BRRRR Strategy really works! Even in the Bay Area!

133 Replies

I am every so grateful to BP and all the great people that are part of the BP community. It was after reading extensively about the BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat) that I was inspired to try it out on my next purchase. I have bought properties before, but I always used my own cash to finance the deal. This time I decided to do it differently.

Below are the details about the process.   Below that are the numbers on the deal.

Deal Process

  1. I found an off-market SFD in Oakland with a motivated seller.  (For those who are going to ask how I found it - it was through the usual marketing efforts that people talk about on BP.)  His tenant had been living in the property for years without paying rent.  Crazy right? 
  2. We negotiated a little bit on the price.  I made an offer, he countered, and we met in the middle.  I sent him a purchase agreement and he signed.  I am a real estate broker so I represented myself.
  3. The tenants were still in the house.  One of my conditions was the tenants would have to be out of the house before close of escrow.  Owner agreed to offer tenants cash for keys in order for them to leave.  They refused and said they would see him in court.
  4. We hired a lawyer for the eviction process, owner paid cost which ended up being around $3k.  Lawyer went through all the filings and the tenant never responded.  In about two months from when the tenants were first served I get a call from the Sheriff saying they are going the next day to evict.  I meet them at the property and the sheriff enters the house.  The tenants have already vacated!  The have left a bunch of junk and took the wall furnace out of the wall, but for the most part the place isn't trashed. 
  5. Now the interesting part with the financing.  The purchase price was $250k.  I asked four friends if they would be interested in lending me money at 10% interest.  Between them I raised $250k for the purchase.  I provided each of them a promissory note and a deed of trust against my primary residence (not the property I bought).  Apparently this is a key element that @Chris Mason explained to me ahead of time (HUGE shout-out to Chris who was my Super-Star mortgage broker and consigliere on this deal..more about his efforts below).  Chris informed me that by securing their loans against my primary property this would count in the lending world as being an "all cash" purchase.  This matters big-time because it then allowed me to do a cash-out refinance.  Read on about that.
  6. We close escrow and the next day I am in there doing clean up and a rehab. I am also a GC and have lots of construction experience so I run all the rehab myself.  Total of the rehab was about $40k (more specifics below).
  7. Once we close I immediately start the process of my cash-out refinance with Chris.  Once Chris has all my docs he is just waiting for me to finish the rehab so he can send out the appraiser.  I finish the rehab and we have the appraiser out at the house two days later.
  8. Two days after that the appraisal comes back at $400k (which is what I expected, but is probably under market value.  I think it would sell for $430-450k)
  9. I immediately put the house up for rent on Craigslist.   After a couple of weeks I rent it out to a great family for $2750/month.
  10. Some more time passes with providing all my docs to underwriting and then the loan closes a month after the appraisal (total loan time was just under 60 days).   I get the loan for $255k which is the purchase price plus closing costs.  My friends all get their principal payments back as a check from the escrow company.
  11. Bottom line - I put about $54k into the renovation from my own pocket, got about $130k in immediate equity, and I'm now cash flowing $800 per month.  From when I closed on the house it took me two months to close on the new loan.   My friends, the investors, are ready to reinvest the moment I have the next deal.  Yes, it works!  even in the Bay Area :)

Numbers on the Deal

  1. House in East Oakland.  Officially a 1200 sqft 2/1.  
  2. Bought for $250,000
  3. Rehab for $63k - $9k rebates = $54k
    1. Clean up and Dump: $2k
    2. All new electrical, lighting and service panel upgrade: $10k
    3. Hardwood floor refinishing and repairs of 120 sq ft.  $4k
    4. Kitchen: new flooring, quartz countertop, all new appliances (bought all the appliances from Craigslist) $5k
    5. Addition of 1/2 bathroom: $5k
    6. Conversion of garage into 3rd bedroom: $5k
    7. Sheetrock work and Painting: $12k
    8. New high efficiency central heating: $6k
    9. New high efficiency tankless water heater: $4k
    10. New Sewer lateral: $4k
    11. Misc carpentry, landscaping and plumbing: $5k
    12. EBMUD rebate for sewer lateral: -$4k
    13. PG&E rebates for efficiency upgrades: -$5k
  4. House is now a 3 bedroom / 1.5 bathroom
  5. Holding cost (10% interest to friends) $5000
  6. Cash out refinance at $255k = $1,950 per month (PITI)
  7. Rent of $2750 per month, so cash flow of $800/month.

Updated over 2 years ago

Location of property is near 73rd and Bancroft. Near Eastmont Mall.

Wow @Ori Skloot that's awesome! It is always exciting to hear success stories happening in my own back yard! Thanks for sharing all the numbers! That's a good rent price for East Oakland, I'd love to know what zip code this is in? Congrats, now go get another! =)

Thanks for the shout out @Ori Skloot , much appreciated. :)

Non-owner occupied, $430k value, total of $59k out of pocket including rehab, is a super cool thing to help execute. 

And, not super hard to be cashflow positive on a $430k property that you picked up for $250k. $2750 rent... I think we have here a 1% rule SFR in the Bay Area.

Ori's networking efforts were also huge part of this. I'm guessing he went to his friends with money earning 5% on Wall Street, and offered them to double their ROI at 10%. Now that he paid them off, they can put it right back on Wall Street earning 5%, and it's a private bank he can draw on the future. Wall Street cannot guarantee you that if you put your $70k with it for 2 months it will become $71k (& you'd be lucky if it did that well in 2 months), but Ori just did exactly that, and proved to his network that he's a better place to park your money than Wall Street, to the extent that you are fortunate enough that Ori is in need of funds. So from the POV of his friends, this was a huge win to double their ROI for a couple months. 

For Ori, hard money would have wanted 3 or 4 points upfront ($250k * 4% = $10k in the garbage) even though he is an experienced and licensed GC, so this was a huge win for him too. I did a little blog post about how it might look to pitch this to people with money sitting on Wall Street doing nothing for them.

For people that only have access to $15k or $25k in capital saved up, but want to get into Real Estate in the Bay Area, this model is also an opportunity for them. I'm certain that if any of his private investors had wanted to see the property, the plan, the numbers, etc, he'd have shown it to them, and knowledge is money.

@Robert Marston   @Daniel Gonzalez 

Location of property is near 73rd and Bancroft. Near Eastmont Mall.

@Chris Mason   Thanks for your thoughtful input.  You continue to impress

@Ana Marie B.   Here are some pics.  All my work was on the inside of the house.  Outside still could use some upgrades and new paint.  But that's down the line.

Kitchen Before                                                Kitchen After

Kitchen Before

    Kitchen After

Living Room Before                                              Living Room After

Living Room Before    Living Room After

Converted Garage                                             New Half Bath

Converted Garage

    

Outside of House

 

Awesome! My only criticism would be to change your title to "Especially in the Bay Area" because appreciation will let you repeat the last two Rs again and again in time on the same property without having to remodel it again ... now onto the last R that leads back to the first B ...

Nice work, @Ori Skloot

I'm curious about your final loan amount. Were you restricted to purchase price plus closing cost by the lender or did you choose that amount for higher cashflow? Were you able to get a conventional mortgage?

@James Free thanks.  Limited to the maximum of the purchase price plus closing costs. I assume if I refinanced after one year that i could refinance at the appraised amount. Yes, I got a conventional mortgage through Chris Mason's company. 

Hi @James Free ,

Yup, we had to restrict him to purchase price plus closing costs. 30YF at a good interest rate is only made possible if you can sell it on the secondary market to an entity like Fannie Mae, and we did this under "Delayed Financing Exception" (DFE) guidelines to prevent @Ori Skloot from having to keep those multiple 10% interest rate mortgages for six months.

This is what capped us, direct from FNMA DFE & doing it no overlays:

The significance of that six month wait we were able to avoid is thus: [ $250k * 10% / 12 * 6 = $12,500 ]. That's what I was able to help with.

Reminder that Ori's networking saved him 4 points up-front on hard money points for a single hard money third mortgage secured by his primary residence. [ $250k * 4% = $10,000 ]. That's assuming a HML 3rd position mortgage secured by a primary residence @ 10% could be achieved with only 4 points upfront (any HML borrowers want to chime in on the probability of that?). This part is what Ori did, and all credit to him for that. I told him that the overwhelming majority of persons that I speak with, would not have the hustle to accomplish this $10k component here. And, in his case, he proved me wrong and did it. Kudos to him.

That's a total of $24,500 in finance charges that he didn't have to pay, by my math. Going from the $59k cash-cost-basis of cash-on-cash ROI to $83,500 is significant, about 50% higher, which in turn would of course drop cash-on-cash ROI by about a full 1/3 or so - from about 16% to about 11%. On a Bay Area SFR, when we are consistently told that Bay Area SFRs do not cashflow at all.

Cashflow according to Ori is $800/mo. So he could have just done this with hard money and zero networking, like everyone else, and the first 30 months of cashflow would have gone towards paying that $24,500 off. 

Time machines that make us 30 months younger, IMO, are pretty nice.

@Chris Mason is making it a lot more clear that @Brandon Turner et al do what they do by using commercial lending to avoid all of these Fannie requirements. It's a higher interest rate, but you can do it on your schedule and purchase price should be irrelevant. Plus you can do it from an LLC!

Originally posted by @Chris Mason :

Hi @James Free ,

Yup, we had to restrict him to purchase price plus closing costs. 30YF at a good interest rate is only made possible if you can sell it on the secondary market to an entity like Fannie Mae, and we did this under "Delayed Financing Exception" (DFE) guidelines to prevent @Ori Skloot from having to keep those multiple 10% interest rate mortgages for six months.

 This is a really great post with a TON of good info, thanks to both of you. I want to bring up 2 questions. 

1. How can I do something similar if I don't have a primary residence to secure the loans? 

2. In a JV deal I have, we purchased the house for $60k in a short sale and the GC went out of busines in middle of rehab 80% finished. Investors are wanting to do a refi, house will be worth about $200k, and they can only refi on what the purchase price, $60k. My question is, why is the refi only for purchase price and not current value of the house?

Originally posted by @Christopher Winkler :
Originally posted by @Chris Mason:

Hi @James Free ,

Yup, we had to restrict him to purchase price plus closing costs. 30YF at a good interest rate is only made possible if you can sell it on the secondary market to an entity like Fannie Mae, and we did this under "Delayed Financing Exception" (DFE) guidelines to prevent @Ori Skloot from having to keep those multiple 10% interest rate mortgages for six months.

 This is a really great post with a TON of good info, thanks to both of you. I want to bring up 2 questions. 

1. How can I do something similar if I don't have a primary residence to secure the loans? 

2. In a JV deal I have, we purchased the house for $60k in a short sale and the GC went out of busines in middle of rehab 80% finished. Investors are wanting to do a refi, house will be worth about $200k, and they can only refi on what the purchase price, $60k. My question is, why is the refi only for purchase price and not current value of the house?

 1. Use some other real estate. Another rental property. 

2. Because Ori didn't want to wait six months. 

Originally posted by @Chris Mason :
Originally posted by @Christopher Winkler:
1. How can I do something similar if I don't have a primary residence to secure the loans? 

2. In a JV deal I have, we purchased the house for $60k in a short sale and the GC went out of busines in middle of rehab 80% finished. Investors are wanting to do a refi, house will be worth about $200k, and they can only refi on what the purchase price, $60k. My question is, why is the refi only for purchase price and not current value of the house?

 1. Use some other real estate. Another rental property. 

2. Because Ori didn't want to wait six months. 

 Right, because he did not want to waste the $12.5k for holding interest. Great post guys!

I've done this a couple of times but had private lender (family) lend me 100% of purchase price on both (I covered closing costs) at 5-7% and gave them a trust deed on the purchased home.  I then rehabbed with my own funds and waited my 6 months (refinancing 2nd one right now).  One thing I also learned is to start the refinance process early, around month 4 so you can close as close to 6 months as possible.  I bought both at 60-70% of as is value so their money was "safe".

The other way to find private lenders is when your speaking to other investors about purchasing their homes for sale. I simply ask them what they plan to do with the money and feel them out. I've had multiple other investors say yes, found one just a few weeks ago. These are the best lenders because they understand REI.

This is the only way to purchase SFR's imo (BRRRR).

I also have hard money lined up at 2 pts and 10%, not horrible.

I'm curious about the statement that this is cashflowing at $800/month. That's the total amount left over after PITI payments. If you take out 10% cap ex, 5% maintenance, 5% vacancy and 10% property management, you're left with negative cashflow... Even if those allocations are not exactly accurate for the property, you're still looking at very minimal cashflow. What am I missing here?

@Rivy S.  you bring up a good point. This deal wouldn't work for everyone. 

I fixed everything up in the rehab so I don't expect capex expenses anytime soon or much maintenance.  It already had a new roof and the foundation is solid. I did brand new HVAC, water heater, electrical, plumbing, etc.   

Vacancy in Oakland is hardly an issue (I know, never say never). I have a clause in my lease that the tenants have to give 60 days notice if they want to vacate.  Plenty of time to find new tenants.  

Finally, I am managing the property myself as I live in Berkeley which is 20 minutes away. 

Wow @Ori Skloot ! Thank you for sharing these details. This deal worked so well because of your knowledge and experience. People who want to start out in the real estate business contact me all the time asking for help with their contracts, and hand holding through this BRRRRR... process. That you are a real estate broker and can do the paperwork for the deal, that you are a general contractor who can personally do the construction work, up to code, is what made this deal cash flow immediately. How much more would it cost if you had to hire a GC and pay a higher price to the sub-contractors? How much more if you paid real estate commission?

Did the City of Oakland allow you to do that garage conversion, did you have to create another parking place/garage/carport?

Thanks also to @Chris Mason for explaining the guidelines to the financing. It really points out why decisions that are made prior to putting a penny into the process have implications for the long-term cash flow.

I have resisted using my home as the collateral for my investments. Based on this success, I'm going to (try to) get over that fear.

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