First BRRR Deal!

67 Replies

First BRRR Deal

The Buy

This property is literally just down the street from my personal residence. I have noticed it for the last year since we have moved into our house. The paint was chipping and it was just obvious no one had lived in the house for several years. One day on my way home from work I noticed a few people painting the exterior. They didn’t look like professionals so I guessed they were the owners. So I pulled over to talk with them and the conversation went a little like this.

Me -“Hi my name is Jake, is this your house?”

Owner – “Yes it is”

Me – “Do you mind me asking what you plan to do with the house?”

Owner – “fix it up and sell it”

Me – “How much are you asking?”

Owner – “Well Taxable value is $38,000 so that makes it worth $76,000 so that’s what we want”

Me (trying to hold back excitement) “That sounds fair, do you mind if I take a look inside?”

After a brief look inside I see this is a 4 bedroom 1 bath house built in the early 1900’s. It needs a slight rehab and some updating done. I went home and grabbed my girlfriend to show her the house. We chatted with the owners for about an hour and agreed to a purchase price of $75,000.

The house ended up appraising for $115,000 and we closed on 8/14/2015.

Purchase price $75,000

Closing costs $4,000

Estimated rehab budget $15,000

All in for $94,000

ARV $150K-160K conservatively.

The Rehab

The rehab was pretty smooth and came in just a bit over budget at $15,600 and we finished about 7 weeks after purchase. We used a mix of contractors and ourselves to do all the work. We hired someone for drywall, HVAC,  a glass block window, carpet and a flat roof replacement. Everything else was done by us. I also was able to experience our first time having to fire a contractor. The flat roof they installed was done poorly, it still leaked and they caught my house on fire. Luckily it was caught early and no real damage occurred. I guess you should screen your contractors like your tenants (lesson learned).

Renting – This is in a nice suburb of Grand Rapids, MI and we were able to rent it within 1 week of posting it online to a nice family with a couple of kids. Property rented for $1,300/month tenant covers all utilities, yard and snow removal. Tenant moves in 11/1/2015.

Refinance – If we decide to refinance this after the 6 month waiting period for my bank it should appraise for a minimum of $150,000 but more likely upwards of $170,000 this spring. At 70% LTV that is $119,000 in cash I can pull out if I decide to. If we refinance my monthly payment with taxes and Ins. Would be right around $1,000 per month and the property would still cash flow positively.

Summary using simple quick math

Purchase price $75,000

Closing costs $4,000

Actual rehab $15,600

All in for $94,600

Cash invested (rehab + down payment) $30,600

Rented for $1,300/ month.

Current payment of $530 including taxes & ins.

Less any other expenses (vacancy, maintenance, etc.) $100/month

+$670 per month in cash flow.

If refinanced cash flow will go to $200/ month but we will have $119,000 in cash to work with.

Probably the best deal we have purchased this year.

See below for some before and after's.

Great Job, and great deal!  Be careful on your estimates for expenses.  50% rule!  You don't have much baked into your cost estimate for vacancy, management, potential repairs that are beyond your control, snow removal, landscaping, water/sewer, etc.  That estimated $200 cash flow after the refi will get eaten up quickly.  Even if you self manage, do your own repairs, and/or your own shoveling and landscaping, leave yourself the option in the future so that it is a positive cash flow property for years to come even if you need to sub out all of the things above.  I'm not the kind of guy to cut a vacation short to fix a tenants water leak, I'm assuming you're not either :)

Looks like an amazing find @Jake Thomas , congratulations!  Seems that many people still think the county's estimation of value means something. :)  Sounds like you purchased it with conventional financing, so it must have been in decent shape.

@Kevin Trumbull yes it was conventional 20% down. It was in fair shape just dated. 

@Linnea Minnema Property is located in Caledonia, MI right in the village. 

@Matt Leonard I don't buy based on the 50% rule. The numbers on this one make sense and its in my backyard. Rent will increase by $50-100 next year anyways. I may not even Refi it if I don't need the cash in the spring. 

Thanks everyone else!

Jake Thomas great work man. Did you already have a relationship w/ the lender you're planning to refi with or would this be your first bit of business with them?

Also, you got a lot of Reno done with a 15k budget... That's impressive. The roof alone must have been at least 40% of that? Were the other components not so extensive?

@Clayton P. I get 2-4 loans per year through this lender. I usually don't refi but the equity is really good on this one so its an option. 

The main roof was fine, the flat roof I had replaced was an addition to the house at some point. $1,100 for the flat roof. The $15K doesn't reflect my time spent but I don't know how to put a monetary value on my own time. I enjoy some aspects of the work, especially using the paint sprayer, I don't know why buts its fun. I will admit laying tile is time consuming and not as much fun but its all a learning experience. I figure one day when I can hire all the work out I will understand the scope of the work I am contracting and have a better understanding to what needs to happen and the costs involved.  

Originally posted by @Jake Thomas :

@Clayton P. I get 2-4 loans per year through this lender. I usually don't refi but the equity is really good on this one so its an option. 

The main roof was fine, the flat roof I had replaced was an addition to the house at some point. $1,100 for the flat roof. The $15K doesn't reflect my time spent but I don't know how to put a monetary value on my own time. I enjoy some aspects of the work, especially using the paint sprayer, I don't know why buts its fun. I will admit laying tile is time consuming and not as much fun but its all a learning experience. I figure one day when I can hire all the work out I will understand the scope of the work I am contracting and have a better understanding to what needs to happen and the costs involved.  

I totally agree with you on understanding the scope of work and being able to know what jobs you don't want to do and what jobs you do.  I started by doing all of my own work and pretty much everything I have ever done in business in fact.  That includes the labor, stuffing envelopes, talking to sellers, building a website, etc...  I try to do everything once so I know what I am paying for and what value it has to me as the owner.   I certainly agree with the guys who haven't done any manual labor in their business too, I'm just not that kind of person and I think it has helped me in the long run.  I try to hire everything out now but occasionally I find myself doing odds and ends when it make sense, I also like doing it.  

Great job on the renovation and I can't wait to see the next one. 

@Jake Thomas This is a good deal. I do not buy based on the 50% rule. If I did, I would have 0 properties right now.  I would refi this house (150K ) at 80%, pay yourself back for the cost of acquisition/ Rehab of 94K and put  26K in reserves. You would still have 20% equity in the deal. If something happens and you need cash, you would have 26K in reserves and in 15 years the house would be yours free and clear.

I like this deal because of the equity capture.   Great win.

@Amine E. Thanks for the response. I have a few options here and I will see how this winter plays out before I decide fully which direction to go.

I throw the 50% and 2% rules out of the window when the property is under a mile from my house. If something breaks I have no problem driving the golf cart down and fixing it. Sometimes location is more important.

Thanks again!

Well Done - nice job recognizing the opportunity and executing.  The house looks great - although my personal preference would be for no carpet!  Congrats!!

@Cliff Harrison Thank you. The carpet no carpet for a rental was a topic of debate for 2 weeks. We got to a point where we can buy decent carpet and get it installed for under $1.30/sq ft compared to covering the whole house in Traffic Master allure at $3/ sq ft. (Installed by us). I can always change it between tenants if it doesn't work out.

Thanks again.

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