I thought I would share what I feel is a small win with the community. Last week, I closed out the cash-out refinance on my BRRRR in South Jersey. Money wise, this property cost me $475 after the cash-out refinance. Not bad! Certainly makes for a quick return on my cash in!

Investment Info:

Single-family residence buy, rehab, and hold investment.

Purchase price: $37,711 (including closing costs)
Cash invested: $45,380 (including holding costs)

Total Money In: $83,091

Appraisal: $125,000
Cash out Refinance: $87,500, less closing costs

What made you interested in investing in this type of deal?

Obviously the prospect of BRRRR seemed like a great way to get money into a deal, and out of the deal and hopefully onto the next. I'm a relatively young (35 y/o) professional by day, and I would love to execute a BRRRR once per year; anything more is gravy. While the prospect of being a real estate professional is welcoming, right now I enjoy my day job tremendously and I'd like to use real estate as a "low and slow" build-up to help my family's financial future.

How did you find this deal and how did you negotiate it?

This was an on-market MLS deal, but was sitting for a long period of time. I went to see it with my agent in January 2020, and figured it was ripe for a low offer. On market for $68,900, and I offered $35,000 cash, no contingencies. They asked me to come up a bit and we settled on $36,500. I believe the property was either in bankruptcy court or had a proxy seller of some sort -- the previous owner may have owned several properties and went belly-up on his investments. My guess is, people saw the price was way too high and didn't even bother to offer, and may not have known they were just trying to dump the properties.

How did you finance this deal?

Cash on the purchase, and then HELOC on my primary home to fund the rehab. I used a local credit union to obtain the HELOC and it was super simple.

How did you add value to the deal?

Essentially a full rehab on the property. I'd say the real value came from meeting the neighbors, introducing myself, being friendly when I was around. I have made a great friend with the next door neighbor who always watches the property, and met another neighbor who does heating/cooling, and replaced the heating system in the house at a very fair price. Every person used for the rehab was relationship-based, i.e., they knew someone I knew, or I've met them before.

What was the outcome?

After a cash-out refinance, my total all in cost is $475. The property should cash flow approximately $160 per month. The unit rents for $1475 monthly, PITI is $750 per month, and my total set-a-side for all expenses is $563. Since everything is new, I expect low CAPEX for the first few years but I am setting aside that amount anyway. You never know, plus with tenants -- they could always be rough on items.

Lessons learned? Challenges?

OK, first, I believe in anything you are not well-versed in or have experience in, you need to be highly cautious and conservative. Almost to a fault.

When I ran the numbers on this deal, I had to be ultra conservative. I didn't care what this deal would look like if everything went right...I cared about what it would look like if everything went WRONG. If I had to dump out of this deal, I had a number in my head that I could lose as a learning experience if things went south. And things did go south to some degree, in essentially every phase of the deal. Let me explain:

1. Purchase was delayed by covid. I was supposed to close March 17, 2020 and we went on an indefinite hold until June.

2. My contractor was wide open in March, but not so much in June. He had to bring on subs who did primarily molasses-slow work. What should have taken 4 weeks, actually took 3 months. Not necessarily his fault, but I wasn't totally on-board with the excuses he made for his subs.

3. The city was extremely difficult to deal with. I got a permit for the new heating system and they dinged me on an electrical permit while inspecting my heating system, of which they had no knowledge of anything new. But they saw all new things and put a stop order on me. Total cost of that permit for the city? $77. They stopped me for TWO MONTHS for $77. These local governments don't make a ton of sense -- if it's about quality of housing and ensuring the city can maintain their resources -- CHARGE ME FOR A QUICKER INSPECTION. I'd pay $200 just to have them inspect the work that week instead of waiting 20 business days, because I have to wait that 20 business day period for the permit and THEN schedule a CO with the SAME HOUSING AUTHORITY to receive a CO to rent. This little $77 maneuver cost me two months of rent. So, when people post "should I get a permit" or "should I get a CO" -- think about the alternative, because its ALWAYS time and money.

4. The first tenant I put into the building was fantastic, but texted me 3 days into her lease and told me she would have to leave. She cited a family emergency/issue. Whether or not its true, I felt like I did enough due diligence on this tenant, and it's a shame. Despite opinions to the contrary (people said hold her entire deposit, make her stay until I found another tenant, etc.), I charged her prorated rent for the 3 days and returned her money, and then offered it to the next qualified candidate, who accepted. 

5. Of course, the big one -- I grossly underestimated my rehab. And I thought it was a good number. I wanted to be ~36.5 in on purchase, and ~35 on rehab, and ~3k on holding costs. I ended up with a rehab around 42k, which included unforeseen items like a new heating system, under-estimating appliance costs, landscaping issues, higher than expected electric costs, etc. When you are doing a pro forma on rehab, don't guess willy-nilly. Know your numbers on what is acceptable and what isn't, and then get your quotes. If you want a rehab around 35k, are comfortable with it going to 40k, and 45k is your absolute line...follow it. But you need to know what is acceptable and what isn't, and always add a contingency for time AND money on your rehab estimate. Something small -- I forgot to put blinds purchase/install on my contract with the contractor...well the house has 18 windows, so I had to measure 18 windows (~1 hour of time), buy 18 cheap blinds (~$200), drag them all to the house, install 18 blinds (~4 hours over two days...some of them had to be redone).

6. Time is money, but spend the time and the money to do things right. I added on a small project towards the end of the rehab for an extra $1000 that would be a quick, cheap, and nice facelift to the front façade. The attached neighbor had a similar work product done and I wanted to match it closely. Doing so would make the houses look more uniform and give it some more curb appeal. I'm really glad I did it, because as you can see in the pictures, it turned out beautifully.

And finally...for anyone looking to complete a project like this, sometimes you just have to "do it" to get off the ground. I think the biggest trick is starting with a property that is way lower than market value. If that property does not exist, don't force it. Also, you have to be prepared to take a loss and deal with the time it takes to execute a BRRRR. Your money is going to be locked up. You might have a HML or HELOC you need to borrow against and pay interest. Think through, methodically, the real costs of buying a distressed property, rehabing it, holding it, and hopefully refinancing to get some or all of your money back. It is a PROCESS at the end of the day, and if you haven't thought through that process, or given the process aspects the respect and time they need, you put yourself at risk. And, don't invest anything you can't comfortably lose if things go belly up. The chances of you actually losing every dollar are slim, but things can go wrong, namely messing up numbers and underestimating rehab. You might not get all your money back, so run the numbers as if this will be a mediocre-bad deal, and if it still looks good and you still like the long term hold, it's worth digging onto the next step of the process.