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Michael Ealy
  • Developer
  • Cincinnati, OH
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BRRR Actual Deal - $2M profit or $15K/mo cashflow: with pictures!

Michael Ealy
  • Developer
  • Cincinnati, OH
Posted Sep 17 2019, 13:15

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% ( 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
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?

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