening?   Did he have a credit score that will be impacted with a hit, You will likely lose some money if your tenant has a poor credit score.  If he has a decent credit score your chance of collecting all funds owed goes up significantly.  Regardless, if they owe money send it to collections that will ring their credit (even if their credit is already poor).

the tenant does not create the rules.  The lease creates the rules.  Do not let the tenant create the rules. 

Good luck

I would like to know the source but I think for most people it is a poor time to buy a house

From the GFC to q2 2022 it was easy to find cash flow positive properties in high appreciating markets.   Add a value add and refinance and in some of those years you made a couple/few hundred thousand without any capital left in the investment and the investment continued to produce.   The cash flow after refi may not have been very impressive but my appreciation on my purchases varies from $2700/month to over $10k/month over their hold.   To be blunt, I and many other RE investors got spoiled.  It was almost free money (I recognize residential RE is not passive and takes work and skill to properly manage the asset, but minimum of $2700/month to manage an asset is pretty sweet).

Today, it is challenging to find rehabs in high appreciation markets that you can come close to extracting all the capital on the refi. In addition, after the high LTV REFI my underwriting (which on new purchases is close to 50% of rent to expense) bleeds cash. I am not referring to a couple hundred a unit but a multiplication factor of that.

Two recent national surveys both indicated it was initially cheaper to rent than to own in virtually every large city market in the US.

I think it is a poor time for most people to buy. Good investors will continue to find purchases that can produce returns, but most owner occupied will likely need to be patient before buying is financially superior to renting. Newby RE investors often buy at retail off the MLS that if having accurate underwriting for a sustained hold (meaning full life cycle on all items) bleed cash. It is amazing what some people post in these forums as having positive cash flow. I have seen rent greater than PITI is positive cash flow. I have seen 20% expense ratios use to depict positive cash flow. To be blunt, most re investors suck at underwriting and seem to pick numbers out of the air or because someone else used them I recently saw underwriting for a handful of cities that used 5% vacancy for each city but each of the listed cities had vacancy rates over 10% and it took about 2 or 3 minutes per city to find this. Where did the 5% come from? Arbitrary number chosen. If garbage numbers are used in your underwriting then your underwriting is garbage.

In summary, I think for most people it is a bad time to purchase a house.  So count me in that group, but I still desire to know the source but suspect it may be some all knowing YouTuber who pulled it out of his a$$.

Best wishes

Quote from @Holly Brown:

Hi @Donald Hatter, 

The only way that someone can assume an FHA mortgage is if the home is their primary residence, which most investors cannot or are unwilling to live in the home for a year to satisfy those restrictions. That is why they are trying to implement a subject-to financing strategy to purchase the home. I am not a fan of most of these contracts as they protect the investor, not the homeowner/lien holder.

If you had a VA loan, an investor could assume it without the primary residence restriction. There is a website WithRoam (https://www.withroam.com) that allows you to see all FHA and VA assumable loans. I utilize this website often to find VA assumable loans for my investors, as a lot of times, the low interest rate allows the numbers to pencil out in a LTR rental scenario

 Similar is AssumeList.com.  It is a fee based service.

Quote from @William Miller:

Quote from @Dan H.:

Quote from @William Miller:

Hey everyone,

I'm deep in the learning and building phase right now and focused on mastering the BRRRR method but let's be real, finding the right deal feels impossible at times. Between rising prices, competition, and tight inventory, it can be discouraging if you're just starting out.

But I know deals are out there  especially in the right markets. Based on everything I’ve researched, the top 5 places I’m seriously looking into right now are:

 Indianapolis, IN

 Cleveland, OH

 Pittsburgh, PA

 Birmingham, AL

 Kansas City, MO

I'm based in California, so I'll be doing this out of state, which adds a whole other layer of challenge. If anyone here has experience doing BRRRR remotely, I'd love to hear what's worked and what hasn't. Also if you already have a team (agents, lenders, property managers, contractors) in any of those markets, I'd be grateful to connect or even collaborate on a future deal if it lines up.

Right now I’m working on tightening up my finances, getting more confident with analyzing deals, and setting myself up to scale this the right way. I’ve got a couple properties already, but I’m fully in learning mode and want to avoid major mistakes by learning from people who’ve actually done it.

If you’re actively working in any of these cities or even just exploring like me, feel free to reach out. I’m here to network, stay accountable, and build something longterm.

Thanks!

Will

what defines a good brrrr market in your mind?   

I will tell you to me it is the market that I can get the highest value add per dollar spent.  The markets you listed are not this markets.   

I completed a value add a year ago that included adding a half bathroom out of existing space.  At the time, and I suspect still today, the data showed a half bathroom in that very expensive market would add ~$50k of value.  Crazy!   How much do you think a half bathroom adds to a property in Cleveland?   If I spend $5k n the half bathroom addition, will I add over. $5k of value?   

my last 2 value add purchases are up $800k and $600k above their cost including cost of the value add.  To me those are quality BRRRRs.

I have done quite a few BRRRRs.   I am typically at the property daily providing oversight and direction.  When things do not go right (which happens on virtually all large BRRRRs), I am ready to perform heroics to get things back on track.   Virtually every job has stuff go wrong.   A recent rehab I had 2 contractors basically quit mid job without adequate notice.   I had an inspector that requested multiple things that were not in the city approved plans.  We did each of them because I wanted things to go monthly even though I believe the people who approved the plans are more qualified at knowing what is necessary.   I had a down draft oven missing some of the venting parts (ovens go in late in the process and I only allocate half a week of margin - we over ran this margin by a couple/few hours but our guest was gracious).

my last rehab I had a contractor quote a price that I accepted then decided he did not want the job.    I had a back up contractor that was only slightly more costly and was already doing work onsite. I had a paint contractor get ill and not make it to the job site until near a week after planned.   My job site manager had an extended vacation (planned) that I took over his role while he was gone 3 weeks.  

i believe doing your first BRRRR OOS will be very challenging and difficult.   Building a reliable and honest team from afar has additional challenges.   There is no oversight better than the asset managing team (ie owner).

good luck

Hey, really appreciate you breaking all that down  I can tell you’ve put in serious work and have learned a ton through doing the hard stuff. That’s the kind of experience I’m trying to learn from right now.

To be honest, I'm a new investor just trying to dip my toes in and get a feel for what makes a solid BRRRR deal. My goal right now is to do it right, even if it's slow at first. I know OOS (out-of-state) adds another layer of challenge, but I'm trying to learn what I'd be walking into ahead of time.

You mentioned the value-add per dollar as your core focus that’s super helpful. I hadn’t thought about the impact of something like a half bath being market-specific. Would you say that’s something you’ve just learned through experience, or are there ways you research that kind of return before doing it?

I’m all ears if you have any tips on what to prioritize as a newer investor trying to avoid the biggest mistakes early on. I really appreciate you taking the time to share your experience that kind of transparency is rare and super valuable.

Thanks again! 

I have mostly done brrrrs but I am not actively seeking LTR brrrs.  It is because after the high LTV refi, my underwriting shows large negative cash flow.   This implies that they would be better flips, but I do not do flips because it is a job.  Stop flipping stop earning. 

I am currently concentrating on
1) sophisticated value adds.  Lot splits, recognizing up graded land use.   My first protege recently sold a property that current use value was $1m but he sold it for $1.5 to be leveraged for bonus ADU program.   Note he had no role in the development other than obtaining the land and selling it to the developer.   This property is largely a reason for local rule changes related to ADUs (4601 Almayo Ave, San Diego).
2) upscale locations that can STR or MTR.  Bonus if they have a value add.

a LTR purchase at today’s rates do not produce the return that I have come to expect at high LTV.  This is true even if there is a value add with subsequent refinance.   In some STR markets, I can still obtain >2% rent ratio.

good luck

Quote from @Rick Albert:

Quote from @Sheronda Smith:

Quote from @Rick Albert:

Did you factor in the tax implications, if any, when selling the investment property? Are you intending to sell the investment property with tenants in it? These can change anyone's recommendation.

I wouldn't focus on the interest rates. That's a trap many people fall into. Just because something is a low interest rate doesn't mean it is worth keeping.

Can you pivot on the investment property to generate more cash flow? For example mid term rental for fire victims while their homes are being rebuilt? Would it actually make sense to put more money into and build out an ADU? The ADU alone might close the gap. The money can come from a HELOC, etc.

How much equity do you have in your current home? That money is going to be tax free and generally speaking a three level home with no yard can be a tough sell. Your buyer pool is very small for a property like that. I've sold homes like those in the past in LA and it ends up being a price play. Maybe taking the liability away with tax free money makes more sense while pivoting the investment property.

Another option that wasn't talked about was moving into the investment property, refi into an owner occupied rate, and then sell the old primary where, again, the money is tax free.

Thanks Rick. 

These are great options and new perspectives. The investment home actually has a great garage and yard that we hoped to make into an ADU at some point so that may be worth considering sooner. This would require us to stay in our current home another two years maybe but we have some wiggle room since our daughter is still young as long as we don’t have any health issues with our parents. 

Other homes in the neighborhood of our primary residence are selling well at the moment. It’s a gated community with a pool and clubhouse that is very young family friendly. We actually love it for that. If we hold out another two years in this community, we won’t be miserable. 

We have a good tenant in the investment property so selling with them in would be ideal if we do. We could move into that property ourselves at some point. It would be a downsize but it is one level and we would gain a yard. It’s not in our desired neighborhood but still a nice area. This would be a great idea if we were sure we were not going to buy our long term primary residence in the next two years because that would lock us into that home for at least one year. 

I suspect that the tenant would actually like if the garage was an ADU because they have a large family. That may be an option worth considering.

Thanks! 

So now you brought up a sticking point: Selling with tenants in place.

A single family home will likely sell for more vacant than with a tenant. If you are hoping to sell with the tenant in place, then it becomes an investor play, where the numbers have to make sense. If you sell vacant, then you follow the comparable sales in a neighborhood.

For example:

Selling as an investment property:

Rent is $6,000/month= $72,000/year

30% for property taxes, insurance, vacancy, cap ex, etc.: $50,400 net

If an investor wants a 5% CAP rate, that's a $1,008,000 value.

But typically we see about the .5% rule (versus the 1% rule of rent versus price), so that means comps are likely showing around $1,200,000 as a valuation. 

Of course this is all hypothetical because I don't know about the home, what area, etc. But with this example you are leaving $200K on the table. 

Also yes you are losing $2K/month, but that may not factor in tax benefits, loan buy down, and appreciation. You might be making that up in unrealized ways. 

Putting my investor hat on, I would consider finding the money to convert the garage into an ADU and generate income. The challenge is your tenants have the rights to use the garage, so it may be after they move out. In which case then you can consider selling.

At 0.5% rent ratio, 30% does not come close to working. The property tax alone will be real close to 20%. That leaves 10% for maintenance/cap ex, pm, insurance, vacancy. I suspect 40% will not be sufficient if allocating maintenance/cap ex for sustained basis (meaning full life cycle of all items). In addition, experienced investors are unlikely to accept 5% cap on single family home. In my view this was always true, but with the net rest rates much higher than 5% this would result in the investor being in the same situation of the OP. The OP got here via poor underwriting and it could happen again, but I consider it unlikely. It s not a good investment property and most investors will quickly recognize this. ADUs have valuation issues and is a poor investment if a hands off addition (meaning owner does not have an active role in the ADU addition). I see no reason to keep this as an investment property.

The OP will get best value selling this property to an owner occupant.   

I do not say this to be mean, but I do not have confidence that the primary will “cash flow right away”    Take the rent multiply by .6 the subtract P&i    This reflects a 40% expense ratio.  My belief is that it will be a negative number and it is likely not a good rental (but getting a good assist from the low interest rate).

Thoughts for OP:

- first step is decide where you want to live: current home, current rental, a different home.

- you do not want to keep the rental as a rental.   It is a bad rental

- your primary has a good loan which makes it a better rental than the current rental.

- you have to decide where you desire to live between current home, current rental, new property.   Any choice other than moving into the rental implies you should not renew the tenant’s lease at the lease end and sell the rental.

- as indicated, I suspect your current primary does not have decent cash flow but that interest rate is no longer attainable. If you decide to not continue to live in your primary do the above calculation to get a different cash flow estimate (I expect it to be negative). Then weigh the (negative?) cash flow versus the positives of appreciation, equity pay down, tax advantages (mostly depreciation and other write offs). In Los Angeles (or San Diego) in this market I would easily choose to keep a class b or higher property if it was only a few hundred negative a month at a high LTV. In my San Diego market, my worst appreciating property has appreciated $2700/month over its hold. I have a few properties that are near or over $10k/month of appreciation over the hold. Do I care about a couple hundred negative on a property or two?

Good luck

Quote from @William Miller:

Hey everyone,

I'm deep in the learning and building phase right now and focused on mastering the BRRRR method but let's be real, finding the right deal feels impossible at times. Between rising prices, competition, and tight inventory, it can be discouraging if you're just starting out.

But I know deals are out there  especially in the right markets. Based on everything I’ve researched, the top 5 places I’m seriously looking into right now are:

 Indianapolis, IN

 Cleveland, OH

 Pittsburgh, PA

 Birmingham, AL

 Kansas City, MO

I'm based in California, so I'll be doing this out of state, which adds a whole other layer of challenge. If anyone here has experience doing BRRRR remotely, I'd love to hear what's worked and what hasn't. Also if you already have a team (agents, lenders, property managers, contractors) in any of those markets, I'd be grateful to connect or even collaborate on a future deal if it lines up.

Right now I’m working on tightening up my finances, getting more confident with analyzing deals, and setting myself up to scale this the right way. I’ve got a couple properties already, but I’m fully in learning mode and want to avoid major mistakes by learning from people who’ve actually done it.

If you’re actively working in any of these cities or even just exploring like me, feel free to reach out. I’m here to network, stay accountable, and build something longterm.

Thanks!

Will

what defines a good brrrr market in your mind?   

I will tell you to me it is the market that I can get the highest value add per dollar spent.  The markets you listed are not this markets.   

I completed a value add a year ago that included adding a half bathroom out of existing space.  At the time, and I suspect still today, the data showed a half bathroom in that very expensive market would add ~$50k of value.  Crazy!   How much do you think a half bathroom adds to a property in Cleveland?   If I spend $5k n the half bathroom addition, will I add over. $5k of value?   

my last 2 value add purchases are up $800k and $600k above their cost including cost of the value add.  To me those are quality BRRRRs.

I have done quite a few BRRRRs.   I am typically at the property daily providing oversight and direction.  When things do not go right (which happens on virtually all large BRRRRs), I am ready to perform heroics to get things back on track.   Virtually every job has stuff go wrong.   A recent rehab I had 2 contractors basically quit mid job without adequate notice.   I had an inspector that requested multiple things that were not in the city approved plans.  We did each of them because I wanted things to go monthly even though I believe the people who approved the plans are more qualified at knowing what is necessary.   I had a down draft oven missing some of the venting parts (ovens go in late in the process and I only allocate half a week of margin - we over ran this margin by a couple/few hours but our guest was gracious).

my last rehab I had a contractor quote a price that I accepted then decided he did not want the job.    I had a back up contractor that was only slightly more costly and was already doing work onsite. I had a paint contractor get ill and not make it to the job site until near a week after planned.   My job site manager had an extended vacation (planned) that I took over his role while he was gone 3 weeks.  

i believe doing your first BRRRR OOS will be very challenging and difficult.   Building a reliable and honest team from afar has additional challenges.   There is no oversight better than the asset managing team (ie owner).

good luck

In my market that would significantly over value the ADU. What I am seeing from appraisers is

1) they want to use sold properties that have an ADU. Unfortunately for those that added an ADU, these comps typically place a value far less than the hands off cost of adding the ADU.

2) in the absence of adequate comps, these ADUs are valued as an amenity and typically gets an even lower valuation than the low valuation from comps.

ADUs typically have good rent to add costs. If it was valued like commercial properties based on NOI and cap rate, then it would be an easy decision to add ADUs but in my market the appraisers usually value ADUs tens of thousands of dollars less than the hands off costs to add the ADU.

Good luck

This will be my 4th BPCon.   I like the smaller venues which I donot believe this will be.   Orlando was like we were cattle and I fear this will be similar.   Yet I will still be there

I find them to be motivational.   Networking with attendees, presenters, and vendors is a good opportunity.   The sessions can be educational.

I suspect you could get as much or more from a n appropriate accountability group.   Costs with hotel and travel are likely close to each other excluding the high cost accountability groups.

I recommend you attend at least one BPCon and Las Vegas is close to Los Angeles.  It is a convenient location for you.  

Good luck