My First BRRRR Deal in San Diego, CA!

Real Estate Deal Analysis & Advice
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My First BRRRR Deal in San Diego, CA!

Jon Khalil
(n/a) · Member since 2018 · 41 posts · 10 votes

Investment Info:

Condo other investment.

Purchase price: $490,000
Cash invested: $6,400

A 3 Bed, 2.5 Bath 1400+ Sq.Ft. Condo located 3 minutes away from SDSU. This property was purchased using 0% down and 0 PMI from our Credit Union. 6.25% interest rate. Closing costs were about $8300 and we received a seller credit of about $3350. We plan to fix it up doing all the work ourselves, get it rented by December 1st, and refinance once rates are back in the 2-3% range to see real cash flow.

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

It was the best way to get our foot in the door. After researching all different types of methods of investing in Real Estate, I found that the BRRRR method was the best for long term wealth and being able to cash-out refinance is the key to receiving tax free money to go buy the next property.

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

Redfin, we looked at comps and had to make an aggressive offer since this property was in a multiple offers over listing situation.

How did you finance this deal?

We invested 0% down and only paid closing costs, which after the seller credit we actually ended up getting about $4K back.

How did you add value to the deal?

TBD- we are planning on upgrading the floors, fixtures, paint, and Kitchen.

What was the outcome?

TBD/In process

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Twana Rasoul is a great Realtor here in the SD area, and he made our transaction smooth and we were very happy with the end result. I highly recommend him.

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Dan H.Pro Member
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
4y
Quote from @Tim G.:

This feels like a very thin deal, banking on rates in the 2-3% range is highly speculative and risky. Did the realtor you're referencing here back you up in this thought process? 

 I share Tim’s concern. I will say @Twana Rasoul and I typically have similar mindset but here are some concerns: 1) multiple offers basically implies you paid at least retail (there are some exceptions, but they are rare) 2) I see no value add costs and no ARV 3) the zero down implies to get anything from the refi will require at least a 25% value add (assuming #1 is correct) 4) these "high" interest rates are very reasonable by historical standards. We may never see sub 3 rates again. No one knows if or when rates will drop appr3ciably. 5) prices have fallen over the last few months. Assuming we are not at the bottom implies the value add must first recover any loss of value from the depreciation to even recover your value add costs.

Local Flippers have heavily curtailed their acquisitions over the last few months. No one knows what the future holds, but I would not acquire as an investor anywhere close to retail (I typically do not look at paying retail) at this uncertain time.  I may be interested at 20% below retail.  Even at 20% below retail, my holding costs will be greater than having paid retail at the beginning of this year due to rates doubling.  

I wish you the best and hope my concerns are all unfounded.  

Good luck

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  • Cody L.
    Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
    3y
    Quote from @Jon Khalil:

    @Cody L. To give specifics, our Mortgage came out to $3339 and our HOA fee is $450. Giving us a total of $3789. We are hoping to turn this into a medium term rental where we can get anywhere from $4-5K per month in revenue.


    With just PITI + HOA being ~$3800, I don't see how you cash flow (remember there are other costs). Even though you're managing yourself, you have to put some value on your time or include the cost of management in your underwriting. Renting by the room is quite management intensive. So how much time will you spend vs. how much you get (and how much do you get relative to the cash you put out)

    But hey -- I hope I'm wrong.  I'll be crossing my fingers hoping you succeed.  I'd rather you do well than me be right. 

    1Reply
  • Tim G.
    Rental Property Investor · San Diego, CA · Member since 2011 · 1k+ posts · 1k+ votes
    3y
    Quote from @Jon Khalil:

    @Tim G. Tim, I think you see failure from your POV. Let’s look at the facts:

    1) I have a property that I got at under market value ($490K worth $530K)- instant equity

    2) I can now take advantage of Real Estate benefits such as tax benefits, appreciation, rent increases, and potential * cash flow

    3) I bought in a great location- 3 minutes from San Diego State University

    4) Multiple exit strategies- Sell, HELOC, Refi, or Rental

    5) I’m only 25 years old. I’m 10 years, this conversation won’t matter.

    Negatives?

    - higher than normal interest rate- 6.25%

    - high HOA fee- $450 per month

    - having to fix up everything ourselves- lots of work, time and money up front.

    Overall- you tell me how is this a failure at all? Maybe in your terms it’s a failure because you wholesale and buy at deep discounts to flip, which I understand, but that’s not my goal here. Short term profits are your game, long term wealth is mine.


     Okay. I'll answer.

    1. (Instant equity) It is no longer worth $530k and it needs renovations. You have NO equity. 

    2. (RE benefits) Taxes yes, rents have flattened, appreciation will need to come after the market correction, and this place doesn't cash flow. 

    3. (Location) Sure, it's great. That doesn't matter if you bought it wrong. 

    4. (Exits) If you wanted to sell today you'd have to take a loss, You have no equity for a HELOC, Rates are higher now so there's no option to refi.

    5. I see a 3/2 unit in this complex (smaller) listed for rent for $3100 a month. 

    With this type of loan aren't you supposed to reside in the property? If your intent was to rent from the start, and you did a low-down owner occ loan you might also be committing mortgage fraud and publicizing it here. 

    I admire your enthusiasm, but the place is no longer worth $530k and August comps are irrelevant in a market that is going down. You have multiple experienced investors trying to nicely alert you that we are concerned and it's being completely ignored... I mean it is too late though. 

    A market assessment as of today, a quarter mile away. We have 5245 Reservoir Dr. a property a flipper bought for $470k in September. It's a larger townhome (not condo) 3/2 1740 sqft with a 2 car garage. They demo'd it, realized the market is in bad shape, and decided to list it. They listed at $580k and are now sitting on the market for $540k and it's not selling. This property will be a new data point soon and I wouldn't be shocked to see it sell at or near the price you paid. So in just a few months, a larger better property in need of repairs is selling near what you paid for your place. This is a declining market. 

    The one upside is you used someone else's money to make this happen so it's mostly your credit and sanity on the line. 

    0Reply
  • Jon Khalil
    OP
    (n/a) · Member since 2018 · 41 posts · 10 votes
    3y

    @Tim G. Thank you for this reply! I appreciate the criticism and feedback honestly and maybe I haven’t explained myself well enough.

    We do plan to live here for a year and rent out the extra room we have to roommates. That is not mortgage fraud. We plan to execute our true strategy after 1 year has passed assuming things get better. Although, I admit I definitely should have mentioned this earlier. We are essentially house hacking now and plan to BRRR, or HELOC after 1 year to purchase a duplex where we will move into one of the units and rent the other out.

    I appreciate you alerting me because I am not a seasoned investor like yourself and I just truly wanted to understand the depth of what you were saying.

    I agree with your data and logic and it makes total sense in the short-term that flippers are struggling to Sell, but I am a buyer in this market and am thinking long term. Ultimately, even if I lose money and time in the short term, as long as I can hold on and keep this property 5+ years, I think we will make out okay. Let me know if you agree and why/why not.

    Again, your concern, numbers and data is truly appreciated and is helping me learn a lot! Thanks for taking the time to explain, sincerely.

    0Reply
  • Tim G.
    Rental Property Investor · San Diego, CA · Member since 2011 · 1k+ posts · 1k+ votes
    3y

    All good Jon, the cake has been baked as a friend of mine likes to say. So now we just wait and see how it turns out. 

    Speculating is not something that was encouraged on this forum in years past, the needle has seemed to of moved where that is a justifiable strategy and that seems very risky. If you are feeding into a negative cash-flowing property and values are down. Stopping your intended plans of a refi or heloc in a year puts you in a worse position to grow your portfolio. 

    Your enthusiasm is appreciated and I'm sure you'll be okay. But I don't think it's because this is a good deal, it's because of your attitude. I want to encourage you to apply that spirit you have to better deals and your success will be even greater. Its about taking calculated risks and prospering. 

    2Reply
  • Jon Khalil
    OP
    (n/a) · Member since 2018 · 41 posts · 10 votes
    3y

    @Tim G. Completely agree that speculating is not a viable strategy, and in a year from now if I can’t cash flow, and values are down, that I will be in a worse spot. I agree with that, and that I possibly could have gotten a better price.

    Part of my thought process is speculation based on Data. SD is getting younger and richer. The military is growing and migrating west bringing more jobs, New Bio Tech hub is being built in Downtown, Apple buying in Rancho Bernardo, the Chula Vista bay front Development, Amazon HQ, etc. I think these are practical data points that excite me and keep my confidence that SD’s economy will continue to thrive despite the market correction.

    I’ll try to do my best in the meantime to stay afloat, and I hope once we are out on the other side of this that things start to stabilize/improve.

    I appreciate you saying that about my enthusiasm/attitude, truly. I will definitely take your veteran advice and apply my attitude to better deals from now on and being stricter on my numbers. Thanks a lot Tim. You didn’t have to take time out of your day to chat with me, and I learned a lot from you in this exchange.

    0Reply
  • Jon Khalil
    OP
    (n/a) · Member since 2018 · 41 posts · 10 votes
    3y

    @Eric Roenker you just made my day! Thanks for chiming in. I completely agree with you, and that’s our goal is to make it work during this lean time. It’s my first deal and certainly won’t be my last, I’m sure I’ll only get better with time, and I appreciate you saying that. Tough love is good sometimes and I appreciate all opinions. In the end, I took action, I’m learning every day, and whether I make money or not in the short term, I know if I hold on long enough it will pay dividends. Thanks for the Reassurement Eric, I look forward to the day I can come back this thread and laugh about it :)

    0Reply
  • Dan H.Pro Member
    Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
    3y

    Did you communicate your plan for this property with @Twana Rasoul.  Did he express any concerns?  

    The sale price versus rehabbed ARV show this is not a good candidate for BRRRR (at least not without a help from appreciation). I recommend reading the BRRRR book by David Green. It will help with your next BRRRR and recognizing what sort of value needs to be added for a successful BRRRR.

    I believe if you hold 10 years you will be glad that you made the purchase. 

    However MTR by room is combining two of the least passive RE processes (MTE and rent by room). This will require work with a potential reward in the distant future. Where did you get your rent by room MTR rent forecast from? I do not know what sort of premium is obtained by going the per room route, but that rent point is above what I would expect your unit to achieve via a traditional STR. Did you use airDna?

    The negative cash flow will also get old quick.  Investors invest to make money, not to have to supplement the investment with more cash without any return.  

    If you can manage to not get frustrated and bail, historically San Diego RE has been a great wealth builder.   I suspect this to continue for a long term (>10 years) hold.  

    Good luck

    0Reply
  • Julio GonzalezPro Member
    Specialist · West Palm Beach, FL · Member since 2008 · 4k+ posts · 1k+ votes
    3y

    @Jon Khalil If you are looking for cash for your next property while you wait out the interest rates to refinance, have you considered a cost segregation study? It would allow you to accelerate your depreciation and take 100% bonus depreciation which would lower your net income, thus lowering your tax bill and keeping more money in your pocket to invest. It's not a tax refund, but simply a tax strategy to lower your tax expense. Determining if the tax benefits outweigh the cost of the study is different for everyone and depends on your property, entity structure and ability to recognize passive losses. Just a strategy to consider in the meantime.

    561-253-6640
    1Reply
  • Peter Eberhardt
    Investor · San Diego, CA · Member since 2017 · 84 posts · 107 votes
    3y

    I think a lot of the criticism in this thread comes from the OP use of the term "BRRR" and "exit strategy". If you were looking for feedback on your purchase based on those goals, no it was not a good buy.

    However, what I see is you literally bought a residence, in San Diego, with the potential to live for free, for $0.  Period. That in and of itself is a big win in my book. Even if you are negative $300 a month, good luck finding a place to live in San Diego for triple that. You are already ahead by not throwing your money away in rent every month.  Then, the benefits of other people paying down your equity kick in that yes, it will take years to tap into, but again, $0 down so you’re not out anything with a whole lot to gain. Hello! 

    No you’re not going to be able to sell this for a profit, no you’re not going to be able to leverage it for many years, no you will not cash flow for many years. Yes, you gained some valuable property that did not set you back at all financially, and you will start to see the power of appreciation and house hacking. Big win in my book on those topics! 

    2Reply
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