My First BRRRR Complete!
After almost 10 months of hard work, I have completed by first BRRRR deal. With the appraisal complete, I now have a chance to look back on the results and offer some lessons learned for others to take note of. I have detailed my planned financials vs the actual below, in the hopes of giving folks a clear cut example of how things worked out. This project was far from ideal. I made a lot of mistakes and have many lessons learned. And this was a huge renovation, which you may be able to tell from the before and after pictures I have included. But, I am thrilled to have an overall positive result in net worth, and a great experience to learn from for my next deal.
Financial Results
Planned | Actual | |
Purchase Price | $51,500 | $51,500 |
Renovation | $35,000 | $80,000 |
All In Cost | $86,500 | $130,500 |
ARV | $135,000 | $170,000 |
Rent Income Before Refi | $0 [didn’t plan this] | $2,400 [only 1 unit rented so far] |
Money back from Refi | $94,500 | $119,000 - $4,000 closing = $115,000 |
Money Left in Deal | -$8,000 | $13,100 [calculation: $130,500 - $119,000 - $2,400 +4,000] |
Net Worth Impact | + $48,500 | + $41,900 |
I had forgotten that my renovation budget was initially so low. When I was looking back to write this post I laughed when I saw what I budgeted. Clearly I had no idea the costs would be so high, but more specifically, I added many things to the scope that I didn’t first think about. Luckily, I had more than enough saved and the additional costs weren’t an issue to cover, but the important take away for me is that I now have data to better estimate costs on future offers.
Interestingly though, I also underestimated my ARV by a lot. These are things that are crucial to making good offers and getting deals, so I will be spending some a good amount of time building out my cost estimates in the future.
Why were costs so high?
You may wonder how my initial cost estimates were so far off, so here are a few examples to illustrate.
- I estimated around $5,000 for demo. However, after getting into it, I decided to gut the majority of the house and get rid of the plaster walls, especially since I needed to rewire the whole house. The extra labor accounted for $12,000 more than anticipated, not to mention the cost of 3 more dumpsters than I expected. If I needed to, I could have saved more of the plaster walls and kept the labor cost down, but I chose to gut and start new.
- I estimated $10,000 for electrical. Electrical ended up being around $16,500 for 2 reasons: 1) After getting 4 bids, the best quote was around $14k, so my budgetary estimate was just low to begin with; and 2) while my first electrician did ok, I did ultimately replace him toward the end of the project as I wasn’t happy with his attention to detail, pride of workmanship, and overall way his helper treated my other contractors. Therefore, I brought in someone new to finish the job, which gave me a chance to test out a new electrician [glad I did, the new guy is a keeper].
- I made a very bad choice on plumbers initially, and going the cheap route to start ended up costing me an extra $2,000 or so to fix their bad work.
- I underestimated the cost of a new HVAC for the second unit, about a $3,000 difference in my budget. Frankly, I probably got oversold and made a mistake on this. While I bid out the cost of the scope proposed by the first HVAC company I received a quote from and confirmed the price was ok, I instead should have had more HVAC companies walk the house and propose what they saw as the best solution. I probably could have gotten away with just installing 3 split units for much less, and my guess is that I would have heard this option if I didn’t just quote out the first bid I received. I think at this point in the project I was in a hurry to get the HVAC in before drywall started, as I had a tight window before the drywall crew would be unavailable for months. So poor project management cost me on this one.
- Finally, due to COVID, my original GC had to stop working. In order to keep work going, I had to find a new GC. This new GC would also need to handle my project management, as I could no longer fly back as often to oversee the project [I live in Texas, but the project is in Cincinnati]. The bill rate of the second GC was twice what I had been paying, but my options were limited and I needed a strong worker to get the project done. The silver lining on this is that I learned that my initial GC was great at demo, but the second GC I brought in was far better at the “rebuild” portion of the project. While his bill rate was higher, he probably saved me just as much by being more efficient and coming up with alternatives to what I was planning. I will be using my second GC as a project manager on future projects, and likely just using my first GC as a labor crew for tear outs.
- Additionally, I way under estimated the number of hours it would take to finish up the project [things like installing trim, baseboards, window sills, etc].
Cash Flow
On an ongoing basis, my mortgage + tax + insurance + water [which I cover] will be around $975/month. One unit is rented for $800/month [probably $100 or so less than market as I a friend move in] and unit 2 should rent for $900/month. So this will leave me with cash flow around $725, before I set aside money for repair and vacancy. Frankly, after doing a full renovation on this house, CapEx should be fairly low for a while. And I have a 3.5% rate on a 30 year mortgage.
Refinance
Another question people may have is in relation to the refinance. I refinanced with the same local bank that I used for my first rental property purchase a few years ago. Because they are local, they are swamped with refi requests, and I was the first investor [non-owner-occupant] they were allowing to refinance so far in 2020. The main reasons they allowed my refi to proceed: I was understanding and patient with them when they were slow to respond due to a flood of requests and COVID, and I had a good track record with them over the past 3 years. Otherwise, I might still be trying to complete the refi!
Summary
This project was an amazing education for me. Having completed my first BRRRR while living 1,000 miles away from the property, during a pandemic, I have a lot more confidence and am ready to take on my next deal. I hope this long post will help others who are considering, or preparing for, their first BRRRR. If anyone has questions, I'd be happy to help give clarifications. Thanks for reading.
