{"id":87397,"date":"2017-04-01T14:30:01","date_gmt":"2017-04-01T20:30:01","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=87397"},"modified":"2021-03-16T12:23:16","modified_gmt":"2021-03-16T18:23:16","slug":"best-brrrr-ever","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/best-brrrr-ever","title":{"rendered":"Case Study: One of My Best BRRRR (Buy, Rehab, Rent, Refinance, Repeat) Deals Ever"},"content":{"rendered":"<p>In my <a href=\"\/renewsblog\/BRRRR-success\/\" target=\"_blank\">previous article<\/a>, I discussed a very good <a href=\"\/renewsblog\/2015\/04\/20\/how-to-100000-dollars-year-real-estate\/\" target=\"_blank\">BRRRR<\/a> (buy, rehab, rent, refinance, repeat) deal. This article will give another example when everything goes right. Indeed, pound for pound, this deal is one\u00a0of our best deals ever, if not the best. Next week, I&#8217;ll discuss a deal that went sideways and what you can learn from it.<\/p>\n<p>First thing, I noted our property criteria, which I will reprint here:<\/p>\n<ol>\n<li>Our total cost into the property will be less than 75 percent of the ARV, allowing us to refinance out our entire investment.<\/li>\n<li>The property must cash flow with a fully financed 8\u00a0percent interest only loan on it (this is what we usually get from our <a href=\"\/renewsblog\/2012\/12\/31\/private-money-lenders\/\" target=\"_blank\">private lenders<\/a>).\n<ul>\n<li><em><strong>Note:<\/strong><\/em> If a\u00a0property doesn\u2019t\u00a0meet this qualification, we would likely <a href=\"\/renewsblog\/2014\/01\/07\/flipping-houses\/\" target=\"_blank\">flip the property<\/a>.<\/li>\n<\/ul>\n<\/li>\n<li>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 <a href=\"\/renewsblog\/2016\/01\/26\/vast-majority-investors-stay-fard-class-properties\/\" target=\"_blank\">too many headaches and problems<\/a>.\n<ul>\n<li><em><strong>Note:<\/strong><\/em> If a property doesn\u2019t\u00a0meet this qualification, we would consider <a href=\"\/renewsblog\/2015\/01\/31\/ultimate-beginners-guide-real-estate-wholesaling-2\/\" target=\"_blank\">wholesaling the property<\/a> to an investor who specializes in such areas.<\/li>\n<\/ul>\n<\/li>\n<\/ol>\n<p>Some people in the comments were surprised we took so little in cash flow (about $800\/year)\u2014although I should note that is with very conservative assumptions and factors in a management fee even though we self-manage.<\/p>\n<p>For most\u00a0investors, a house with $35,000 to $40,000 equity that only cash flows a little would be worth flipping, at least generally. However, we are looking for long term principal pay-down and appreciation and have the resources to hold just about anything we buy without hindering further acquisition.<\/p>\n<p>In addition, properties in better neighborhoods generally have a better appreciation potential, are less risky, and involve less\u00a0hassle. So we try to buy a mix of the properties and hold them. We\u00a0have split them out into three classes, which we refer to as\u00a0follows:<\/p>\n<ol>\n<li><em><strong>Equity Deal:<\/strong> <\/em>These are properties, such as the property on Terrace in <a href=\"\/renewsblog\/BRRRR-success\/\" target=\"_blank\">last week&#8217;s article<\/a>, that are in good areas with low crime and good schools. I&#8217;m not talking about A+ areas or luxury housing or even anything close to that. That type of product is not something we&#8217;re looking for. But these properties will generally have lower cash flow, but higher potential equity margins and appreciation potential:\n<ul>\n<li>We are looking for approximately 1.2% rent to cost on these deals.<\/li>\n<li>We are looking for approximately $75+ positive cash flow per month with 100 percent financing at 8% interest.<\/li>\n<\/ul>\n<\/li>\n<li><em><strong>Value Deal<\/strong>:<\/em> These are properties in the middle. Generally lower middle class or working class areas that are solid, but come with some crime and not the best of schools.\n<ul>\n<li>Approximately 1.5% rent-to-cost ratio.<\/li>\n<li>Approximately $125+ positive cash flow per month with 100% financing at 8% interest.<\/li>\n<\/ul>\n<\/li>\n<li><em><strong>Cash Flow Deal<\/strong>:<\/em> These are lower end properties that I would not recommend a newbie try to manage. They come with more risk, and it&#8217;s much easier to rehab the equity out of these properties because they are very cheap. But there is also more reward as the rent to cost ratios and cash flow are quite high.\n<ul>\n<li>Approximately 2% rent-to-cost ratio.<\/li>\n<li>Approximately $200\/month with 100 percent% at 8% interest.<\/li>\n<\/ul>\n<\/li>\n<\/ol>\n<p>Of course, what each person considers an Equity\/Value\/Cash Flow play is different. But for us in Kansas City, the price ranges are about as follows:<\/p>\n<ul>\n<li>Equity: $100,000+<\/li>\n<li>Value: $60-99,000<\/li>\n<li>Cash Flow: &lt;$60,000<\/li>\n<\/ul>\n<p>This deal was just on the edge between and equity and value deal.<\/p>\n<h2>Finding the Deal<\/h2>\n<p>This property was simply sitting around on the MLS for anyone to find. Banks, particularly Fannie, Freddie and HUD will sometimes wildly miss-list a property. Usually it will create a feeding frenzy with a highest and best situation, but sometimes, these properties go under the radar.<\/p>\n<p>Great deals going under the radar was something that happened much more often back in the days of Great Recession, but it still happens from time to time today. <a href=\"\/renewsblog\/2015\/07\/08\/find-profitable-deals-on-the-mls\/\" target=\"_blank\">Our strategy with the MLS<\/a> is to look at large numbers of properties in one &#8220;property tour&#8221; and make offers on any were interested in. Usually, it&#8217;s something like 10 to 12 each time. Sometimes we make low balls; sometimes it&#8217;s a highest and best on a mis-listed property.<\/p>\n<p>This time, for some reason, we were the only one&#8217;s offering. In fact, the property was listed at $39,900, and we only offered $28,250. I had just moved out to Kansas City a year ago and mistook the area for being worse than it was. By the time I realized my mistake and decide to raise our offer, the bank had already accepted our\u00a0original one. Sometimes mistakes work out pretty well.<\/p>\n<h2>Evaluating the Property<\/h2>\n<p>The subject property was on Harrison Ave in South Kansas City, MO and was a 3-bed, 1.5-bath raised ranch. Here is the exterior:<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-87450\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/1-1-1.jpg\" alt=\"\" width=\"800\" height=\"600\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/1-1-1.jpg 800w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/1-1-1-300x225.jpg 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/1-1-1-768x576.jpg 768w\" sizes=\"auto, (max-width: 800px) 100vw, 800px\" \/><\/p>\n<p>There weren&#8217;t too many sold comps in the area, but they were all nearby so they were at least quality comps:<\/p>\n<h1><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-87407 size-full\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Picture-1.jpg\" alt=\"\" width=\"644\" height=\"133\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Picture-1.jpg 644w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Picture-1-300x62.jpg 300w\" sizes=\"auto, (max-width: 644px) 100vw, 644px\" \/><\/h1>\n<p>It&#8217;s important to remember when evaluating comparables that you want to compare your property with properties like what it will become AFTER you&#8217;ve completed the rehab. So usually foreclosures and fixers aren&#8217;t good comps.<\/p>\n<p>Both Colony Place and the house on Lydia that sold for $70,000 were foreclosures. And the pictures on the listing for Shepards Drive made it clear the property needed a bit of work. While the rest of the properties were bigger than ours, I was confident that Harrison was worth at least $100,000.<\/p>\n<p>Rent comps came in around $1000\/month. This is from <a href=\"http:\/\/www.RentRange.com\" target=\"_blank\" rel=\"noopener\">RentRange.com<\/a>,<\/p>\n<h1><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-87408 size-full\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Picture-3.jpg\" alt=\"\" width=\"771\" height=\"448\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Picture-3.jpg 771w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Picture-3-300x174.jpg 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Picture-3-768x446.jpg 768w\" sizes=\"auto, (max-width: 771px) 100vw, 771px\" \/><\/h1>\n<h2>Financing and Due Diligence<\/h2>\n<p>Financing on this one wasn&#8217;t very hard. After showing the first private lender the comps, she knew it was a safe deal and we got the financing for the purchase and rehab very quickly. Remember, a great deal will make the financing much, much easier.<\/p>\n<p>This deal looked so good it almost seemed like due diligence was unnecessary.\u00a0You should always ignore such a feeling. Do thorough due diligence no matter what and play devil&#8217;s advocate with yourself. You don&#8217;t want to get paranoid, but you do want to ask yourself what you might be missing. There are deals we&#8217;ve gotten under contract we thought were great but weren&#8217;t. For example, one had a shot septic tank in the back and needed to be hooked up to the city sewer, which, with fees, would cost over $10,000. That&#8217;s not something you want to miss.<\/p>\n<p>Luckily, on this deal, there was nothing out of the ordinary.<\/p>\n<h2>Rehab<\/h2>\n<p>Surprisingly for such a cheap property, it didn&#8217;t need much work. Here were the major items:<\/p>\n<ul>\n<li>Epoxy cracks on garage wall<\/li>\n<li>Put french drain in backyard (to help with drainage from hill behind house)<\/li>\n<li>Trim trees in front<\/li>\n<li>Paint interior two tone<\/li>\n<li>Vinyl kitchen and half bath<\/li>\n<li>Appliances<\/li>\n<li>Punch out items and knick knacks<\/li>\n<\/ul>\n<p>Overall, I budgeted $12,500, and the rehab came in pretty close at\u00a0$14,895.\u00a0Here is how the house looked afterward:<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-87449\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Picture-4-1.jpg\" alt=\"\" width=\"800\" height=\"600\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Picture-4-1.jpg 800w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Picture-4-1-300x225.jpg 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Picture-4-1-768x576.jpg 768w\" sizes=\"auto, (max-width: 800px) 100vw, 800px\" \/> <img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-87447\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Picture-6-1.jpg\" alt=\"\" width=\"800\" height=\"600\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Picture-6-1.jpg 800w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Picture-6-1-300x225.jpg 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Picture-6-1-768x576.jpg 768w\" sizes=\"auto, (max-width: 800px) 100vw, 800px\" \/> <img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-87448\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Picture-5-1.jpg\" alt=\"\" width=\"800\" height=\"600\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Picture-5-1.jpg 800w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Picture-5-1-300x225.jpg 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Picture-5-1-768x576.jpg 768w\" sizes=\"auto, (max-width: 800px) 100vw, 800px\" \/><\/p>\n<p>And here is our current balance sheet:<\/p>\n<h1><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-87409 size-full\" src=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Picture-7.jpg\" alt=\"\" width=\"485\" height=\"314\" title=\"\" srcset=\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Picture-7.jpg 485w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Picture-7-300x194.jpg 300w, https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2017\/03\/Picture-7-214x140.jpg 214w\" sizes=\"auto, (max-width: 485px) 100vw, 485px\" \/><\/h1>\n<h2>Refinancing<\/h2>\n<p>Banks have really loosened up over the last two or three years, but it was extremely tough at first to find a lender. Even rehabbed and rented with a tenant paying $1,070\/month, it took us almost two years. Luckily, it cash flowed well even with a 9 percent loan because we got the property so cheap.<\/p>\n<p>Nowadays, it rarely takes us more than six months to refinance. But then again, the properties are much more expensive than they used to be. As an aside, for help getting a lender on the back end to say yes, see this <a href=\"\/renewsblog\/2016\/01\/06\/selling-loan-submission\/\" target=\"_blank\">article<\/a>.<\/p>\n<p>The property ended up appraising for $106,000, and so we were actually able to pull out about\u00a0$30,000 upon refinance! In total, our equity was about $63,000.<\/p>\n<p>Here&#8217;s how it worked out on our three criteria:<\/p>\n<ol>\n<li><em><strong>ARV:<\/strong><\/em> $43,000\/$106,000 = 40.56%\n<ul>\n<li>40.56% beats 75% easily<\/li>\n<\/ul>\n<\/li>\n<li><em><strong>Cash Flow:<\/strong><\/em>\n<ul>\n<li>Rent: $12,840 ($1070\/month)<\/li>\n<li>Vacancy: $1284 (10%)<\/li>\n<li>Expenses: $4000\/year<\/li>\n<li>Debt Service: $3686\/year ($43,000 at 9% interest only)<\/li>\n<li>Cash Flow = $3,686\/year or $307\/month which is easily above our criteria.\n<ul>\n<li>Upon refinancing, our cash flow is cut to about $1500 per year, but that&#8217;s after pulling a good deal of money out.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<li><em><strong>Area:<\/strong><\/em> The zip code isn&#8217;t great, but by evaluating the subdivision both by driving around, evaluating nearby comps and using the map feature on <a href=\"http:\/\/www.city-data.com\" target=\"_blank\" rel=\"noopener\">City-Data.com<\/a>, we were able to determine it was a decent area. The map feature on City-Data.com allows you to get data, such as median household income, by subdivision. In this case, it is a solid $47,950.<\/li>\n<\/ol>\n<p>Now that is a successful BRRRR deal if there ever was one!<\/p>\n<p>So overall this property was one of our best deals ever and an example of how great a BRRRR deal can be when everything goes right. Next week, I&#8217;ll discuss what happens when a deal goes sideways along with how to get through it and preferably, how to avoid it altogether.<\/p>\n<p><em>What&#8217;s the best deal you&#8217;ve ever encountered? What do you think of this BRRRR property?<\/em><\/p>\n<p><strong>Leave your questions and comments below!<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>This article will give an example of when everything goes right. Indeed, pound for pound, this deal is one of our best deals ever, if not the best.<\/p>\n","protected":false},"author":1689,"featured_media":87452,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[5524],"tags":[1090,5861,1243,376,187,81,4410,59,2282,685,274],"class_list":["post-87397","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-investing-for-beginners","tag-arv","tag-brrrr","tag-buy-and-hold","tag-comps","tag-equity","tag-mls","tag-private-loans","tag-real-estate-investing","tag-refinancing","tag-rehab","tag-reo"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/87397","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/1689"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=87397"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/87397\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/87452"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=87397"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=87397"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=87397"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}