My First BRRR Deal- Does NOT cash flow- Did I do something wrong?

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My First BRRR Deal- Does NOT cash flow- Did I do something wrong?

Account Closed
Investor · New York, NY · Member since 2016 · 60 posts · 24 votes

I haven't found much information online about rental properties that didn't cash flow and still are successes. I'm reaching out for your opinion because most of the "non cash flow" opinions by other investors are that you did this deal horribly.

But I don't think that is the case with my situation. Or maybe it is? You tell me!

Bought a duplex on xome auction site for $112,500.

I got a quote from a contractor that it would need $75,000 to bring it up to par with the other homes.

Took a hardmoney loan out for a total of $192,000 (incl. construction loan). Had to pay all of it off in 6 months.

The only money I spent was $14,500 for fees/closing.

6 months is up and I have renters (signed 1 year lease) in there giving me a total of $3200 per month total gross.

I refinanced, paid the hard money loan off and the house appraised at $370,000.

After all said and done, I got 75% ARV from $370K, Paid off the hard money loan and was left with $52,925 in my pocket.

Now the terms are, 30 years and 8.4% interest. (UGH!) No balloons. After 5 years I can refinance with no penalty. I needed to close quickly and the title wasn't quite seasoned at 6 months and this was the best loan term i could find.

So, the duplex profits $3200 per month gross.

Taxes $630 per month

Insurance $162 per month

Maintance fee $320 per month (10%) because this neighborhood is C/D class and I just can't

Water/Sewer $40 per month

Mortgage is $2123.26

They pay electricity.

I pay heat with a set theromostat. oil tank is 275 gallons and at $1.91 per gallon and probably must fill up three times.

My NOI ends up being -$75.26

I bought this place at a steal, what the HECK happened?

Did I get taken advantage of somewhere? or should I see this as good deal OVER TIME?

Appreciation rates in Westchester County NY are good, and rents and homes are always on the rise (until the next bubble burst) 

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Sam Wilson
Investor · Memphis, TN · Member since 2016 · 279 posts · 257 votes
10y
"You're sitting on a goldmine trebek!"You still have what? 100k in equity in the property? Punt it. You can use that to set yourself up better on the next deal. It's going to take you an eternity to generate that in rental income- even if it did cash flow. Who cares about appreciation at this point. And who cares about $75 in negative CF per month?! You just made $150k or more on your first deal, paid off a bunch of debt and are not happy with the results? I'll take your version of a mistake everyday. Seriously. Just move on from it. Maybe the rents don't add up- but flipping this one is basic math.
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  • Brendan R.
    Investor · Lancaster, PA · Member since 2016 · 48 posts · 28 votes
    10y

    Given the 8.4% interest rate that you got into with your back against the wall, I probably would not have cashed out the $52,925 but just gotten into a mortgage for the amount to pay off your HML. If you had not cashed out the additional equity you would have been near positive cash flow (you don't account for vacancies or management).

    4Reply
  • Brandon Shewbridge
    Virginia Beach, VA · Member since 2016 · 44 posts · 20 votes
    10y

    A 4.5% note would put your payment at $1371/month (q tax & ins).  Look to refi again as soon as you can and in the meantime use that cash out to cover the difference.

    3Reply
  • Logan Hassinger
    Specialist · Fort Worth, TX · Member since 2014 · 528 posts · 226 votes
    10y

    @Account Closed

    Since you cashed out the equity, you need to move on and make some arbitrage on the cash you're sitting on. 

    2Reply
  • Matt Pagano
    Investor · Corona, CA · Member since 2016 · 14 posts · 7 votes
    10y

    @Account Closed - I am still new to investing and have a property that I recently purchased with cash and I'm looking to do a cash out refi after my 6 months seasoning time is over. My question is why your interest rate is so high? I've been shopping around and what I've been told the rates are much lower? Am I missing something or is your case unusual and that is why the rate is so high?

    Thank you,

    Matt

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    10y

    tax's are very very high given other areas of country.   pulled all your cash out. so to break even with no cash in it is not he worst thing ever

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    8Reply
  • Ceasar Rosas
    Real Estate Broker · Bronx, NY · Member since 2011 · 597 posts · 341 votes
    10y

    In my opinion, you definitely have a high interest rate. Also I agree with Brendan, you should have not pulled out the equity in this deal to put cash in your pocket at an 8+ interest rate. This is also the Westchester/NYC market, in order to receive good cash flowing properties I see investors purchasing 3+ units and putting 20 - 25% in the deal. With that still your average cap rates are 6-8%. 

    If I were you I'd refinance as soon as possible to a lower rate and put the money back in. Or sell the property all together and walk away with 100k+ and put that into a 3+ unit property. Good luck. 

    I hope this helps. 

    4Reply
  • Bryce Wong
    Rental Property Investor · Exeter, CA · Member since 2016 · 60 posts · 35 votes
    10y
    Your taxes are unusually high. Am I missing something? You need to also have enough cash reserves in case of an eviction or non payment of rent (touch on wood)
    1Reply
  • Zoran M.
    Real Estate Investor · Cleveland, OH · Member since 2013 · 301 posts · 112 votes
    10y
    You pulled out $60k. If you left it in your be CF positive. You also have the tax benefits of the loss plus depreciation. Not terrible
    2Reply
  • Frank Gucciardo
    Highland, NY · Member since 2013 · 169 posts · 130 votes
    10y
    Bryce Wong yup, taxes are actually spot on. This is NY after all.
    1Reply
  • Brandon Schlichter
    Real Estate Agent · Circleville, OH · Member since 2008 · 633 posts · 488 votes
    10y

    I'm lost.

    You've taken near $60k out of the property in cash, and are positive on equity overall. Sure you've got a very high rate, but you've also put a bunch of money in your pocket. Had you of not taken out extra, and got a more average rate, you would have certainly cashflowed, but not put all this money in your pocket. You're talking something like 4 or 5 years with of rental cashflow you're sitting on now.

    All of this should have gone in spreadsheets at multiple points in your project along with bank situation estimates to know what your yields and cashflow numbers would have been. This is all simple stuff and I don't understand either why you haven't just done it, or why you're complaining now.

    Don't like your rate? Spend a quarter of the money you set back and refinance out of the loan, sure it'll suck but you'll be profitable and have cash in had, albeit less cash in hand.

    2Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    10y

    You did make a few minor mistakes but the biggest was in believing the property was in a good rental market. A good rental market is one in which the rental income minus  debt repayment and expenses will allow positive cash flow. With taxes so high this is in fact a terrible rental market. The tax man benefits more than the owner therefor it is a bad market.  As for pulling cash out being a good or bad idea it is irrelevant as it has no direct impact on what the true calculations are for a rental income property. Debt repayment costs (interest only) are calculated based on 100% financing to include a separate return on any equity lying dead in a property. Equity/no equity the dept. repayment interest cost is the same only the principal amount is different.

    I would sell the property and move on to a better area to invest.

    1Reply
  • Simcha Davidman
    Rental Property Investor · Baltimore, MD · Member since 2014 · 408 posts · 209 votes
    10y

    As others have said, this is not a terrible deal - just make sure you make a great learning experience.  Next time, run your numbers and try to get advice before you do anything like this.

    If I were you, I'd be tempted to sell and plow your gains back into more value-add properties.  You obviously did a good job almost doubling the value of this one.

    1Reply
  • Sam Wilson
    Investor · Memphis, TN · Member since 2016 · 279 posts · 257 votes
    10y
    "You're sitting on a goldmine trebek!"You still have what? 100k in equity in the property? Punt it. You can use that to set yourself up better on the next deal. It's going to take you an eternity to generate that in rental income- even if it did cash flow. Who cares about appreciation at this point. And who cares about $75 in negative CF per month?! You just made $150k or more on your first deal, paid off a bunch of debt and are not happy with the results? I'll take your version of a mistake everyday. Seriously. Just move on from it. Maybe the rents don't add up- but flipping this one is basic math.
    13Reply
  • Account Closed
    New Jersey, NJ · Member since 2015 · 327 posts · 137 votes
    10y
    I do see one mistake from a contractor point of view, you should not be paying anyone's heat/gas/oil. I would had rip and taken that oil tank out and install separate gas meters so each tenant would pay there own gas. It would had cost an extra $5000 and time which I understand you were in a hurry to get the HML out the way but it's still not too late to do so plus is one less expense/stress you don't need to deal with in the long run.
    2Reply
  • Ryan Dressel
    Conshohocken, PA · Member since 2016 · 42 posts · 12 votes
    10y
    Given the debt you have outside of the deal, it sounds like you couldn't afford to put enough $ down to get traditional funding- as others have previously mentioned. Banks probably looked at your liquidity / solvency situation and decided it was too risky to lend. Perhaps you tried to scale up too big pre-maturely? I would sell it and use the gains to clear up your other debt, and use the remainder to get much better loan terms on your next deal. Thanks for sharing your experience and GL!
    1Reply
  • Adrian StamerPro Member
    Real Estate Investor & Agent · Richmond, VA · Member since 2013 · 319 posts · 167 votes
    10y

    damn, 8.4% interest rate and 5% early pay off fee? That's incredible 

    2Reply
  • David O
    Investor · Detroit, MI · Member since 2012 · 119 posts · 64 votes
    10y

    This isn't horrible, but it's definitely not ideal. Rates are low right now and you can get rates on something like this in the low 4s easy, which would save you a LOAD of money. This rate makes me cringe. It's a shame you couldn't have waited for six months of title seasoning and did the deal in your name. I would never do this deal as you are running extremely thin and there isn't much room for error here. You are basically banking on the fact this property appreciates and there will be no market correction.

    On the bright side, you have 52k, so if you can turn this into something that cash flows nicely you will be okay.

    2Reply
  • David O
    Investor · Detroit, MI · Member since 2012 · 119 posts · 64 votes
    10y

    Oh I missed the ARV part. Yeah I would flip this then and you'd have quite a nice flip if you can get the ARV above. Use the gains to rinse and repeat. That would be a pretty solid flip and turn this decision right around.

    1Reply
  • Account Closed
    Investor · Canton, GA · Member since 2015 · 88 posts · 63 votes
    10y

    @Account Closed I see where things went wrong.  Not that the deal was bad - it looks good on paper except for a few key things.

    1.  The taxes are VERY high.  I would not have invested in this area because of that.  You need to look for counties in the USA that have low taxes.  Parts of Ohio, Memphis, Indianapolis, Atlanta, Kansas, and much more have more amicable taxes for something like this.  I'm purposefully staying away from NY and California for these reasons.

    2.  Your insurance seems awfully high.  I pay $30 per month on average for my units.

    3.  You should make your tenants pay all the utilities.  Why are you fronting that money?

    4.  Your mortgage is very bad for a refinance.  Yes, I realized you didn't have many options to choose from, but I would refinance asap.  I have a lender who can do 15% down payment and 4% to 5% interest rates on investment properties.  Message me for details.

    Overall, you have to minimize your expenses.  That's the single biggest strategy in all this.  This could be an excellent rental considering the gross amount you're pulling in.  Get the refinance done, make the tenants pay the utilities, find a different insurance broker and ask for the lowest premium/highest deductible available, and find a way to get those taxes lowered.  Maybe there's an appeal process you can go through.

    3Reply
  • Account Closed
    Investor · Canton, GA · Member since 2015 · 88 posts · 63 votes
    10y

    @Account Closed If you can swing it, try refinancing using your personal name as the guarantor on the loan. Yes, LLC's will command higher interest rates because you're taking out commercial / private loans. If you go for more retail / residential loans you'll get a better deal. My loan officer might be able to help, but no guarantees.

    1Reply
  • Marc Jolicoeur
    Investor · Minneapolis, MN · Member since 2012 · 187 posts · 117 votes
    10y

    Wait 12 months before selling so that you can 1031 exchange and not have to pay taxes on your gains. 

    If you flip right away as others have suggested, be prepared to pay your top tax rate on the profits so you could lose a third of any gains and have a big tax bill even if you already spent the money paying off CC debts.

    5Reply
  • Stacey Paulin
    Investor · Atlanta, GA · Member since 2015 · 139 posts · 98 votes
    10y

    It's amazing how taxes can affect a deal, and I think it's something that new investors often overlook.  

    2Reply
  • Account Closed
    Rental Property Investor · Vancouver, WA · Member since 2014 · 308 posts · 144 votes
    10y

    These are all excellent bits of advice from everyone.  While you aren't making money at the moment, you aren't losing a whole lot either.

    However, let's not forget that rents do rise, and simply raise the rent when the lease is up just a bit and soon enough you'll be making a few bucks.

    Also, those taxes.  Holy crap!  Check in your area, as there's companies that specialize in appealing property taxes and take a cut of whatever they save you.  Might be worth investigating that.

    Those two items will likely get you back in the black soon enough, you just might have to eat the loss for a year or so.

    Also, we all make mistakes, sometimes big ones.  Just learn from it, and don't make it again, and in a few short years, you'll just laugh about this. :)

    1Reply
  • Kelly Crone
    Investor · Littleton, CO · Member since 2016 · 47 posts · 9 votes
    10y

    @Account Closed  Sell it now and find another deal. Do the math this time and find a better loan rate. The next property will be a breeze.

    Good luck!

    1Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    @Account Closed, if that -$75/m is LESS than the interest/principal you were paying on those other Loans you've paid out, then you're actually ahead with your cash flow from this investment.

    Best of all, you've learned a lot, while not losing a lot! I'll summarize what I reckon the biggest thing you should change next time: Make sure any short-term HML loans are for a longer period than the normal seasoning period required to conventionally refinance! All the best...

    2Reply
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