My First BRRRR: Success or Failure?? LOTS of Details and Pics
Prepare yourself: this is a long post. I wrote this post for any newbies and for anyone with questions about the BRRRR process. I also wrote this to let you know about me and my process. Born and raised in Chicago Illinois, this is the area I am very familiar with and like to invest. I've stayed on the north, west and south side at some point throughout my life. I can quickly recognize a good area from a war zone and steer clear of Chicago's worst. I am in pursuit of passive income. I want freedom and independence that passive income provides, not only for myself but for my family and to give them the best things in life.
I was searching high and low to find a property that would work for me as a rental but not having much luck. I finally decided to narrow my criteria and do one of two things; find a property, pay the 25% down for a loan and rent it out or find a fixer upper and implement the BRRRR method. I've listened to every podcast from BP twice and I was determined to use the BRRRR method in my investing career. While having an infinite cash on cash return is a killer deal, I prepared myself to leave money into the deal. If I left anything less than 25%, it was still a win and a good position to be successful.
After searching for deals and either not finding what I was looking for or someone else beating me to the punch, I realized that maybe I needed to change my approach. As I was listening to a podcast about building townhouses (also called Skinny Mini's), I thought, why not rent a townhouse?? Once you start wanting something, you start to see it everywhere. My eyes were open to a lot of townhouses that where available for under $100K and would rent for $1000-$1200 depending on the amenities. Pros: price, size and potential to cash flow. Cons: bad locations for some and lack of association for most of them in the Chicago area which means capital expenses are on you and the property is devalued (which I will explain later).
After a couple of months of searching for a townhouse, I finally found one. It was a 2BR/1.5BA 1000 Sq. Ft. with a full unfinished basement on the market for $50,000 and had been previously rented by the owner for $1,000 a month. The agent put in the notes that the seller was motivated to sell due to his bad experiences with the property. The neighborhood was a class C area. My first instinct was to offer full price because the banks would not do a mortgage loan for less that $50K, but seeing how the seller was motivated, I thought to offer a little less. There were two other townhouses for sell two doors down for less than $40K but were in REALLY rough shape. I actually tried to buy them but both deals fell through. I offered $35K and they countered at $45K, I countered at $42K and they stopped responding (OH NO!!!) . Four days later they responded and claimed they never saw the last counter and went with someone else's offer (CRAP....) Another deal lost. Except it wasn't, the buyer backed out of the deal a week into it and they came back asking if I still wanted it. Seeing how I had the control, I said "Yes, but for $42K" and they agreed.
ARV's ranged from 70K - 100K range in the immediate half mile radius. My rehab budget was $20-$25K.
How did you fund it??
Some of the money was simply saved over five plus years of working my W-2 job and the other was from a GOOD deal I got back in 2011 when I brought my first home/condo. That's a story in itself, so to keep it short and simple, I paid that property off and got a HELOC on it to fund deals. I am renting this condo nowadays.
I got an inspection done. Other than an 19 year old furnace and a roof that was on the last third of its life, everything checked out and was functional. I closed on the property in 14 days. I used only the funds from the HELOC so that I could stay liquid.
What did you do to it??
Now the fun begins, fixing it up. The property had old dirty carpet, peel and stick tile in the kitchen, dated bathrooms and laminate countertops. Before I even decided to purchase a property, I defined what type of amenities I wanted to feature in all my properties. I am a firm believer in the style of your property will attract a certain type of tenant. In other words, nicer amenities attract nicer tenants and trashy places attract people who don't mind living in garbage. In my opinion, there is a nice rental market for nicer amenities and that was my target audience. I intended to put granite countertops, backsplash, ceramic tile as needed (which was the kitchen and main bath) and finish the hardwood floors hidden under the carpet.
I paid subs to come in and do their individual tasks, i.e. paint, tile, flooring, HVAC, etc. I put a lockbox and an alarm on the property. Subs had access to the lockbox but not the alarm. So I deactivated and re-activated daily with the push of a button. I knew who was at the property and who wasn't at all times. The biggest challenge was that I picked a bad HVAC guy and had to fire him. He said it would take two days to do the job and it took more than two weeks. I called in Four Seasons to finish it up and make sure he did everything right. Then I deducted the cost of Four Seasons out of his final payment and made sure I got a final payment waiver of lien. I paid a handyman to do all the little punch list items that needed to be done. The total rehab budget was $25,000.
Here is a break down of what I paid for:
4K - HVAC
3K - Painting
2.4K - Hardwood Flooring
1.5K - Electrical updates
1.5K - Plumbing
1K - Granite Countertops
3.5K - Tile
2.5K - Materials such as new toilets, ceiling fans, etc.
1.7K - Concrete replacement
2.5K - Management/Permits
1K - Appliances
I wasn't happy with some of the prices to get work done but I made sure not to fall into the trap of "oh, I can do that myself". I know how to do a lot of things but had to remind myself not to be the contractor and to be the investor. In two months, rehab was complete. It could have gotten done quicker, but I had to take the time to develop my team of subs and screen them accordingly. Now I have a set of guys that I like to use to get things done and they give better pricing because they know I will be a repeat customer.
I marketed it for rent for $1200 which was high but I wanted to see if there were people willing to rent it for that amount. I only got a couple of bites but it had everything on their checklist they were looking for (Bingo!). I did not want to make the rent too high for the neighborhood and get a tenant who could not afford to stay or decide that they could be in a better location for the same price. Ultimately, I rented it out at $1066 a month, which was shown to be market rent for the area. It took about two months to find and rent it out. My standards are:
Must have a minimum credit score
Must make a minimum of 2.5 times the monthly rent
Must be employed with current employer for a minimum 8 months or continuously employed for 2 years
No evictions
Credit and Background Check
Reference Check
Visit their current residence (How you treat your current residence matters and says a lot about how you will treat mine!)
Section 8 Welcome (There are lots of good people who leave have section 8 - more than people think and talk about)
I am a militant when it comes to my standard, no exceptions! The day I deviate is the day I accept losing money.
Next came the refinance. I waited the 6 month seasoning period because it would cost more to do it any other way. I got the better interest rate by doing the refinance in my name vs in the LLC name. I would have been charged 7.625% to keep it in my LLC name vs 5.75% in my name. The only other advantage to keeping it in the LLC name was I did not have to wait six months to refinance. I intend to acquire ten loans/properties in my name and quit claim them into the LLC one year after each refinance. The bank I used took three weeks longer than they should. I gave them all my information months in advance so that we could close right on the 6 month mark. The appraisal did not go as well as I hoped. The appraiser came in at $80K despite all my improvements. I called the appraiser and challenged him on the issues but of course, like most appraisers, he refused to change his report. The biggest thing I did not agree with was his refusal to use properties in Hyde Park. He choose properties two miles south of mine but refused to go less than a mile north and use Hyde Park townhouses. If he only used one comp from Hyde Park it would have appraised at or above $100K. His rationale was Hyde Park was a "special location" and not comparable while two miles south of the property was. He did not compare it to any condos because condos are defined as Fee Simple with an association while my townhouse was only Fee Simple. So the value would go up if there was an association.
I also had a small problem with the bank over the insurance. They required that I have replacement cost on the roof versus actual cash value and required me to get different insurance. I complied but simply changed it back to the insurance of my preference. The difference in the price was $450 - $650.
The bank will lend 75% on investment properties.
Purchase: $42K
Rehab: $25K
Loan Amount: 60K - Closing cost = $54,400 Net
Which means that I have about $13,000 stuck into the deal. Technically, it's the HELOC money but nevertheless, money that needs to be repaid. My cash on cash return is 21% so I ask, was this BRRRR a success or a failure?? There is a lot of people that would be happy with a CoC return of 21% and I am one of them. While I did not get every dollar out, I learned valuable lessons that I'll take from this deal and on to the next.
Since this deal, I have acquired two more townhouses for even cheaper in the same area. I am a quick learner and realized that if I want an infinite Cash on Cash return, the price has to be cheaper and/or the rehab budget has smaller. So you will be hearing about those deals once they are completed. So all in all, I gain invaluable experience and got a property that cash flows nicely.
P.S. You may probably notice the taxes are much higher than they should be. Considering the purchase price of $42K and appraised value of $80K, I will be contesting it and that should definitely increase my cash flow more!
$1,066.00 Monthly Income
$836.40 Monthly Expenses
$229.60 Monthly Cashflow
8.68% Pro Forma Cap Rate
$6,945.44 NOI
6 months Time to Refinance
21.19% Cash on Cash ROI
16.54% Purchase Cap Rate
| Vacancy: | $85.28 | Repairs: | $53.30 |
| CapEx: | $53.30 | Insurance: | $37.00 |
| P&I: | $349.19 | Property Taxes: | $258.33 |