BRRRR Strategy really works! Even in the Bay Area!

[Ori Skloot]

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.