BRRR Actual Deal - $2M profit or $15K/mo cashflow: with pictures!

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Here's an actual BRRR (Buy-Renovate-Rent-Refinance) deal, with a $2.2M profit if we sell it or a $15,170/month cashflow if we keep it.

But before I share with you the details, a word of CAUTION to the newbie investors here. "Do not try this at home." What we did here is not something that newbie investors can do. It will become apparent as you read this post. But, even if you're a newbie, read on so you can learn from my experience.

How Did We Find The Deal

We found this deal from a wholesaler. The wholesaler originally wanted $5,000 for his contract. However, I didn't like the price at first and I told him that if he can get it for $450,000, I will give him $20,000. He delivered so he got a $20,000 wholesale fee. 

If you want to verify this deal, you can search 3561 Eden on the Hamilton County Ohio Auditor website.

The Property, Area and The Problems

The property is comprised of 30 units of 2 bedroom-townhome style units. The units were rented for $300/month and only 3 units are occupied (or 4 - don't remember). 

The property is in one of the highest crime part of Cincinnati called Avondale. The previous owner just neglected the property and more than happy to get the $450,000 from me and thought he got the better end of the deal. Little did he know...

The Opportunity and The Numbers

I bought the deal because the Cincinnati Children's Hospital is expanding and bringing in 5,000 jobs to the area. So I know the rents will go up dramatically. When I did the underwriting, the rent I was assuming is $850/month. I was wrong. The actual rents that we were able to collect is $1,250/month (and I have a waiting list of tenants!).

Here are the numbers:

Purchase price: $450,000
Wholesale fee: $20,000
Closing & other costs: $10,000
Estimated Renovation & Holding costs: $1,320,000

Total "All-in" costs" $1,800,000

Because of the city is encouraging development and the low purchase price we got, we were able to get a TAX ABATEMENT on the property for 15 years. Also, as we see rents rise across the board in the Avondale area, the cap rate has also gone down to 7% (conservatively...it might even go down to 6-6.5% cap next year). The vacancy rate has also decreased to 6% or the occupancy rate is 94%.

With those factors, below is the valuation:

Gross rents collected (estimate): $1,250 x 12 mos x 30 units x 94% occupancy = $423,000

We do bill-back for water & sewer and the units are separately metered for gas & electric so there are no utility costs. With the building being basically new construction, we expect repairs and maintenance as well as capex will be very low and since we self-manage the building, our cost of management is also low. Hence, we estimate the operating expenses to be $96,000 but we use $125,000 in our underwriting (which is right in line with new builds). Hence, the value of the building is:

Gross income: $423,000
less
Op Expenses: $125,000
equals NOI: $298,000 divide by 7% cap = $4.2 MILLION value

So, since I am all in for $1.8M, my gross profit is $2.4M or net $2.2M after selling costs.

We actually refinanced out all our "all-in" costs so we got all our capital back. After debt service, our cashflow is $15,170/month.

Below are the Before & After Pictures:

What's Next?

The project will be completed 1st quarter of 2020 but it's nice to know that it will be fully rented by the time we finished it (due to the waiting list on it). In fact, our nearest comparable 2-bedroom unit but not as updated as ours rents for $1,650/month. So it's possible that our rent next year can even go up to $1,500 because by that time, the Cincinnati Children's Hospital project a few blocks from the property will be finished.

What Did We Learn?

1. Be selective & patient to get a great deal - I was approached about this deal 3 years prior but I said NO. Then a year later but the numbers didn't work. Then finally, the seller became more motivated and said "yes". We just don't do any deal. If we can't get 30% to 40% IRR, we don't do the deal. A lot of apartment syndicators are happy with 20-24% IRR but we don't go with marginal deals.

2. A bad area can change and you should know where developments are going on in your area - an area changing from "F" to "A" or "B" will result in HUGE profit. Everytime a big employer is moving into an area, jobs are going to be created, rents will go up and property values can rise dramatically.

Also, real estate developers and investors can also CHANGE an area by providing good product, which in turn can drive out the "bad neighbors"...specially if you can buy the whole block. Just ask John Hickey here on BP.

3. Being vertically integrated gave us HUGE cost savings, and is part of the reason why this deal is very profitable. Vertical integration means we have our in-house construction/renovation company and a lot of our contractors are employees so we can spread their costs across multiple projects and lastly, because of our volume, our cost of construction is 30%-60% cheaper than our competition.

So, if you have a deal like the above, will you sell and get $2.2M profit or would you rather have the $15,170 a month cashflow?

Congrats on the great deal! Impressive that your hurdle is a 30-40% IRR. Most investors who are honest with themselves aren't underwriting to anything better than 15% these days!

Total "All-in" costs" $1,800,000 ā€” you own cash ?

So you doubled $2M to $4M quickly.   

Just sell and repeat. Till you reach $1B. 

Originally posted by @Ethan Smith:

Total "All-in" costs" $1,800,000 ā€” you own cash ?

So you doubled $2M to $4M quickly.   

Just sell and repeat. Till you reach $1B. 

 It's actually better than that :)

The downpayment was $300,000 on our construction loan but I already refinanced so I got that back already. I have no money in the deal and a $2.2M profit.

Only in real estate my friend. Only in real estate :)

Originally posted by @David Almeida :

Congrats on the great deal! Impressive that your hurdle is a 30-40% IRR. Most investors who are honest with themselves aren't underwriting to anything better than 15% these days!

Yeah. I can't do 15% project IRR. The reason is when cap rates start to go up, 15% IRR is GONE and I want to protect my investors' money and return it even if the worst case happens.

I've been investing since 1999 and actually THRIVED in 2008-2009 recession while other apartment investors lost their properties. I've also never lost money for my investors since I started raising money from investors in 2006.

Part of the reason for my success even during the recession is being highly selective in the deals I acquire with 30-40%+ IRR (or better).

Some syndicators, some of whom have acquired even more units that I have and those who are OK with 15% project IRR...have not been through the Great Recession.

So having a big margin of safety, as Warren Buffett would say, is necessary to survive and thrive in this business.

Yes , in real estate , many things are better than it looks. Also tax benefits.

You use the building or personal resources to guarantee the construction loan. ? 

still you need some cash , like $300k , stand by and available   


Originally posted by @Jaison Emmanuel :

I didn't realize there are wholesalers for multi-family?

congrats... cash out. and buy again.  

 

 

Thanks Jaison.

You can wholesale anything so yes, there are wholesalers even for MFs.

In fact, since I was getting some really good value-add deals (ones with a lot less rehab than this deal), I just started wholesaling large MFs. In the past 3 months, I was able to get a total of 922 apartment units. I have the capital to close on 388 units and decided to wholesale 534-units. I was able to assign 344 units out of that portfolio. Once we close on that, that's a topic for another post.

So, yes, you can wholesale even apartment buildings.

 

Originally posted by @Ethan Smith:

Yes , in real estate , many things are better than it looks.  Also tax benefits. 

You use the building or personal resources to guarantee the construction loan. ? 

still you need some cash , like $300k , stand by and available   


We have a relationship with several lenders and yes, I personally guaranteed the loan.

I have been doing this for a while (since 1999) and if you don't have a six-figure bank account and a 7 or 8-figure net worth, you're doing something wrong ;)

 

Originally posted by @Michael Ealy :
Originally posted by @Jaison Emmanuel:

I didn't realize there are wholesalers for multi-family?

congrats... cash out. and buy again.  

 

 

Thanks Jaison.

You can wholesale anything so yes, there are wholesalers even for MFs.

In fact, since I was getting some really good value-add deals (ones with a lot less rehab than this deal), I just started wholesaling large MFs. In the past 3 months, I was able to get a total of 922 apartment units. I have the capital to close on 388 units and decided to wholesale 534-units. I was able to assign 344 units out of that portfolio. Once we close on that, that's a topic for another post.

So, yes, you can wholesale even apartment buildings.

Would love to hear more about these deals. Looking forward to the post! Also glad to hear deal volume is keeping up in the Midwest. It has really slowed down in suburban Northeast markets.

@Michael Ealy

Great job, and very motivating! I'm very familiar with Avondale. My husband and I sold our "forever home" just blocks away. The area isnt for everyone but the profit from our unintentional flip allowed us to purchase several investment properties. We still live close by, if you're in need of any assistance, feel free to reach out!

WOW, this is wonderful! Keep up the great work. Love to hear success stories like this!
I would refi the property, Take some money out and put it in a new deal. 

@Michael Ealy Thanks for sharing this.  Congrats on recognizing a deal with such great potential. I've enjoyed many of @Account Closed 's contributions on investing in rougher areas. Who funded the initial construction loan and who funded the refinance?  What were the terms (ball park) associated with each loan?  

All the best,

@Alex Bekeza thanks...but the only thing Iā€™m contributing to mikes deals is a stare of wonder. And he does it in my kind of neighborhood. Guy is unstoppable. Good stuff.

@Michael Ealy

Daaayumm! Yup impressive. My mind can't even think on that level.

Here I am struggling with a $3000 deal šŸ¤¦šŸ½ā€ā™€ļø Oh laud!!

@Michael Ealy

My suggestion would be to Hold the property for 6 years.

The property should be relatively easy

To get back in like new condition at this point.

The mechanicals should be fine.

You might as well cash flow an extra mill.

While you wait for the next big deal to come along.

Who knows maybe by then you can cash out even

More equity and hold both

Awesome job @Michael Ealy !

I'd do both. Hold it for 366 days, then sell.  The difference in tax implications with just one year of productive use to reach cap gain status vs ordinary income will blow your mind. 

@Michael Ealy That is super impressive, wow. Incredible job. I'm curious, when you're researching an F area, are there other criteria that you use and look out for other than just potential job growth in the area? What else can one keep a pulse on to get a good sense of updrafts in the quality of the neighborhood?