All Forum Posts by: Marc Jolicoeur

@Eli Sunderland for BRRRR to work you need to "rehab" something. That means you need to find properties that are in some sort of distress or ugliness. After rehabbing you need to be able to get an appraisal at significantly higher value than what you bought it for.

Eg.  You purchase a place for 112K that would be worth 165K after being fixed up, and it needs 20K to fix up.     After fixing it up, you can get an appraisal for 165K and on a refi investor loan, you can have 75% Loan to Value.  75% loan is 124K.  Pay off the original loan, and get back the downpayment you put on that first place.  You get about 12K more cash back that offsets your 20K rehab.   After all is done, you have only left 8K of your own money in the deal.

Appraisals on refis are very conservative. An appraiser will always estimate averages of all sorts of comparable properties in different conditions, which could be very different than if you were trying to get a property sold for top dollar in a bidding war. So - an ARV for refi purposes is lower than an ARV for resale purposes.

For BRRRR to work, your cashout refi based on a conservative appraisal needs to be significant enough to pay you back for all your rehab and most of your original downpayment. If a cashout only returns 10K back to you, its not worth doing the refi at all.

How I shop for BRRRR houses is to look at a lot of REOs and other houses advertised at handyman specials or needs TLC. You can tell by the pictures. If it has nice carpets, all appliances, and nice paint, its NOT a BRRRR deal. Those normally are yucky enough that a rehab will significantly increase the value of appraisal.

@Eli Sunderland Watch the Minneapolis Association of realtors monthly "Skinny" video on you tube.  It shows the median price every month and compares to previous years.     for SF homes normally better to focus on the bottom or middle tier of house values for best liquidity and highest demand currently so I always watch where the median is.

BRRRR is what I do too. For BRRRR to work the best to get all of your invested cash out, you need to buy at 70% ARV minus repairs. That is a tough order this year. I think 80% ARV is more like our current market.

@Eli Sunderland  The current appreciation in most sub-markets in the twin cities is completely driven by inventory which is super low.     Based on local and national inventory trends we will probably continue to appreciate at between 1% and 3% year over year for the next couple of years.  If you want to understand where I get this prediction look at the recent webinar recording by Zillow economists on youtube and also look at the Minneapolis Association of Realtors video called The Skinny.

Basically, the growth will be slower than it has been over the last few years, but no significant drop.  

An actual correction will only happen if we have significant growth in inventory or a very large drop in demand.   Where is that inventory going to come from?      

Here is the risk list:

- REOs.  REOs are at about 9% of the listed market which is a very healthy and normal rate.

- Pre-Foreclosures.  Are banks going to repossess lots of houses? Not really because all recent and new owners have very good credit scores and income.    Look at short sale rates of listings for an indicator.

- SF construction.  Virtually ALL new construction is big expensive housing over $400K.  Those are not competition for you if you buy a rental worth under $250K

- Multi Family construction.   Lots of new units coming online in uptown, SW suburbs, North Loop, North east Mpls, U of M, light rail lines, etc...     If you buy rentals in these areas, your SF values are probably not affected too much unless you are buying a Duplex, Tri, Quad, or apartment.  However, your ability to charge high rents in those areas could be affected by lots of new competition. 

- Move up buyers listing their properties.  I am not expecting this to jump too much because those move up buyers will need to pay a lot to get a bigger and better place.  

- Accidental landlords selling inventory they converted into rentals in 2008.   

- Professional investors and hedge funds selling inventory because they think we are at the top of the cycle.  We are seeing some of this but I not very much.  Many more people like you just getting started in RE investing.

- Major economic recession, causing massive layoffs like our last recession.

So in balance, watch inventory, preforeclosure, and job loss statistics in the metro.  Right now, all indicators are bright GREEN.

Assuming you are keeping the property for 10 years, a softening market is not likely to bother you much at any rate.  So, to mitigate that risk I would highly recommend the following

- Single Family or townhome worth under median price < $247,000

- Buy at a discount because of some distress or renovation needed to force some equity on the front end even if you are doing a low down payment.

- Caution in areas with lots of MF rental units coming online as this will put pressure on the rent you can charge

- Good areas with good schools - will keep your vacancies lower when the rents start getting pressure.

- Should cashflow as described in my last post.

1% deals are much more the norm around here.    This is a rule of thumb so don't make any decisions based on 1% rule.

I would also recommend you buy a property that you would keep long term as a rental.   Some day you will be tired of house hacking and will want to move out to a new place and you may want to have someone rent the whole place rather than renting bedrooms.   

Selling a house has significant costs associated and if you got in with a low down payment now and pay market value, and decide you need to sell in 3-5 yrs you may find that you are underwater.

Instead, buy a place that would be a great rental and buy it as an owner occupant now, to house hack it.

Open up a spreadsheet and work up a full estimate of your costs vs rents.

- Estimate your rent using craigslist, rentometer, and Zillow rent zestimates

- Assume 1 month of vacancy out of 24

- Estimate your taxes for non-homestead

- Estimate insurance for a landlord policy

- Estimate your mortgage amount based on the rates and terms you can get today on a fixed rate loan.

- Based on the property you are considering, estimate when you will need new roof, HVAC, and other big ticket items

- Assume 5% maintenance costs

- Assume 10% for property management

- Estimate how much you will need to put down and need for closing costs.

If the property cash flows with the above assumptions...it might be a good investment.    I look for about 8-10% cash on cash return on the money I invested in rehabbing and for the downpayment, and closing costs.

House hacking, you should be able to make even better cashflow as you will have homestead taxes and insurance and will not have vacancies and will not need property management.

But in 5 years when you are tired of renting out rooms, you will have yourself a good rental.

I have done two Conventional refi's with 75 LTV. The second one did require me to show a signed lease, however they never asked if I was actually collecting rent or not. Maybe they skipped that question because my bank account reserves looked great. I seem to remember it being the same with my first refi too.

Marc

The key for the BRRRR strategy is to buy low enough and rehab enough to significantly increase the property value such that 75% of new valuation is enough to pay off your original lender and to pay for your other cash you put into the deal for rehab work, holding costs, and closing costs (twice).

Be extra conservative in your estimates of ARV because refinance bank appraisers are very conservative. And their number is what your loan amount will be based off of. This appraisal amount is not the same as trying to determine if a buyer is willing to pay more for your awesome design skills, style, staging, colors, or a bidding war. This appraisal is based on previous sold comps and they are all over the place for quality and sale amounts. Appraisers will do you no favors to get to your target number.

If you buy at 70%ARV minus repairs, BRRRR works well. If you are paying more like 80% ARV-repairs the refi does not pay off everything plus all the cash you put in.

BRRRR is easier to do in an appreciating market where an appraisal in 5-12 months can be 3-5% higher because of market forces. In a declining market, buying right is even more important.

Also calculate what happens after you do refi to a much larger loan.  You may be paying $150-$200 more for the new mortgage payment. Are you still cashflowing?

Wait 12 months before selling so that you can 1031 exchange and not have to pay taxes on your gains. 

If you flip right away as others have suggested, be prepared to pay your top tax rate on the profits so you could lose a third of any gains and have a big tax bill even if you already spent the money paying off CC debts.

@Stephanie Limpert Check out the local Minnesota forums and check out some of the local meetups too.

@Thomas Worm check out the Minnesota local forums.  If you post there and read previous posts you may find an agent or two who work in your area and you will get to know some of us who are active in the forums.

I am happy to share what in know about buying, renting, refinancing and rehabbing so feel free to send me your questions. 

On my part, I am always looking for a drywaller/finisher who can do medium and small projects in the metro.  Most houses I am offering on lately need some drywall for a basement, moving a wall, fixing holes, water damage, etc..   So.... nice to meet you!

@John Bayer I am looking for a couple of properties this year to hold or flip and I would happily pay bird dog fees for someone who could find me some sellers with some motivation.   I can provide a list of target properties in target neighborhoods but it would require driving around and knocking on doors, plus adding leads to my database and doing regular follow up on the leads.

Message me if you are willing to be a bird dog and we can have coffee to discuss tactics.