First BRRRR (from auction) finally in the books!
After a couple years of trying to get a BRRRR done, I finally accomplished this goal and wanted to share my experience!! This was after a ton of sifting through properties and being very very picky about what I would go for. I hope this is just the begging of a string of these deals, but we'll see. Next, I want to purchase a 5-10 unit property. I'm hoping this serves as inspiration for other people who have found the BRRRR thing a bit tough to crack.
About 2.5 years ago, when I decided to get into RE investing, I had no experience and I turned to BP for the vast majority of my learning (thanks BP!). I found a market, started putting together a team, found a partner etc. Still, it took me about a year to actually close on my first property. That first property was a 3-unit that I purchased for a fair but good price and is now occupied and cash flowing. I bought that property for $152k with a partner and it currently cashflows about $1,000 per month - that's with a conventional purchase mortgage we got from Wells Fargo at 75% LTV. This property gives us a nice return, but it's not worth much more than we bought it for and is going to be a simple buy and hold without much opportunity for value add or BRRRR.
After buying that first property, I realized that I just didn't have enough cash to keep buying properties that required me to let so much cash sit in the deal. It was clear that BRRRR was the only strategy that would work for me.
So I spent another year looking and in August (2018) finally found a foreclosed 3-unit being sold through an auction site in the same upstate NY area where my last property was located. It looked good, although obviously there wasn’t much info about the property and I wasn’t allowed to check out the interior in person. The exterior looked solid and there was no evidence of any issues regarding structural integrity. I also knocked on some neighbors doors and asked them about the property: I learned that the tenants had been solid, and there hadn’t been any issues with the former owner - he had just gotten sick and given up on being a landlord.
Given the inherent risk of not being able to do an interior inspection, I spoke with my contractor and figured out what was the cost of the worst case scenario and priced that in to my offer of $71,000. This was the number that made the worst case scenario still an ok outcome. I lost the auction, but when the winner dropped out, the seller (a mortgage company) accepted my offer instead. The closing process with this auction company was terrible. The terms are extremely one-sided and I was dealing with a closing agent, unable to speak with the seller or sellers attorney. It was like playing a sick and twisted game of real estate telephone. My lawyer almost quit from having to deal with this headache.
We finally closed on the last day permitted by the contract, and what did my property manager find when he visited the property? He found a well-maintained 3-units, with about $5k of work to be done. That was much better than the $40k I had made room for in my calculations.
On top of this, I knew it was 3 units and 6 bedrooms, but we didn’t know how they were distributed. I had foolishly assumed that it was 3 2-BR units, but its actually 3-2-1. This was the only disappointment, but I’m obviously not complaining.
After completing that $5k of work - paint, floors in one room, new appliances in one unit - we rented out the property and it’s currently fully occupied. Just last month, the property that I had bought for $71k appraised at $163 and was able to get a portfolio loan with a local bank. I’ve taken all my cash out of the deal and then some, and the property is still cash flowing!!
Top level numbers:
Purchase price: $71,000
Initial CapEx: $5,000
Purchase all in: ~ $80,000
Appraised: $163,000
Loan: $112,000 / 5.5% fixed / 25 years
Monthly payment PITI: ~ $1,150
Rent: $2,300
Expense Estimates: $664
1. Capex (5%):$115
2. Maintenance (5%): $115
3. Vacancy (8%): $184
4. Property Management (10%): $230
Rough estimated monthly cash flow: $487
And this is after taking EVERY PENNY out of the deal and an extra $30K to put toward another one!!
NB: I realize I got very lucky there wasn’t any damage or serious flooding or electrical or plumbing work to do. BUT since I priced that into my offer, it wouldn’t have sunk me. I just would have ended up with a single instead of a home run.
BRRRR is real haha/ thank you BP!