First Investment Property: Diamond in rough or just rough?

Question

I wanted to jump into multifamily investing since last year during quarintine. In February 2021, I closed on a triplex in Columbia, SC for $155k. It was not in the best shape structurally but had three tenants paying rent totalling $2k/month. No brainer I thought but the situation wasn't as shiny as it seemed after closing.

Tenant A refused to pay ever and I finally got to evict in June. Tenant B paid one month and then abondoned unit in June. Tenant C is only one that is actually paying since March but has many "customers" coming in and out his unit lately.

My property manager has suggested some renovations and repairs be done to increase appearance of units while they are empty to attract better tenants and in turn, increase rents to closer to average for the area ($850+). My property is the second roughest house on block so I agreed that enhancing the image would be helpful. Total renovation costs are around $40k and would no doubt increase value of property in long run.

Being this is my first rental property, I don't know what I don't know. I am thinking the the BRRR method can be employed here but I am unsure how to proceed or predict if that's a sound strategy. What do I need to consider moving forward?

THANK YOU!

Ronald Allen Barney · Answer

Numbers numbers numbers.

ARV rent of $850 gets you to total income of $2550.  Getting to ARV is probably required to have any rental income at all so consider it an all in rehab and rent, or sell/1031 to learn your lesson and move on.

Selling versus hold and refi are a wash at near-0 since it's a new purchase.  No equity to compare.

Cash outlay to hold is estimated at $40k.  Cash flow is not known for sure but I would take a wild stab and say the mortgage on $155k and some default cost percentages would put your cash flow at $750/month total at ARV.  Your cash on cash return to rehab and hold would be 22%.  Barring something insane like the Russian mob having a war in your neighborhood I would definitely do the rehab, get better renters, and hang on.

Vatsal Suthar · Answer

You are absolutely correct Seth. The appraisal outlined perfectly the items that devalued the property and so those are being addressed in the renovations now. Thank you so much for the advice and support!

Brian Armstrong · Answer

Agreed with @Ronald Allen Barney but with slightly different numbers.. Assuming you put 25% down ($38,750), if the rehab costs you $40k you're all in for $78,750 so if you are able to cash flow his estimated $750/month = $9,000/year = ~11% cash on cash, which is very respectable for a buy and hold. Now as for whether or not to BRRRR, that's dependent on your goals and the area you're in. I'll assume that the ARV goes up 1:1 with your repairs, so if your ARV is $195,000 then you could refinance and theoretically pull out ~ 25% of that or $48,750 so you would be all in for ~$30,000 but you'd have close to $50,000 cash to reinvest. However, your cash flow will be less because your loan will be like 40% bigger than your original loan. Depending on your market maybe the ARV is much higher though, if it was ~$315,000 ARV then you'd be able to pull 100% of your cash out on a refi.

Seth Engelbrecht · Answer

Vatsal, in my opinion I would say go ahead and move forward and complete the renovations. If you stay one of the worst properties in the neighborhood you are going to get the worst tenants paying the least rent. If you do not do the updates now they will likely need to be done in the next couple years anyways. Rates are still incredibly low and you should be able to refinance at competitive after completion. If you look at your appraisal from the time of purchase it may give you some ideas of the repair/renovation items the appraiser docked you on and the amount they discounted. That should give you some indication of what it might appraise for after renovations. Even if you aren't able to pull off a "perfect BRRRR", you may be able to get a good portion of your cash back

-Seth

Vatsal Suthar · Answer

Hey Will,

4017 Ensor Avenue 29203

It is off North Main St in Downtown close to Zesto.

TBG Property Management, LLC helps me with taking care of the property

Will Gaston · Answer

@Vatsal Suthar That area has gotten a lot nicer in the last few years and it appears it is continuing in that direction.

There are some pretty significant developments coming down as well. (A 34 million dollar brewery is scheduled to open up in 2022 off of North Main.)

https://www.wltx.com/article/n...

I don't think it would be a bad investment but I certainly would monitor it with a close eye. 40k + out of state investor + this current construction climate could equal a mess if not managed properly.

Vatsal Suthar · Answer

I absolutely feel confident that can happen with the surrounding house values.

Caleb Brown · Answer

Rehab it and refi. Make sure the GC is solid and have a scope lined out.

Jill F. · Answer

In that neighborhood, could you put the triplex on the market and get $195k for it after renovations?

Will Gaston · Answer

@Vatsal Suthar a couple of questions:

1) Where in Columbia is this?

2) Who is your PM?

First Investment Property: Diamond in rough or just rough?

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