Just Jump: A story on our 'first' deal in St Louis
Hello BP Community!
I'm writing this post to begin chronicling the learning experiences we've had so far in the purchase, renovation, refinance, and renting out of a multi-family property in the city of St. Louis. I'm hoping that others of you who are considering jumping in can learn something from our learnings and from our mistakes. And of course advice or "hey that happened to me too" is always appreciated!
My brother and I have each individually owned single family properties for several years now in the St. Louis area. After both of us got hooked on BP, we decided to join forces and start looking to BRRRR it up. We both are professionals with full time jobs, so for the time being - this is a second job. We both own single family rental homes in nicer (ie more expensive) areas of St. Louis County, and they all cash flow decently - but after listening and reading from this community, we decided we probably could do better. St. Louis City (the area roughly 10 miles South, West, and North of the Arch) has a plethora of housing for sale that could use some improvement - so opportunities to build some equity! The biggest problem is finding therightarea. One street can be prime and a great opportunity in a growing area that is hot for millenials, the next street could be a D-class slum.
There is one overwhelming and repeated piece of advice we (and likely you) hear on this forum. Borrowing from old Nike slogans, "just do it." Borrowing from Steve Harvey, just "Jump." Pick your inspiration - the point is that in order to get action, you have to take action. So we started getting our ducks in a row to take action. But where do you even start?
We started driving the streets. Looking for neighborhoods and streets that we felt like we could handle. There are areas of St. Louis that are chocked full of Multi-Family properties so those were our focus areas.
If you know the city, we landed on areas around Tower Grove Park South. The properties could be acquired for between $75K-$200K and many have improvement opportunities to build some immediate equity. It's also an area hot for renovation. It doesnt take much driving to see a dumpter full of house guts from an active reno. They're everywhere.
OK, neighboorhood in our sights. Tons of stuff for sale, so now it's time to focus. We started an LLC holding company in preparation for acquiring properties.
The next step was to set our goals. What did we want? We both had experience with single families (both of us kept our previous primary residence as rentals), but we started to believe what we read/hear/see on BP that multi-fam is where the money can be made. So we knew we wanted multi-fam, but how big? I posted a question to BP with some great responses - do we look for small apartment complexes, or start with 2-4 unit multi-fam? Answers to that question were all over the board, but the best advice we thought we heard was to start with 2-4 unit. Get our feet wet with a small multi first before diving into true commercial-class apartments. We set our goals on finding a multi-fam with opportunity for moderate rehab where we could achieve a $20K immediate profit in ARV (after repair value) compared to purchase price + renovation costs, with a total budget of approximately $125-150K. We are looking to hold and rent out, with intent to cash out most of our initial investment in a refinance.
OK, so now we have our general geographic area and general goals for the property. We had started working with an agent who has a bunch of C-class rentals of his own, so he knew what to look for and what not to look for. Sort of. We scoured the MLS daily, and visited many a house. Some were turn-key, ready for renters... but those aren't quite what we were looking for. In others, you could quite literally see sky when you walked in the front door. Those were more than we were willing to bite off for the first project. We were looking for something where we could gain some equity with renovation.
Before I go any further, here's the biggest challenge we realized, and frankly are still struggling with. Everyone talks about needing a “team” – a group of professionals to help you with your goals. We had an agent, but we needed a contractor (or contractors) we could trust. This has turned out to be our biggest challenge. Frankly, unless you have family in the business – you need a project in hand in order to start finding and vetting contractors. We started reaching out to various contractors prior to having a project, and if they responded at all, it was generally a “call me when you have a project and then we’ll talk.” I mean that makes sense, they’re busy and don’t have time to shoot the **** with n00bs about hypothetical properties. The problem is that it’s tough to do good rehab estimation without having someone in your back pocket. More on contractors later. We just decided to get the project first, then we’ll find the contractors.
So we found a property. It was a doosy all right. Two unit multi-fam in the city on a big street called Kingshighway Blvd with a nice size, detached 2-car garage with separate doors (monetizable!). One unit was occupied, the other was open and “recently renovated.” We were not allowed to see inside the occupied unit until a contracted was accepted. We ran the numbers on a nifty estimation spreadsheet I built:
| Purchase Details | Financing Details | ||
| Purchase Price | $ 90,000.00 | % Down | 25% |
| Esitmated Closing Costs | $ 1,000.00 | Down Payment $ | $ 22,500.00 |
| Estimated Repairs | $ 33,984.00 | Loan Amount | $ 67,500.00 |
| After Repair Value (ARV) | $ 145,000.00 | Loan Points | 0 |
| Total Project Cost | $ 124,984.00 | Loan Fees | $ - |
| Potential Upside | $ 20,016.00 | Amortized Over (Years) | 30 |
| Interest Rate | 4.75% | ||
| Total # of Payments | 360 | ||
| Monthly P&I | $352.11 | ||
| Total Cash Needed to Close | $ 57,484.00 | ||
| Cash Flow Details | |||
| Income | Future Assumptions | ||
| Unit 1 Monthly Rent | $ 850.00 | Annual Income Growth | 2% |
| Unit 2 Monthly Rent | $ 850.00 | Annual Prop Value Growth | 2% |
| Unit 3 Monthly Rent | $ - | Annual Expense Growth | 2% |
| Unit 4 Monthly Rent | $ - | Sales Expenses | 7% |
| Additional Revenue | $ - | ||
| Total Monthly Revenue | $ 1,700.00 | ||
| Expenses | Expense Forecasts | ||
| Insurance / Month | $ 100.00 | Vacancy Rate (%) | 5% |
| Monthly Taxes | $ 91.50 | Maintenance (%) | 10% |
| Water/Sewer | $ 69.70 | Cap Ex Savings (%) | 10% |
| Waste Removal | $ 57.08 | Property Management (%) | 10% |
| HOAs | $ - | Vacancy Rate ($) | $ 85.00 |
| Electricity | $ - | Maintenance ($) | $ 170.00 |
| Other Monthly Expenses | $ 50.00 | Cap Ex Savings ($) | $ 170.00 |
| Description of Other: | Lawn Mowing | Property Management ($) | $ 170.00 |
| Total Operating Expenses | $ 963.28 | Net Operating Income (NOI): | $ 736.72 |
| Total Monthly Expenses: | $ 1,315.39 | ||
| Monthly Cash Flow: | $ 384.61 |
| Summary | |
| Monthly Income | $ 1,700.00 |
| Monthly Expenses | $ 1,315.39 |
| Monthly Cash Flow | $ 384.61 |
| Annual NOI | $ 8,840.64 |
| Purchase Cap Rate | 9.82% |
| Pro Forma Cap Rate | 6.10% |
| Total Cash Needed | $ 57,484.00 |
| Cash on Cash ROI | 8.03% |
| Rules of Thumb | |
| Total Monthly Cash Flow using 50% Rule | $ 497.89 |
| 1% Rule (Revenue >1% of purchase price) | Pass |
| 2% Rule (Revenue >1% of purchase price) | Fail |
| Monthly Revenue as % of Purchase Price | 1.89% |
Note – numbers above assume refinancing, maintaining 25% equity.
It was immediately apparent upon walking into the unoccupied unit that the “recent renovations” were simply some lipstick trying to cover a pig in hopes we wouldn’t see. Odd fresh paint, some clearance mosaic tile slapped haphazardly behind the kitchen counter, and some paneling in the bathroom with a clawfoot tub and a strange smell of mold.
The owner started out by asking $149K and after 2 months had dropped the price to $129K. After looking at the property, we came up with our number. We negotiated and got an accepted offer at $105K.
Lesson #1: Cash is king. By offering to pay cash with quick close, the seller turned down other financed offers of more money for our cash offer. We got a good deal just by offering cash.
We weren’t willing to pay a penny more, someone else could deal with the headaches for that. The property was “as-is” but we made sure to have an inspection clause. Scheduled, done (building and sewer). We also finally got access to the occupied unit. When we walked into the occupied unit, the smell of pot was rough. And we noticed a few cockroaches, but didn’t stick around long enough to count them.
The building inspector showed up and within 2 minutes before even going inside, pointed down the side of the building. “See anything odd there?” The 2-story brick wall along the building side was very clearly not as straight a wall should be. The back corned was at a bit of an odd angle. Structural problems.
Our agent pulls us aside and says “the first sign of structural problems, I say run.” We asked the inspector – “If you wrap it up now, what do we owe you?” He said “I only do 1 inspection a day, so if I do the inspection or not it’s the same fee.” Ok hell, finish the inspection then.
He wraps up the inspection, and the list of issues is substantial. One corner of the house has a serious foundation issue, main stack should be replaced, flat roof needs serious work, major leaks in that moldy smelling bathroom (we found gym shorts wrapped around the toilet drain and subsequently sprayed with flex-seal, OMG). Serious cockroach infestation, substantial tuckpointing needed, 2nd story porch that is starting to fall away from the house, bad windows, multi-tapped breakers with evidence of arcing, and the list went on. The big ones to us were the foundation issues and the main stack. Against our agent’s recommendation, we saw those as big ticket opportunities for price reduction. Those are items that scare people away – including current owners. Maybe we can use it to our advantage.
So we call a structural engineer to evaluate the foundation, and 7 different plumbers to come bid the plumbing work. Structural engineer says it needs helical piering, likely 3 but worst case scenario as many as 7. We take the worst case scenario, multiply by $1500 per pier and start with an immediate reduction in our bid by $10,500. Plumbers came back with estimates ranging from $4,700 to $18,000. I think some of them just didn’t even want the job. Roof repair needs $1,000. So we use all of this to go back to the table, saying “this place needs a ton of work. Here are the estimates we have so far. We’ll give you $85,000.” We settle on $88K and the roach motel is ours.
Lesson 2: Get multiple bids, use them to re-negotiate the price. Be prepared to walk if the repair costs are more than the seller is willing to reduce.
The day of closing was a monster rain storm. We paid cash for the property, left the title company and head straight over to the property. We go inside to find a 2 foot chunk of ceiling fell off the second floor unit ceiling due to roof leaks and water was coming through at a substantial rate. Great. We own the place for 20 minutes and already found a new problem.
We convinced the first floor occupant to get the hell out, so within 2 weeks of closing he was out as well. And he was kind enough to leave a dumpster worth of **** behind in his unit.
Lesson #3: It’s worth every penny to find some crew on Craigslist to come empty out and clean a unit trashed by a renter.
We paid some guys $300 to come empty out the unit and haul off all the trash. They did. Now that the place was empty, we could better evaluate the condition of the unit. And oh my God, the roaches. It makes me shudder just reliving the roach horror. The tenant was so sloppy, he would leave months of takeout containers piled up in the fridge and layer upon layer of food slop on the stove, on the floor, being the cabinets, everywhere. And the roaches loved it. I moved the refrigerator, and at least 1,000 roaches from under the fridge scattered like teenagers at a kegger busted by cops.
We got some roach bombs, but they just laughed at us. We then said screw it, and tore out all of the cabinets and hauled them to the front yard. Doused them with Raid and posted them for sale on Craigslist. Ripped them out of the second floor unoccupied unit for good measure too.
Lesson 4: You’d be amazed what people will buy on Craigslist. Posted the cabinets for a few hundred bucks, and they were gone in 24 hours. When the person came to buy them, we watched a roach the size of my thumb crawl out of one of them and into her baby’s car seat. OMG.
After tearing out the cabinets, we started tearing out all of the wood paneling in the bathrooms… only to realize the roaches were there too. Tore the bathrooms down to studs and got rid of everything. Started tearing stuff our from everywhere in the house. Ripped out a “partially finished basement” that was really just drywall covering up a black moldy mess of a stone foundation.
Lesson 5: You’d be amazed at how quickly a dumpster fills up. We got a 30 yard dumpster expecting to only need 10. We filled it to the top, and over-shot our weight quota by 2 tons. Wow.
We started interviewing contractors at this point. We got bids from general contractors, renovation companies, and flippers. Numbers were all over the place – ranging from $30K to $80K for roughly the same scope of work. Now we had to find a contractor that we could trust to do good work but not gouge us on price, but someone who could also get the work done in a reasonable time so we can get it occupied and refinanced and move on.
We found a guy who does general contractor work, focusing on flips in St Louis (if you’re from STL and want to know the name, send me a note). His prices were pretty good, and he took me to 3 different projects he had ongoing to show me the quality of his work. It all seemed on the up and up, and his quality was good. But there was 1 major problem. My brother/business partner is an attorney. His instincts were to check into lawsuit history, and he found multiple previous lawsuits against this man for unfinished work. We confronted him about this, and he told us what seemed to be an honest story. E used to be an alcoholic and, while he delivered on hundreds of projects, there were a small number that he let get the best of him. He claims to be sober 18 months now, and these problems are in the past. He also claims to have since made amends with those inividuals.
I called several of his references, and they had nothing but positive comments on the guy.
We decided to take the gamble and negotiate a contract with the guy. The contract stated that the work was to be completed in 5 weeks, and we would withhold 10% of the total cost until the building passes occupancy inspection. He let us know he’d be going on a 2 week vacation the week after we signed the contract, but his crew would be there no matter what to get the job done. To cover ourselves, we ensured the contract stated that he would reduce total project cost by $500 per week after the 5 week timeframe was up.
Within the first few days, his crew had all of the windows ripped out and new windows in. The new cabinets were already delivered. We were elated – could we have found just the kind of guy we need on our team?
Well, then he went on vacation. Pace of progress came to a crawl. For the 2 weeks he was on vacation, very little work was done. We could tell people were coming over still, as random little things were done, but progress was painfully slow.
After the guy returned from vacation, he waited an additional 3 weeks to even get the permits in place. Once the permits were approved, progress did seem to pick up again. Tomorrow is the final day of week 8, so we’re already 3 weeks past his anticipated deadline. We’re still making progress- main stack has been completely replaced and new rough in plumbing is done, tubs are in, lots of plaster work done, but there is still a ton more work to do. I’ll be honest, we’re concerned about the job getting completed. It’s been a bit of a nightmare. Our only solace is that there are tons of materials at the place, work is getting done, and his price was still a few thousand less than the next lowest bid. So while time is money and delays are preventing us from getting the place rented out in a timely manner, we’re willing to be a little tolerant of delays given the job cost is still cheaper than the next cheapest bid and we’re getting $500/week off the project cost. Still, going with the cheapest isn’t always the best idea.
I’ll keep this posting updated with the renovation progress. Hoping it will be complete by end of week 10.
Lesson 6: Pay attention to legal history of contractors. Cheaper isn’t always better, and you can’t teach an old dog new tricks.
Now that we're getting closer to job completion, however, it's time to start working on the refinance. We learned something from a recent BP podcast that made us both a little concerned, something we didn't previously know. While we paid cash for the property, we were unaware that we couldn't refinance the property for 6 months after closing (at least not with Fannie Mae). That is going to put a bit of a strain on our hope to cash-out refi as quickly as possible in order to BRRRR. Coupled with that, we are also owning the property under the name of a property-specific LLC and that is owned by a holding company LLC. We're also trying to identify lenders that are willing to lend to an LLC as opposed to individuals. We are trying to avoid the quit-claim issue that others have discussed out of concern that the loan could be recalled once interest rates start to rise.
So, that’s where we are today. We did it – we pulled the trigger and bought a property that needs work. We’re trying to get that work done, and struggling to get our team of contractors, lenders, and professionals together. We knew building this team would be a challenge, but we didn’t quite realize how big of a challenge it would be.
How do you do it, those of you that have been successful in similar stories? Tips for building a team?
Stay tuned for further updates…