My Failed (almost 0$ down) BRRRR that netted me $26,663.00 tax-free and $37,000.00 of equity. Investor Profit: $14,175.00
Background: If you're new investor, here are some strategies with reflections so you can choose the best vehicle for your REI goals. These are some ideas/wisdom that I picked up doing my first few deals.
I started my REI journey in 2012 with a "house hack" and didn't know what that was at the time. Two properties on one lot, renting out one while I lived in the smaller one (With a roommate) after I cosmetically rehabbed the property. I graduated with $60k+ in student debt and two teaching degrees. I was able to live for "free" by having my rent cover the mortgage payment. *Good way to start your REI journey is house hacking
I then connected with a with a local fellow teacher on BP in July 2015, he asked me if I would start going to a local meeting if he kick started it. OF COURSE! (Started Late 2015) *Network with others in your field of interest
So I was strapped for cash, like most newbies. I needed to find money to start buying REO properties off the MLS. About 6 months into meetings, a wise man said use a HELOC on your primary as a down payment and partner with Hard Money. I said "I can't, I bought my primary with FHA and don't have much equity." He said, "some lenders will go up to 100% LTV". Couldn't believe it! (May 2016 applied for a $21k HELOC) I was also paying extra each month towards the principle balance, which helped accelerate pay down of the mortgage. My goal was/is to get the PMI off in 5 years time which was the requirement in 2012 upon reaching 78% LTV. *Be creative, there is a solution to every problem. Ask questions and seek mentors
I partnered with a local agent that specializes in REO's and investments (it is very important to find an agent who aligns with your goals) Started looking at properties while running numbers through the BP calculators. (Which looked great when I needed to hand a spreadsheet and scope of work for HML, shows professionalism and builds credibility as an investor) *Partner with an investor friendly agent
I then made an offer on a local property listed at 119k, multiple bid situation. I won with "cash" offer (using hard money) with a 3k deposit. (Cash outlay was around 5K at the time) I was approved for the HELOC at the time, but I didn't have the funds for sure. I took a chance and I knew if I had a good enough deal someone would fund it if the HELOC didn't come through. *Have the funds to close and be quick when a deal pops up
Purchase Price: $100,600.00
As is Value Appraisal: $146k
ARV Appraisal: $187k
*Buy right, typically 70% of the ARV minus the rehab
Original scope of work rehab estimate: $3499.71 (Was originally keeping pool and buying used appliances)
2nd(Second scope of work edit was during 10 day inspection period where I brought in 3 pool companies) Keep the pool for $6500 or demo for $3500. I decided to remove the pool.
Cash needed for closing: $14,997.33 (Points, legal fees, down payment, upfront interest charges, title services, recording charges, transfer taxes) I ended up paying the 6 months of taxes in two weeks for another $2,400.
Actual Rehab Numbers: $10,371.76 (Pool Removal was $3,500.00 and 4 brand new appliances around $2,200)
Rest of work was done by myself, so rehab budget – actual rehab = $3,871.76 out of pocket before being rented in Sept. for $1575. *Not counting sweat equity, I worked around the clock to finish the bulk of the rehab in 11.5 days. (A benefit of being a teacher at the time.)
Total cash for Purchase of REO with down payment of 3k: $23,459.12 (Not quite 0$ out of pocket, $2,459.12 over hard money and HELOC) *When budgeting your first rehab, add in a % contingency and really hone in your budget during your inspection window by bringing people through the property.
After the rehab was complete, I marketed on Zillow and used Transunion smart move to screen tenants. It took about a month to find quality tenants with about 40-50 leads from Zillow.
So I have bought, rehabbed, and rented starting 9/1/16, just in time for tenants to pay the monthly hard money interest $949, monthly taxes $400, and insurance $100. So by the time the 6 months came around to refinance I had my mortgage guy run numbers.
The bad news: my DTI ratio was off because of my aggressive tax returns from my primary house hack combined with low teaching salary and student loan payments.
*Truly understand both conventional and commercial mortgages, their underwriting process, and sit down with a mortgage specialist to run your DTI and other key factors.
- Fannie currently allows 10 loans at once, however underwriting guidelines get tougher as you move up to that 10: You’ll need higher credit scores, 6 month cash reserves for each property, and larger down payments.
My new plan: Time was ticking; Hard Money loans are short interest loans that result in a balloon payment (the balance of the note) at the end of the term. Mine was 12 months. I decided to call every local credit union in CT to find a portfolio lender, someone who keeps the loan in house and doesn’t sell it to Fannie/Freddie. My email to them was: (Which I learned from a podcast guest)
I was wondering if your credit union offers cash out refinancing? If so, what is the percentage of the appraised value?
I wanted to find out what restrictions the bank had. Most local lenders underwrite like Fannie/Freddie in case they need to sell them off at a later date. Learn how a bank operates, they have to keep a certain amount of cash on hand against their liabilities. Also, find out if they loan to an LLC, if not how long does it have to "season" in your name to obtain financing.
I was also waiting for tax season, I planned on "not taking" some repair deductions, seems silly to pay more in taxes, but it ends up lowering your DTI ratio. Thus allowing you to play the conventional financing "game" and have a greater purchase power on paper; which I STILL don't understand as an investor. Paying more taxes, which puts me in a worse cash flow position… But now I can have more debt?
My DTI was still too high and only one commercial lender said they could do it, but the deal didn't cash flow: higher percentage rate and lower cash out because commercial loans go off the DSCR. And they also wanted a year seasoning; my hard money balloon payment was due at 1 year. Which ended up being 13 months total. *DSCR: basically you have to make 20% over your debts. 1.2 DSCR is the minimum I have seen in my travels
So no matter which way we ran the numbers, my DTI ratio was still too high. I was stuck and had no exit that I had originally planned for (buy and hold). Considered selling, but I would have to extend the note and pay taxes on the gain. Not the worst outcome…
In order to keep the house, because my vehicle of investing is buy and hold, I moved into the property to obtain owner financing with my girlfriend, who I was already living with at the time. Her income balanced out my debts which resulted in a $26,663.00 tax free profit (Paid for with sweat equity, networking, reading books, finding mentors, learning the trades, and playing the conventional “finance game”)
…and $37,000.00 of equity. Which is the ARV of 185k minus the loan amount of 148k. Which to me is currently "useless", it has a 0% return unless I am able to access it. (HELOC) Best way would be to "live in flip" the home, only after living there as a primary residence for two out of the last five years. You can take up to 250k as a single owner, 500k married, and not pay capital gains up to that threshold.
Investor Profit: $14,175.00 total paid to my HML, interest only payments, closing fees, and points.
It was a great learning experience and the reason I called it a failed BRRRR is because I had originally wanted it as a non-owner occupied rental. But sometimes life throws you a curveball and we adapt while moving forward.
I appreciate the online forum and community for allowing me to continue to grow into a wise investor.
Best of success,
Way to go Scott! Sometimes you have to go left when you want to go right! Or something like that.
When you used your HELOC for the down payment, did that drive up your DTI as well? How would you have done this deal differently so that you could have refinanced with a bank/lender?
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