Case Study: My BRRRR (Buy, Rehab, Rent, Refinance, Repeat) Success—All In Under 75% ARV
We have been investing in real estate in Kansas for just over six years now, and our strategy is the good ol’ BRRRR method (buy, rehab, rent, refinance, and repeat). So, for our method to work, we are looking for houses and small multifamily properties that fit the following criteria.
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Our Property Criteria
- Our total cost into the property will be less than 75 percent of the ARV, allowing us to refinance out our entire investment.
- The property must cash flow with a fully financed 8 percent interest only loan on it (this is what we usually get from our private lenders).
- Note: If a property doesn’t meet this qualification, we would likely flip the property.
- The property must be in at least an OK neighborhood. Blue collar and lower end properties are fine, but we are not looking to buy D properties as rentals. There are just too many headaches and problems.
- Note: If a property doesn’t meet this qualification, we would consider wholesaling the property to an investor who specializes in such areas.
We seek out properties in a variety of different ways, from the MLS, to letters, to networking with wholesalers and real estate agents. This property however, was just found by scrolling through Craigslist, which we do regularly, as every once in a while, you’ll find a gem.
And luckily, this was one of those cases.
Finding the Property
While scrolling Craigslist, we came across a property located on 41st and Terrace in Kansas City, Missouri, which is near a well-to-do area called Westport, just northwest of the famous Country Club Plaza and about two miles south of downtown Kansas City.
The property was listed at only $75,000, which seemed very inexpensive for that area, so we immediately reached out to the seller and arranged a time to look at the property.
The seller actually turned out to be a wholesaler who noted he had a lot of interest in the property and wasn’t willing to come down on price. My rehab estimate came to $20,000 (that included a 20 percent contingency for unexpected expenses), which meant that my anticipated all-in price was $95,000. The nearby comparables looked as followed:
Upon closer examination, we found the properties that sold for under $100,000 were owned by investors, and the listing pictures showed that they needed work (or there were no pictures, which is a sign in and of itself). While the properties that sold for over $150,000 were noticeably nicer than our subject property, I felt the comparables easily justified a value of $140,000. My rent estimate was $1195/month.
Related: 3 Critical Keys to a Successful Refinance (for the BRRRR Strategy!)
So, let’s see how it fit with our criteria.
ARV: $95,000/$140,000 = 67.9 percent
- 67.9 percent > 75 percent
Cash Flow: Assuming $4,500/year operating expenses and 10 percent vacancy:
- Rent: $14,340 ($1195 x 12)
- Vacancy: $1,434 (10 percent)
- Operating Expenses: $4,500
- Debt Service: $7,600 (8% interest only annualized)
- $806 Profit per year
- Area: According to CLRSearch.com, the crime rate in this property’s zip code is rather high (190 compared to the average in the United States of 100). But it also has a per capita income above the American average ($31,070 compared to $29,126), the neighborhood looks great visually, and it’s generally considered to be a good area. So, check.
So, this property meets all of our criteria. We made a full priced offer and promised to close quickly (10 days), which, I should note, is usually something that wholesalers want.
Financing and Due Diligence
The upfront financing on this property was rather easy. We have a number of private lenders who we’ve built relationships with over the years, and when we showed one of them the comparables for this house, he jumped at it. Remember, the stronger you can make your case that the property is a good deal, the more secure a private lender will feel in lending on it.
Unfortunately, when doing our due diligence, we found that the sewer line was broken. We discovered this by scoping the sewer lines, which is something I highly recommend doing on any older homes you have under contract. It only costs about $200, and you definitely want to know if the sewer line is shot before you rent out the property. Normally, you can use this type of information to renegotiate the purchase price. However, in this case, there was no negotiating with the seller because he had plenty of other interest.
Still, even adding an extra $5,000 to replace the line to our budget (it cost us $3,500), we would still be all in for $100,000, and that would leave us being all in for 71.4 percent of the property’s value ($100,000/$140,000), so it was still worth it.
After closing the property, I expanded the rehab into a detailed scope of work. In this case, we had one of our own crews do the work, although we’ve often had contractors bid out and do similar work as well. In this case, the main items to repair were:
- Trim the trees in front
- Repaint the front porch
- Replace the porch rail
- Paint the interior two tone
- Refinish the hardwood floors
- Replace the appliances
- Carpet the back bedroom and vinyl the kitchen and bathroom
- New countertop
- Repair the back door and trim
Refinishing the hardwood floors really brought the house to life, as you can see:
And since it was a home in a nicer area, we went with stainless steel appliances, which were a huge improvement on what was there:
We ran into a second unexpected problem as we got into the rehab. We were hoping to salvage the patio door in the back room, but it had too much damage and the area had a significant amount of dry rot that I had missed on my initial inspection. And patio doors aren't cheap, unfortunately.
So, we had to repair a good amount of the trim and subfloor and install a new door. Remember, the best laid plans are just plans, and in any rehab that is decent in size, there will almost always be unforeseen issues. This is why it’s important to put a contingency in your budget.
Still, it looked a lot better when it was finished:
Still, despite the fact that we had some unforeseen issues, we still came in under our revised budget ($25,000 with the sewer line) when all was said and done:
(Note: the wholesaler's fee was $10,000, and the closing costs and an internal "capital management fee" for my time were the remainder of the intangible costs that brought our all-in price over $100,000.)
Renting the Property
We actually considered doing something fairly unusual and creative with this property by renting it out to a friend of ours who has multiple rentals that he rents out on a short term basis with AirBnB. Generally, he makes a killing on the rentals he already has.
The arrangement would have been something along the lines of a base rent plus a percentage of the profits. This could have worked because the property is relatively close to the Country Club Plaza, where many hotels are located.
In the end, we decided against it, given how much of an anomaly it would have been in our portfolio, and simply rented it out on a normal year-long lease. Given the area has a high rental demand, it wasn't hard to find someone. Still, we declined a few applications with spotty credit, as it's better to have a property sit vacant than to get the wrong tenants.
Our strategy is to bundle several properties together into small portfolios and bring them to various local banks to refinance out the private loan or the cash we have into the property. This gets us long-term financing and allows us to take advantage of principal pay down while reusing that private loan on a new property. This property is next on deck and shouldn’t be a problem, as it’s in good shape and in a good area.
Some banks, particularly a few years ago when the market was softer, wanted a seasoning period (usually one year) before they would refinance a property based on its appraised value and not just the cost you had into the property. Since our cost into the property, including closing costs, was only $104,000, we could only borrow $78,000 if the bank lent on just our costs. That’s barely 50 percent of the value! So make sure the bank lending to you is willing to go off of the appraised value.
In this case, we should be able to close the loan on this one in the next few months, successfully BRRRR-ing out, as they say. And anytime you can BRRRR out with no cash left in the property, well, that's a deal worth celebrating.
Any questions about this deal? How have your recent BRRRR deals compared?
Let me know your thoughts with a comment!