BRRRR Investing: Is This Property a Smart Purchase? (Real-Life Deal Analysis)

BRRRR Investing: Is This Property a Smart Purchase? (Real-Life Deal Analysis)

5 min read
felipe mejia

Felipe Mejia is a real estate investor and co-host of the Real Estate Rookie Podcast. His primary investments are single-family homes, of which he currently owns eight. Felipe is passionate about building wealth and enjoys spending time helping individuals navigate the process of acquiring their first investment properties.

Experience
Felipe has been actively engaged in real estate investing for four years. However, he unknowingly “house hacked” his way through college while attending Tennessee Tech University. This ultimately was the gateway into his real estate journey.

After obtaining his bachelor’s degree in Criminal Justice, Felipe realized that a career in law enforcement was not in the cards for him. He started a moving labor company and realized just how hot the Nashville real estate market was. This piqued his interest in investing and led him to BiggerPockets.

While Felipe has owned mobile homes, a multi-unit complex, and a condo, his current investment strategy is unique in that he usually buys a certain style of house that allows him to double the amount of living space. He then rents by the room. It is certainly not a traditional approach but has proven to be quite successful for him.

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Listen to Felipe explain more about his strategy on episode 329 of the BiggerPockets Podcast. He has also shared his experience and story on The Best Real Estate Investing Advice Ever, The Wealthy Neighbors Show, Pura Cultura Podcast, and The Daily Real Estate Investor.

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In the video and article below, I’m going to walk you through a property I was looking at recently.

It was crazy how this property came on the market last night, and I was super excited to jump on it. Let’s run through and analyze this deal together to see if it’s something that fits into my portfolio.

Here we go.

BRRRR Walk-Through

This house is not my typical cup of tea. This kitchen’s a little smaller, but that’s OK—I think it would work, and I’ll tell you why in a minute when we talk about the rooms and how big or small they are, as well as how many there are.

But what we noticed right away is this house is turnkey. Somebody has already flipped it, and it’s ready to rock and roll. This is a perfect property for maybe a newbie investor—someone who’s just starting—where there’s not going to be a lot of expenses right off the bat.

Kitchen

In the kitchen, everything is brand new—stove appliances, everything. There’s just no refrigerator, and we can work that into the price later. And that’s OK.

But what I like about having new appliances is the electricity bill will be low. There’s not going to be tons of maintenance right off the bat—it’s all brand new so it works perfectly.

Now, that doesn’t mean I trust it. That means that my inspector is going to have an easy time telling me whether the property flippers did a good job. So an inspection is very important when the house is brand new like this and has been completely been renovated.

Bedrooms

Typically, I like to purchase a home that has three bedrooms upstairs and one full bath so that whoever is renting can share a bathroom and there’s no master bedroom. It’s the same dynamic in this house, but the only downside is that I only have two bedrooms.

Hypothetically, my cash flow would be down $500 if that’s what I’m charging per room.

Now, the good thing is this house is completely renovated, so I don’t have to put any money into it right off the bat. In turn, this allows me to charge maybe $1,200 for this house versus $1,400 or $1,500.

So I would be losing $200-$300 a month in cash flow, but that’s not terrible—because I don’t have to put anything into it.

What I would do in this house is probably rent it to a family where they would cover their costs of living, their light bill, their water bill, etc. And then I would probably charge them $1,200-$1,300 to stay in the upstairs, completely renovated home.

And we’ll talk about cash flow at the end of the day and break down the numbers.

Related: BiggerPockets Podcast 373: Invest Locally or Out of State? Why Not Both! BRRRRing & Building with Lee Ripma

Creating More Bedrooms

At first, I wasn’t so sure about this house just because it’s a two-bedroom upstairs. We were going to have to figure out how to make sure the numbers work.

But right now, I’m loving it a little more after walking downstairs—simply because even this area is great. There’s a full bathroom and full kitchen.

This is really cool because as you may know, typically what I do is I add value downstairs by adding bedrooms to it. What I’m really digging about this house is that it’s already here, and it looks like someone’s already basically built it out for me.

In the video above, you can see an air conditioning and a heat unit that would keep this place nice and cool (or nice and warm, depending on the weather).

You’ll see a whole other bedroom, as well, and like we talked about, we’ve got a kitchen and a bathroom. Downstairs rooms are already built, so this house already is going to cash flow about $900. (Again, more on the numbers later.)

And this has to be one of my favorite parts so far: Because it has a private entrance, now it’s separate from the upstairs.

Imagine a duplex, except as an up/down, top and bottom. The upstairs is going to rent for $1,200-$1,300, and then the downstairs I’ll be able to list as a private space with a private door. This area is basically going to be used like a duplex.

Turning a Garage Into a Master Bedroom

This area is really sweet because most investors see this as wasted space—a one-car garage is a waste of square footage to most investors for this property.

For me, this is a master bedroom suite—an easy 10′ x 15′ or 15′ x 15′ area for a master bedroom. Not just that, but you can close off the garage door and give this space a private entrance as well if you wanted to. This area is perfect for what I do.

Now to wrap it up—this property looks like something that would work for me based on the square footage, the number of bedrooms, and the value-add that we found downstairs.

I think it would work just fine. The last thing I have to do is run the numbers, see what the market’s going to hold, and find out what my offer price is going to be. Let’s get that knocked out.

calculate-financials

The Numbers

Now comes the not-so-sexy part of real estate investing—running the numbers. When doing so, even as a seasoned investor, sometimes you’re going to realize you’re wrong.

This property does not work, and you can see it in my face.

Let’s run the numbers, and I’ll explain why. It hurts my heart because I really was excited about this property.

So, let me explain.

The asking price was $209,900—we thought that would work. We were excited. We were saying, “Yes, that’s a fair purchase price.”

Now, as you remember, upstairs there were only two bedrooms, meaning we could get top-dollar for both of those rooms because it is remodeled.

Here’s what happened.

  • Asking price: $209,9000
  • Offer: $189,000
  • Counteroffer: $200,000
  • Remodel: $15,000
  • Proposed equity: $4,000

But that still would not work. We offered $189,000 and we said, “Maybe they’ll settle. Maybe they won’t. We’ll see.”

What ended up happening was they countered with a $200,000 accepted price and that just didn’t fit our budget.

I’ll explain why.

With the remodel coming in at $15,000—we determined we had to add a bathroom, drywall, paint, and floors for that extra part in the garage that was going to be the crème de la crème that was going to make this deal work.

But without getting it for the right purchase price, the numbers don’t work.

Now, if you’ve seen some of my content, you know that I can use the equity in a property to build out a certain area of the house. Or if I have to go a little bit negative equity in the purchase price, then those extras need to already be there.

This property neither had equity nor already built out anything. What ended up happening was the market value of the property minus the countered purchase price was only a $9,000 difference.

It was going to cost me $15,000 to add a bathroom, floors, paint, drywall, and create a true master. We were only going to have $4,000 in proposed equity, so we’re already going to be in the hole $10,000 purchasing this property.

Related: 6 Pros & Cons of Investing in Turnkey Properties

The cash flow wasn’t going to cover that right away. The rent from upstairs was going to cover all the bills, the mortgage. But everything that has to do with running the property was going to leave us no cash flow.

We were banking on the downstairs of the property, which we could’ve rented for about a $1,000 (maybe $1,200 on a good day) to be our cash flow. While we were there and without analyzing the numbers, we figured that would work. But it doesn’t—because we have no equity in the deal to create that extra revenue that we need.

So, we’d have to pay out of pocket to make sure that we added a bathroom, kitchen, and things of that nature. Therefore, unfortunately, it doesn’t work out—not even for me, a seasoned investor.

As they say, there’s not enough meat on the bone to purchase this property.

Now, if we had gotten the property at $189,000 as we discussed, then we would have had $10,000 to $15,000 in equity. We would have used that to build out the downstairs.

Clearly, I was wrong at first glance though. So, we ended up passing on this property.

What do you look for in a potential BRRRR investment property?

Let us know in the comments below!