BRRR Actual Deal - $2M profit or $15K/mo cashflow: with pictures!
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?
Originally posted by @Michael Ealy:Originally posted by @Chris Salerno: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.You're very smart Chris. That's what I am leaning towards also.
The rents are increasing in the area and when I did the math, if I sell, I would net $1.54M after taxes and I lose the cashflow, while if I refi, I would net $1.35M tax free and my cashflow goes down to $10K/month and I get to take advantage of the rent increase that can happen 1-2 years from now.
Great, If you also look at it this way it may help as well.
$1.54m-$1.35m=$190k. If you are getting $10k a month... $10kx12(12 months in a year)=$120k. Now depending on the cost segregation and depreciation, it can be close to tax-free too.
It will take 19 months to get to $190K, not counting any rent increases you do!
When 19 months pass, you are very smart! That $1.35m will turn into $2m+ easily.
Looking forward to hearing about your future success! Keep up the great work!
Originally posted by @Chris Salerno: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.You're very smart Chris. That's what I am leaning towards also.
The rents are increasing in the area and when I did the math, if I sell, I would net $1.54M after taxes and I lose the cashflow, while if I refi, I would net $1.35M tax free and my cashflow goes down to $10K/month and I get to take advantage of the rent increase that can happen 1-2 years from now.
Great, If you also look at it this way it may help as well.
$1.54m-$1.35m=$190k. If you are getting $10k a month... $10kx12(12 months in a year)=$120k. Now depending on the cost segregation and depreciation, it can be close to tax-free too.
It will take 19 months to get to $190K, not counting any rent increases you do!
When 19 months pass, you are very smart! That $1.35m will turn into $2m+ easily.
Looking forward to hearing about your future success! Keep up the great work!
That's exactly how I looked at it too.
If I refi and just hold it, I am earning $120K/$190K or 63% cash on cash return. I doubt it if I can find a project with that much of a CCR. We are good but not that good ;)
Great minds think alike!
@Michael Ealy strikes again! No fear going into an area and helping to transform it for the better, and make some good money while doing so. Great Job!
Regarding what to do - I have a hard time believing you'd get 4.2M for that property - even if the NOI and CAP rates warrant it. People will be very wary of paying that kind of money per unit anywhere in Cincinnati, let alone Avondale. I'd refi some money out and hold onto it as long as you can get that kind of cash flow.
Originally posted by @Heshel Mangel:@Michael Ealy strikes again! No fear going into an area and helping to transform it for the better, and make some good money while doing so. Great Job!
Regarding what to do - I have a hard time believing you'd get 4.2M for that property - even if the NOI and CAP rates warrant it. People will be very wary of paying that kind of money per unit anywhere in Cincinnati, let alone Avondale. I'd refi some money out and hold onto it as long as you can get that kind of cash flow.
Lots of things are changing in Avondale my friend.
As you know Avondale is predominantly African American & lower-income neighborhoods.
However, with the spot where my project is, I am getting a different tenant-base: middle-class African American, white, Asian, millennials and so on. Over time, there are certain spots that will look like OTR.
Avondale is gentriying in some spots and the change has been happening for several years already. You can see 3 cranes working night and day building new buildings, which will bring in 5,000 high-paying jobs. And if $1250 is the rent I am getting now for 2 bedrooms...I can only imagine what will happen when those jobs are there. I just don't see that happening for other D and F areas of Cincinnati.
Bottomline...
Higher rents = higher NOI
and more demand for housing will make prices go up = cap rate compression
which means massive profit for those who bought at the right time (which is a year or two ago).
@Michael Ealy Great project! Nice to see actual rents beat assumptions.
If you have not already, I would suggest analyzing the impact of your tax abatement in your decision making (sell/cash flow).
A direct cap is not typically used in the valuation of a tax abatement. You would value the property as if it had full taxes and cap that NOI and do a DCF for the anticipated saving from the tax abatement. With a tax abatement, the value of your property (ignoring property appreciation), goes down every year until the term of the abatement is over.
I do not know anything about Hamilton County, but if you think that without the abatement the NOI would be greatly reduced (upon full assessment) and the values in the area are going to go up, I would keep selling the property on the table!
Originally posted by @Paul Garcia:@Michael Ealy Great project! Nice to see actual rents beat assumptions.
If you have not already, I would suggest analyzing the impact of your tax abatement in your decision making (sell/cash flow).
A direct cap is not typically used in the valuation of a tax abatement. You would value the property as if it had full taxes and cap that NOI and do a DCF for the anticipated saving from the tax abatement. With a tax abatement, the value of your property (ignoring property appreciation), goes down every year until the term of the abatement is over.
I do not know anything about Hamilton County, but if you think that without the abatement the NOI would be greatly reduced (upon full assessment) and the values in the area are going to go up, I would keep selling the property on the table!
That's a good point. We analyze every project's NOI with and without the tax abatement. And we assume we'll not get the tax abatement when we acquire it and also when we sell it. Tax abatement is additional cashflow & NOI if we get it and additional value when we sell.
But yes, I agree with your point and it's worthwhile looking at that when considering whether to sell or refi. You made me think...thanks for a valuable input to this discussion!
Originally posted by @Michael Ealy:Originally posted by @Chris Salerno: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.You're very smart Chris. That's what I am leaning towards also.
The rents are increasing in the area and when I did the math, if I sell, I would net $1.54M after taxes and I lose the cashflow, while if I refi, I would net $1.35M tax free and my cashflow goes down to $10K/month and I get to take advantage of the rent increase that can happen 1-2 years from now.
Great, If you also look at it this way it may help as well.
$1.54m-$1.35m=$190k. If you are getting $10k a month... $10kx12(12 months in a year)=$120k. Now depending on the cost segregation and depreciation, it can be close to tax-free too.
It will take 19 months to get to $190K, not counting any rent increases you do!
When 19 months pass, you are very smart! That $1.35m will turn into $2m+ easily.
Looking forward to hearing about your future success! Keep up the great work!
That's exactly how I looked at it too.
If I refi and just hold it, I am earning $120K/$190K or 63% cash on cash return. I doubt it if I can find a project with that much of a CCR. We are good but not that good ;)
Great minds think alike!
You are doing wonderful! Keep up the great work! Let me know if you are ever in Charlotte NC. Would love to connect!
Originally posted by @Alma Mills:
@Michael Ealy I do not have that kind of relationship yet but would greatly appreciate a referral to your credit union....my brother is remodeling a 17 unit in bond hill right now and is worried as he has spent a lot on the project but your post has given me added hope he can get an appraisal to get his money out. He's not next to a new hospital but there are many improvements planned in the area. What thoughts to you have on the south side of bond hill?
Send me a PM Alma.
I like Bond Hill - I have a 41-unit building and a 42-unit building in Bond Hill.
@Michael Ealy, TLDR all the posts. You're aware, I presume, that the property is in an Opportunity Zone? Given that, I can't foresee a scenario that would involved disposition of the asset, unless the Opportunity Fund wasn't created...
@Michael Ealy This is such a motivating read. You got your buy in money back, 2.2 million profit but probably more, and 15k positive cash flow. Not only that but principle of the loan going down every single month. Im just starting out on my Multi_family ventures but this really set the tone of whats possible. I would definitely keep the property and take the cash flow, and move on to the next one.
Congratulations @Michael Early. What a great inspiration for all of us interested in value-add multifamily investing.
What would be your simple step by step process to accomplishing what you've achieved?
Who have you modeled your strategic acquisition strategy after?
It would be super, super helpful and I would be grateful to learn your method to achieving just a small part of what you have you achieved.
Have you written a book? Were you a guest on the BiggerPockets podcast yet?
Thanks & All The Best!
Originally posted by @Manik Sewak:@Michael Ealy This is such a motivating read. You got your buy in money back, 2.2 million profit but probably more, and 15k positive cash flow. Not only that but principle of the loan going down every single month. Im just starting out on my Multi_family ventures but this really set the tone of whats possible. I would definitely keep the property and take the cash flow, and move on to the next one.
Thanks Manik. That is what I will probably do but refinance again to pull $1M cash out and then use that to acquire another project.
Originally posted by @John Culotta:Congratulations @Michael Early. What a great inspiration for all of us interested in value-add multifamily investing.
What would be your simple step by step process to accomplishing what you've achieved?
Who have you modeled your strategic acquisition strategy after?
It would be super, super helpful and I would be grateful to learn your method to achieving just a small part of what you have you achieved.
Have you written a book? Were you a guest on the BiggerPockets podcast yet?
Thanks & All The Best!
Thanks John. I am glad I've inspired you. You've asked great questions and here are my answers:
Simple Step-by-Step process of doing value-add...to be honest, there's nothing simple to it. What I did in this particular deal is VERY RISKY and it's not for the newbie investor.
You got to find the right deal in the right location and have the right plan and the right team to pull it off. And you need to be well capitalized because heavy value-adds like what I did almost always takes twice as much time than you expect. You need to have ample of capital and operating reserves.
I was able to do this because our business is vertically integrated (so our cost of construction is lower than what other investors get), I have budgeted (and over-budgeted) for every possible risks and have contingency & mitigation plans (I am an electrical engineer by background so I am very risk-averse and conservative in my underwriting).
Who Have I Modeled My Acquisition Strategy After? No one. I just learned it by doing it, reading books and talking with people who are more experienced than me. One of the most critical aspects in acquisition is the location. Some investors focus on the numbers of the deal but forget how important the location is. I acquire these projects in D areas that are transitioning to A/B. But, I have a Plan B - and that is section 8. If my numbers won't work under section 8, I don't do the deal (argh- I revealed too much already).
Have I Written a Book or Guest on a Podcast - not on the podcast on BP. Book - yes, I've written a book and about to publish it. Let me know if you will be interested in that and again, awesome questions.
@Michael Ealy - thank you very much for taking the time to respond. Very insightful and wise advice. I'm right with you on your thought process and strategy. Yes, very interested in your book. Have a great day!
John Culotta
@Michael Ealy could you take a couple minutes and analyze this deal on LoopNet? It reminds me of your deal where you used the brrr strategy.
It’s been on the site for a few months and no one has taken it. Located in booming Jacksonville, fl. Selling super cheap, extreme value add.
I’m curious why other investors are passing on it. There’s a university 6 blocks away too.
Would love to hear your thoughts on this...
Originally posted by @Manik Sewak:@Michael Ealy could you take a couple minutes and analyze this deal on LoopNet? It reminds me of your deal where you used the brrr strategy.
It’s been on the site for a few months and no one has taken it. Located in booming Jacksonville, fl. Selling super cheap, extreme value add.
I’m curious why other investors are passing on it. There’s a university 6 blocks away too.
Would love to hear your thoughts on this...
Manik,
I am not sure why - but, if this is a deal that you're thinking of getting and you indicated in another post that you're new to MF investing, I would strongly advise you to NOT do this deal.
A vacant building is not for the newbie.
Construction/renovation cost overruns can easily kill the deal and extreme value-adds like this can take twice as long and twice as much to finish. In other words, it's too risky even for experienced investors like me and it's just not advisable for newbie investors.
There are a lot of easier projects that one should work on specially where the market is at. I used to do a lot of heavy value-adds in the past and I made MILLIONS of them but, it's not easy. If you're doing a heavy repositioning project and you're relying on refinancing as an exit to get your money back and the money of your investors but the market turns south, financing will dry up - and then what? You're stuck and your investors are mad they can't get their money out.
@Michael Early,
Thanks for sharing your experience and wisdom in how to buy apartments and protect investor capital. I have been out of the Military for almost 2 years after Serving 20 year in the Air Force. I have always loved real estate. I latched on to Grant Cardone and his philosophy of 32+ doors makes a lot of since to me. As you say in this market with Cap Rates continuing to compress, how would you advise me on the first deal I should do? I don't want to put my investors capital at risk and with so much money going into Multi-Family Apartments, many of the deals that I analyze are in the A to B Class range. Should I look at more B to C properties as a newbie? Thanks again for the advise.
Originally posted by @Martin Lewis:@Michael Early,
Thanks for sharing your experience and wisdom in how to buy apartments and protect investor capital. I have been out of the Military for almost 2 years after Serving 20 year in the Air Force. I have always loved real estate. I latched on to Grant Cardone and his philosophy of 32+ doors makes a lot of since to me. As you say in this market with Cap Rates continuing to compress, how would you advise me on the first deal I should do? I don't want to put my investors capital at risk and with so much money going into Multi-Family Apartments, many of the deals that I analyze are in the A to B Class range. Should I look at more B to C properties as a newbie? Thanks again for the advise.
Martin,
First, thanks for your service brother.
Second, I have a lot of respect for Grant Cardone but as far as your first deal is concerned, it depends on many factors. About 9 months ago, I made $175,000 profit on an 11-unit building in just three months and all I did is turnover 2 of the units and increased the rents. I would be happy if that was my first deal.
My advice instead of focusing on the number of units and the area is be open and be opportunistic. If you can find a 4-unit building in a C neighborhood that can be a great deal, do that. Profit from it and roll it over to the next deal.
My assistant told me about another apartment investor here in Cincinnati. I guess the apartment syndication guru seminar he attended had him convinced that he should only buy 100-unit+ apartments. He told my assistant that he can't find any good deals. Well, I have him beat - I found a 5-property portfolio totalling 346 units (not one of the properties is 100-unit+) and it's an awesome deal. My partners and I will make $12-$18M profit plus $1.3M/yr in cashflow but since he was so focused on what the gurus taught him on only doing 100+ units, he missed out on that profit opportunity.
@Michael Ealy. You are very welcome. The military was awesome and gave me the drive that I have now to keep pushing in real estate till i have success. Fight! or Die! attitude has gotten me through 2 wars and will get me over these business hurdles as well. I 100% agree with you on keeping your mind open and on the look out for a good deals that might not fit into your investment criteria perfectly. I know early on I just need to do deals and get experience so I am not stuck on 100+ or even 32+. As you say, as long as the profit is there and it is worth my effort and time it doesn't matter about the number of units.
I am putting in the work right now to learn my local market (Boston MA) as well as look at other markets that intrigue me like Nashville and Austin. Once I find a good consultant/Mentor (Taking Interviews...hint..hint..haha) I will at least be able to bring some knowledge of a few markets to my team and add value that way while I learn from the experts and grow. congrats on your success and I look forward to further discussions.