My First BRRRR in Baltimore
I'm writing this post to track progress of my first attempt to BRRRR a property in Baltimore City (it is a length post). After two years of reading books, studying BiggerPockets, researching neighborhoods in Baltimore and saving money living at home, I'm happy to say that I've taken action and acquired my first property. My hope is that this will inspire someone else to take action and help inform of some of the nuances and headaches I've encountered thus far:
Property Details:
The property was a semi-detached 3 bedroom, 2 bathroom foreclosure (1200 sq. ft) located in the 21229 area code. 2 levels w/ basement, HVAC and wooden deck. It listed at $73,000, with most properties selling between $130k-$140k after repair within 0.5 mile radius. There was evidence of water damage in the basement (you could see mold on the drywall sections around the laundry room, baseboards separating from the wall, splintered doors, etc.) Everything else in the home appeared to be purely cosmetic.
Rationale for purchase:
Rents are good in this area ($1400 median rent for 3 br). The property appeared to have been updated (DIY job perhaps) with stainless appliances, granite countertops, new hardwood floors so that lowered my basis for rehab . There was a bonus room in the basement that I envisioned could be converted into a 4th legal bedroom, increasing the value of the home. Using "The Book of Estimating Rehab Costs," I roughly predicted the rehab would cost little more than $20,000. With an all-in cost of $105,000 (73,000+20,000 + ~12,000 in closing costs), this would meet my 75% of ARV criteria for the BRRRR strategy with >22% CoC return.
Before/During Contract (in order):
- Set up my LLC and pre-qualified with Lima One Capital (HML)
- Viewed the property with my agent and wrote an offer below asking w/ 10-day inspection contingency (unless you are sophisticated or plan to do a full gut renovation, DO NOT OMIT THIS, I was under contract for a property in Baltimore City prior to this one and I did not include the contingency to be competitive. Two days after the contract was ratified, squatters moved into the property and the bank told me there was nothing they could do. Fortunately, there was language in the purchase and sale agreement stating the home must be delivered in an unoccupied state and my EMD was returned.)
- The property had multiple offers, so I gave my H&B offer at 77,000 with the same contingencies. The offer was accepted and I used the seller's title company since they agreed to cover all title-related closing costs.
- Day 7 - had the home inspection completed. The only CAPEX expenditures needing replacement were the hot water heater (it was on it's last leg at 10 years old). The only utility on at the property was electric (no water, gas) so the other fixtures could not be inspected. The home inspector was also a contractor that my agent referred me to, so he completed the construction budget based on what he discovered. That amounted to $22,000 including 10% contingency. I moved forward with the purchase.
- Day 8 - Ordered lead inspection with LeadProbe for $295. Because all of the interior surfaces had been painted over (albeit sloppily), there was no lead found inside the house. Exterior showed presence of chipping paint. I plan to go for the limited lead free cert at a minimum.
- Day 10 - Appraisal ordered. The report he provided me showed a slightly lower post-rehab appraisal than I hoped for ($130,000). I inquired about the addition of a 4th legal bedroom - the appraiser told me that because the room is below grade, it would make little difference in the value. With that, I abandoned the expense of doing the work to make the basement room legal and adjusted my budget.
- Day 11-15 (closing): I began soliciting bids from 4 other contractors for the work. One was referred by another agent friend, the other from BiggerPockets, and two from the local REIA list. The lender and title company were not really communicating with one another, so I took on the task of reaching out to each party and make sure that documents were being sent to the appropriate parties. I prepaid an annual Builder's Risk Policy with Luray Insurance. I retained an attorney recommended by another BiggerPockets member to review an Independent Contract Agreement I prepared for the rehab portion of the project.
- Day 16 (closing): I received my final HUD for closing costs with a bit of sticker shock. Costs that I did not account for/underestimated (transfer taxes, ground rent redemption, crediting the seller for taxes already paid) showed up, but I became a homeowner.
Predicting the numbers using BP Calculator:
Purchase Price: $77,000
Rehab (financed using HML) : $22,140
Final Down Payment/Closing Costs: $16,000
Total All In: $115,000
Assuming refinance at 75% appraisal:
Rent: $1500
Mortgage after refinancing ($105k, 30 year, @7%): -$593
Expenses (insurance, taxes, Capex, vacancy): -$570
Net Monthly Cash Flow: $385
Equity: $35,000 w/ $10,000 left in the property
After closing:
- The day of closing I went straight to Home Depot, picked up some cheap Kwikset locks and changed the locks on the house
- Baltimore City requires you to register the property with the city within 10 days or they will fine you. I submitted the registration online, it was a fairly simple application.
- Changed all utilities to my name and had the property de-winterized. Discovered the water pressure is low at the main value (~40 psi) and water is not made made it to some of the fixtures. Turned on the gas and verified the furnace and stove are working.
- Continuing to collect bids for the rehab work
What I have learned thus far:
- The hardest part of this process was getting started and overcoming fear. It feels good to be on the other side of the analysis paralysis.
- Below-grade bedrooms do not matter from an appraisal standpoint and it is ok to have ( I would love for someone to confirm or refute that).
- My hard money lender required me to prepay for an annual (12-month) insurance policy. In addition, they required the property to be a "fee simple" transaction - the property has ground rent associated with it, so they required me to redeem it at closing. Those were additional expenses that I did not initially account for at closing.
- Contractors in Baltimore City are not the best communicators at all. It's somewhat surprising the amount of headache I've had before hiring anyone for the job.
- "The Book on Estimating Rehab Costs" has been a tremendous help for me to ballpark the rehab costs for this project using various finishes.
My current challenges:
- The appraisal came back lower than I expected, which will squeeze me for cash left in the deal at refinancing. This is the biggest risk with implementing this strategy as it depends heavily on the appraisal and your ability to refinance.
- Many lenders that I've spoken with in Baltimore
- My real estate agent lives closer to Washington DC than Baltimore, so he would have his assistant show me properties. I feel as though he lost interest in working with me as my ambitions changed from wanting to own my own primary residence to pursuing rentals. Communication became poor and I would rarely get a call back within reasonable time, which made this process more stressful for me as a first-time homebuyer. I plan to pursue a new agent that wants to help me build.
- I have interviewed and solicited bids from four (4) contractors and they have not yet worked out for various reasons.
- Contractor 1 (my home inspector) does not carry an MHIC license and has lagged in communication with me despite providing the initial estimate and expressing interest in performing the work.
- Contractors 2 and 3 carried verifiable license and insurance, both knowledgeable and pointed out things my first contractor missed. Both had very poor communication with respect to bid turn around and answering questions and quoted me ridiculous prices for the rehab ( ~$36,000 for the work omitting HVAC and plumbing), most of what I deem cosmetic. As an example, I was quoted $5000 for interior paint, $4000 for exterior paint, and $4500 for refinishing cabinets - maybe they thought they could take advantage of me?). Contractor 3 told me it would take him 7-10 days to turn around a bid. I did not receive the bid until day 13. That same day, I submitted questions about the bid and have not received a call/email back.
- Contractor 4 is licensed and insured, had great references, took notes and measurements during the walkthrough and was generally a better communicator. His estimate was slightly higher than the initial $22,000 bid I received but it was not unreasonable and he was willing to work with me on price. However, it seems to take days to send me information that he would promise within 24 hours (ehh, is this to be expected). Still ongoing discussions...
What I need to do next:
- I am still seeking licensed, insured contractors that are interested in performing work. I would prefer not to GC the job myself since I work full-time, but I am desperate to get the project started at this point.
- Determine what my long term strategy for keying the properties (master key vs. separate keys for each). I've read a lot of landlords are using LandlordLocks.com, but it seems like an expensive buy in. Need to do more research.
- Prepare for the inevitable completion of this project and preparing to market it for rental.
I plan to update this post as the project progresses and include my final SOW, but I am happy to answer any questions and welcome feedback from others.
Keenan