All Forum Posts by: Nick Coons

Quote from @Dwayne Poster:

How do you handle this in a situation where an appraisal is required by the bank in order to secure financing for a refinance?

@Andrew McGuire

Thanks for the response!

When you say "manage with the upside of AirBnb, Furnished Finder or Co Living", do you mean purchase it with the intent of a long-term rental, but if the numbers don't work then switch to a short-term rental strategy?

@Jerryll Noorden OP says he's mailing to owners in preforeclosure, not just "people". Seems to me they'd be fairly motivated, but interested in your thoughts on why they wouldn't be.

Quote from @Bill B.:

Try to sell one of these properties for what you think it’s worth. If it doesn’t sell the appraiser is right. If it does sell, then you have a new comp for the appraiser. Especially if you tell them it was a property you bought and fixed up, just like the one they’re appraising today. Let them see it can be done. 

While this would certainly answer the question about value, it does sort of seem to solve the problem by pushing someone off of a cliff to see if they're a witch. (Reference: The idea of pushing someone off a cliff to see if they're a witch would result in either them falling to their death, in which case they're not a witch; or they fly away, in which case they are. If they're not a witch, you've got your answer, but now they're dead).

The OP wants to be able to hold and rent the property. If he sells it, he might get what he thinks it's worth, but now it's no longer a long-term rental for him. I don't know what the actual solution is, but since people have been successfully using the BRRRR strategy for a long time, there definitely is a solution outside of simply selling the property (even if that solution is legitimately "you're overvaluing the property, and the appraiser is right"). Perhaps the OP needs to pull his own comps to see if what he thinks the property is worth is accurate.

I'm working on BRRRR, in the Phoenix area, which is appreciating like crazy. Rents are going up too, but not nearly to the same degree (which is what we'd expect). So the issue I'm having is something that I'm sure others have had too. Even when I find deals that are well below market, they still have negative cash flow because rents don't keep up with expenses.

I'm not concerned much with cash flow initially other than that I don't want it to be negative, because I don't want to come out of pocket every month to cover operating costs (that makes the Repeat part of BRRRR more difficult). So something like $100/month after all expenses would be fine. I've set my management expenses at 8%, CapEx and 10%, vacancy at 5%, and repairs at 5%. I'm thinking of eliminating the CapEx expenditure altogether (or for the first few years at least) since anything major is being taken care of during the Rehab phase (i.e. I shouldn't have to worry about something like a roof or HVAC unit for awhile after Rehab).

Even then, the numbers don't look great. If I buy a place for $245k, put $50k into it (rehab plus holding costs) for an ARV of $400k, I can get about $2k/month for it, I'm at -$405/month, so negative cash flow. The numbers work out for the refinance this way so that I end up (after paying off everything and getting my original down payment back) that I'm just over break even (+$300), so I can "repeat" in that sense. If I want to bring the cash flow to $100/month (that's a $505 swing), then I need to reduce the cash-out refinance from $300k to $210k, which leaves $90k in the deal, making the "Repeat" part of the process impossible for me.

I haven't been doing this for long (recently), but here's what I've discovered so far. Because properties are appreciating so fast, even "distressed" sellers are able to list their properties and get above market value for them. Something that needed a complete gut and rebuild was listed for $270k (a decent deal) and sold over asking in a couple of days at $290k. It almost feels like 2005 all over again in that sense (that was the last time I was actively doing this).

Regarding the "deal" above.. $400k is the limit of the ARV based on the neighborhood in question, and $260k is a realistic "deal" value because anyone asking for less is going to end up selling for over asking anyway. And because appreciation is so fast, foreclosures (or owners in preforeclosure that have very little recourse but to sell cheaply) are more rare. There was a foreclosure with massive fire damage listed for $97k and needed at least $100k of work, ended up selling for $218k.

Generally, I can see a lot of these properties being decent flip candidates (which I'm not interested in doing, though this puts me in competition with someone that can pay more for a property because they aren't looking to hold and cash flow), but not great as rentals unless I have tons of cash to either cover the negative cash flow or leave in the property.

So here are my questions:

- Do I just need to be more patient in looking for deals? I have no problem with that if that's the answer. Or are there unique methods in a market like this I should be employing?
- Is BRRRR an effective strategy when the market has this much of a gap between expenses and rental income?
- Is positive cash flow realistic in a market like this, or do I just need to find a way to make it work with negative cash flow for the initial stages until rent eventually catches up?

I'm interested in others' thoughts on this too, also including comparisons to PiN from Connected Investors.

Originally posted by @Shiloh Lundahl:

@Nick Coons one thing your missing, and that has not been stated yet, is that if you buy the house for 300k that should be worth 400k, if you don’t put money into the property to make improvements then you risk the appraiser valuing much lower than 400k because the bank will question the appraiser as to why it should be worth 400k when you bought it for only 300k. Even if there are great comparables, the appraisal is likely to value it lower.

That's an interesting point to consider. I wouldn't be doing zero improvements, but I also wouldn't be doing major improvements (like a full kitchen reno). I'd be surprised though to find the purchase price, after maybe 6-12 months, affecting an appraisal with appropriate comps.

The answer to the bank's question as to why I paid significantly lower than market value for an off-market property seems easily answered and is a common enough practice. I wouldn't think this would be an issue. Have you experienced this before?

Originally posted by @Lynn McGeein:

You may want to research the conventional lenders now, start forming a relationship, as cash-out refi of an investment property is harder to find, may be stricter limits on LTV, like 70%, waiting periods before they'll do it and possibly rental history requirements if needed to qualify.

I didn't have any plans to do a cash-out refinance. Would plan on waiting 6-12 months after purchase to refinance (which means my primary lender would need to carry the loan for that long), should that generally be sufficient?

Originally posted by @Carini Rochester:

We would all like to do it that way!

What challenges do you face in your attempts? I would imagine finding 100% financing from a private or hard-money lender would be a big one.

Originally posted by @Jaron Walling:

@Nick Coons Sounds about right. Provided you're financially stable go out and find a deal 25% below market value, and get it under contract. If it's a good neighborhood and in decent condition the money will find you.  

It's 2022 and markets are still crazy. I'll send you some luck, you send me some back.

Definitely financially stable. Covering the mortgage without a tenant (post-refinance) wouldn't be a problem at all if the need were to arise. I could likely put money into savings for two years and have the needed $100k down. But there are some opportunities that I'd like to not wait two years for (or if they would even exist as they are in two years), so looking for some creative ways to get started sooner.

Luck coming your way, thanks!