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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  • Account Closed
    Investor · New York, NY · Member since 2016 · 105 posts · 118 votes
    10y

    @Account Closed most of the feedback you received so far is spot on. The combination of taxes, interest rate and the LTV on the loan is what's putting you in a negative cash flow situation. That being said you still have a good deal in your hands and there are ways you can still improve the cash situation.

    For starters, you shouldn't be paying 10% for property management.  I have small units in Westchester that I am paying 4.5%.  Send me a PM and I'll introduce you to the property management company that I use.  

    In terms of the loan, I always work with a community bank that understands the BRRR strategy and can close pretty quickly without requiring seasoning. What I can usually get them to do is to get a 75% LTV loan as soon as I've stabilized the property and take out the hard money guy. The caveat is that since I have not fully seasoned the property they will keep the extra equity in an escrow account and release it once I have seasoned the property. This allows me to get the best rate, take out the expensive money quickly and still unlock my additional equity a few months later. Try reaching out to Thompkins Mahopac Bank for a refinance.

    In terms of operational efficiency, you should look into converting to individually metered gas heat. In Westchester I am seeing 25%-30% savings on my heating costs. The buildings in my portfolio that don't yet have gas heat are in the process of being converted as we speak. It will cost you a bit upfront but it will significantly improve your NOI which directly impacts the value of your property.

    Lastly, look into doing a cost segregation study for the property.  It'll allow you to accelerate a good chuck of your depreciation which will put more money into your pockets.

    I am based in NY and most of my properties are in Westchester.  Feel free to PM me if you'd like to connect and troubleshoot a bit deeper.  

    Ruben

    2Reply
  • Marvin McTaw
    Rental Property Investor · Atlanta, GA · Member since 2014 · 807 posts · 274 votes
    10y
    Vas Bouras you've already gotten a ton of advice so let me just say this: congratulations on completing your first BRRR deal! I recognize you want the property to cash flow but as you've pointed out already, there were very rational reasons why you did what you did like paying off your hard money loan and credit card debt. In the grand scheme of things for your aggregate P&L (not just the property) you are probably ahead. For example, the credit card debt was likely at a higher interest rate than what you're paying on your mortgage.
    1Reply
  • Stephan Nezuch
    Investor · Fitchburg, MA · Member since 2016 · 1 post · 1 vote
    10y

    Yes this Investment purchase looks on paper like it was done for a short term flip situation not a long term buy and hold investment property. If it looks like a duck and walks like a duck... sell get the cash out and try again keeping a very close eye on overall expenses, (debt service, taxes, insurance, management cost and the like). You have just wiped out most of your revolving debt (I assume) which boosts your credit standing. You will have bought and sold an investment property which gives you valuable investment experience and again boosts you credit rating. I think you will find your next investment property pursuit will have a much more favorable interest rate and you will be more aware of the financing in general and be able to predict your bottom line after closing the finance with a bit more accuracy! 

    1Reply
  • Edward Rhoads
    Rental Property Investor · Indianapolis, IN · Member since 2016 · 200 posts · 87 votes
    10y

    The good news is that you have already made a 25% profit on the property or 300% cash on cash return by flipping to yourself.

    However since you have negative cash flow (which does not mean you are loosing money as you should be gaining about $500 in equity a month) if this were my property I would sell it and use that money to buy the next deal.  If you sell it for 90% of the appraised value for example after closing costs and paying off that loan you are about to sign you would pull in roughly $30-$40k more for a total profit on the deal of $80-90k which is pretty darn good for a 6 month investment you really did not put much of your money into.

    This one may just not be a good hold...

    1Reply
  • James Blalock
    Investor · Fredericksburg, VA · Member since 2016 · 33 posts · 8 votes
    10y

    Looks like everyone is providing good advice.  

    I thought the usual amount of time for seasoning a property was a year and that you should plan at least that, up to 18 months for paying back to a hard money lender. Sounds like that would have altered your outcome if you had more time to find lower refinancing terms. 

    1Reply
  • Alex CraigBusiness Member
    Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
    10y

    @Account Closed

    This is the same mistake many made when $0 down was so popular.  Just don't do what others did when their large cash out and buy material objects that give you $0 return.  Use that cash out money for your business.  I cashed out on several deals and watched individuals waste it on stupid things, those people are no longer in business and 9 years later, I am still buying.  Your off to a good start.  Just be careful with your next move.  You need to cash flow. 2 Major mistakes:

    1) Rate to High

    2) Leveraged to High

    Take that cash out money and turn it into cash flow whether it be through conventional financing or cash buy.  Or sell it and take the profit into a 1031 and do a better cash flow deal or find another deal you can make a huge profit on the sell.

    I did not read every response, but being a duplex, you should have been able to put down 20 to 25% through a conventional lender.  I have several lenders that I work with that would finance this deal so long as you were able to qualify for conventional lending.  Terms would be 4.5% rate on 30 yr fixed.

    901-848-9028
    2Reply
  • Ashley Thomas
    Chicago, IL · Member since 2016 · 8 posts · 3 votes
    10y

    Hi @Account Closed. Congrats on your first BRRR deal! I'm no RE expert, I'm actually working on my first BRRR deal now- but I AM pretty good at math and your deal doesn't look terrible to me. It just seems like you could have run the numbers a bit better from the start and had a more clear goal of either taking out a lump sum -or- cash flowing long term, but I don't think you should be disappointed that you couldn't do both. You were able to pay off a TON of debt and avoid losing money on your first flip/brrr deal, which is a lot more than most would-be investors can say! You should be proud. Good job girl! Also - if you want to "feel" better, or feel like you got more of a deal, I'd say sell the property. Based on your numbers it looks like you can still walk away with at least a solid 80k at closing... with the 50k you already made, you'd be in excellent shape.

    Also - Are you willing to share which hard money lender you worked with originally? It looks like they were in the deal 100% and all the HMLs I've talked to will only go to a max of 80% LTC for a first time flip. Any insight would be greatly appreciated. 

    Good luck! 

    1Reply
  • Chris Pohlson
    Investor · Sioux Falls, SD · Member since 2016 · 102 posts · 113 votes
    10y

    I don't understand where you get -$75 NOI. Based on your numbers, your property would cash flow -$350/mo and that's assuming you're managing the property yourself. Flip it. Good luck!

    1Reply
  • Joshua Sclafani
    Investor · Tampa, FL · Member since 2016 · 66 posts · 27 votes
    10y

    Thanks for sharing your experience and congrats on your first deal! Question: Why not move it out of your LLC to refinance? Just take out an umbrella policy to provide some extra protection. If it's the difference of 4-5 points it would be worth it. My 2c.

    1Reply
  • Matthew A.
    New Haven, CT · Member since 2016 · 90 posts · 99 votes
    10y

    The best advice would be to sell as soon as possible, and start over. 

    Insane amounts of money on this flip. Don't rent it.

    Good job, just don't make the mistake of holding on.

    Matt

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  • Joe McCorkell
    Santa Barbara, CA · Member since 2016 · 5 posts · 4 votes
    10y

    Seems like  a recipe for a disaster. If you truly made the money on the improvements, why not sell it, and close out the loan? 

    Also, sounds like you went from one Loan Shark (HML 15%) lender to another (8.4%, + 5%) prepayment penalty.

    Can you sell it and clear the books?

    Can move into one side a refinance at a more traditional rate as owner-occupied?

    The market is hot right now, there is an election coming that may or may not affect the economy, and more and more people are using HML and other tricks to get into the market. This could be dangerous for you long term.

    0Reply
  • Daryl Biberston
    Appraiser · Apple Valley, CA · Member since 2015 · 11 posts · 4 votes
    10y

    You score well.  If this is your first deal like this, come 4/15/2017 you will see just how well you did.

    0Reply
  • Sal Mazzone
    Investor · Tarrytown, NY · Member since 2015 · 44 posts · 10 votes
    10y

    Everyone keeps mentioning that the taxes are high, and yes they are relative to most states in the country. However, relative to westchester county this area is probably one of the lower cities for taxes. Most of westchester is 1k+ a month in taxes. This doesn't make it a bad rental market, it's close to Manhattan making it desirable, and typically appreciation is higher than most areas. Returns may be slightly lower than other areas of the country, but I have filled all my vacancies in westchester in less than a week. 

    I think you did a great job on the deal itself, just got caught in a bad situation when you had to obtain financing quickly. I suggest learning from that and having financing lined up ahead of time- or at least be in talks with lenders to understand their terms or criteria. 

    1Reply
  • Matt Geerts
    Investor · St. Thomas, Ontario · Member since 2015 · 692 posts · 312 votes
    10y

    You just made >150k in 6 months and you have a pile of cash ready to do the next one. The cash in your hand is costing you 8% but the alternative would be hard money at 15%. Sure your mortgage rate sucks, but despite that, this is a win on all sides. So it costs you 75 bucks... that's a lot cheaper than the 7% spread on 52k that you'd have to HML.

    Clearly you're good at this. Go do it again. Even if it is in the same hood and you end up with another $75/mo deficit. I repeat, you just made 150k in 6 months.

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