BRRRR Strategy really works! Even in the Bay Area!

BRRRR Strategy really works! Even in the Bay Area!

Ori SklootPro Member
Investor · Berkeley, CA · Member since 2016 · 242 posts · 304 votes

I am every so grateful to BP and all the great people that are part of the BP community. It was after reading extensively about the BRRRR strategy (Buy, Rehab, Rent, Refinance, Repeat) that I was inspired to try it out on my next purchase. I have bought properties before, but I always used my own cash to finance the deal. This time I decided to do it differently.

Below are the details about the process.   Below that are the numbers on the deal.

Deal Process

  1. I found an off-market SFD in Oakland with a motivated seller.  (For those who are going to ask how I found it - it was through the usual marketing efforts that people talk about on BP.)  His tenant had been living in the property for years without paying rent.  Crazy right? 
  2. We negotiated a little bit on the price.  I made an offer, he countered, and we met in the middle.  I sent him a purchase agreement and he signed.  I am a real estate broker so I represented myself.
  3. The tenants were still in the house.  One of my conditions was the tenants would have to be out of the house before close of escrow.  Owner agreed to offer tenants cash for keys in order for them to leave.  They refused and said they would see him in court.
  4. We hired a lawyer for the eviction process, owner paid cost which ended up being around $3k.  Lawyer went through all the filings and the tenant never responded.  In about two months from when the tenants were first served I get a call from the Sheriff saying they are going the next day to evict.  I meet them at the property and the sheriff enters the house.  The tenants have already vacated!  The have left a bunch of junk and took the wall furnace out of the wall, but for the most part the place isn't trashed. 
  5. Now the interesting part with the financing.  The purchase price was $250k.  I asked four friends if they would be interested in lending me money at 10% interest.  Between them I raised $250k for the purchase.  I provided each of them a promissory note and a deed of trust against my primary residence (not the property I bought).  Apparently this is a key element that @Chris Mason explained to me ahead of time (HUGE shout-out to Chris who was my Super-Star mortgage broker and consigliere on this deal..more about his efforts below).  Chris informed me that by securing their loans against my primary property this would count in the lending world as being an "all cash" purchase.  This matters big-time because it then allowed me to do a cash-out refinance.  Read on about that.
  6. We close escrow and the next day I am in there doing clean up and a rehab. I am also a GC and have lots of construction experience so I run all the rehab myself.  Total of the rehab was about $40k (more specifics below).
  7. Once we close I immediately start the process of my cash-out refinance with Chris.  Once Chris has all my docs he is just waiting for me to finish the rehab so he can send out the appraiser.  I finish the rehab and we have the appraiser out at the house two days later.
  8. Two days after that the appraisal comes back at $400k (which is what I expected, but is probably under market value.  I think it would sell for $430-450k)
  9. I immediately put the house up for rent on Craigslist.   After a couple of weeks I rent it out to a great family for $2750/month.
  10. Some more time passes with providing all my docs to underwriting and then the loan closes a month after the appraisal (total loan time was just under 60 days).   I get the loan for $255k which is the purchase price plus closing costs.  My friends all get their principal payments back as a check from the escrow company.
  11. Bottom line - I put about $54k into the renovation from my own pocket, got about $130k in immediate equity, and I'm now cash flowing $800 per month.  From when I closed on the house it took me two months to close on the new loan.   My friends, the investors, are ready to reinvest the moment I have the next deal.  Yes, it works!  even in the Bay Area :)

Numbers on the Deal

  1. House in East Oakland.  Officially a 1200 sqft 2/1.  
  2. Bought for $250,000
  3. Rehab for $63k - $9k rebates = $54k
    1. Clean up and Dump: $2k
    2. All new electrical, lighting and service panel upgrade: $10k
    3. Hardwood floor refinishing and repairs of 120 sq ft.  $4k
    4. Kitchen: new flooring, quartz countertop, all new appliances (bought all the appliances from Craigslist) $5k
    5. Addition of 1/2 bathroom: $5k
    6. Conversion of garage into 3rd bedroom: $5k
    7. Sheetrock work and Painting: $12k
    8. New high efficiency central heating: $6k
    9. New high efficiency tankless water heater: $4k
    10. New Sewer lateral: $4k
    11. Misc carpentry, landscaping and plumbing: $5k
    12. EBMUD rebate for sewer lateral: -$4k
    13. PG&E rebates for efficiency upgrades: -$5k
  4. House is now a 3 bedroom / 1.5 bathroom
  5. Holding cost (10% interest to friends) $5000
  6. Cash out refinance at $255k = $1,950 per month (PITI)
  7. Rent of $2750 per month, so cash flow of $800/month.
94Reply
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Most Popular Reply

Chris MasonPro Member
Moderator
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
9y

Thanks for the shout out @Ori Skloot, much appreciated. :)

Non-owner occupied, $430k value, total of $59k out of pocket including rehab, is a super cool thing to help execute. 

And, not super hard to be cashflow positive on a $430k property that you picked up for $250k. $2750 rent... I think we have here a 1% rule SFR in the Bay Area.

Ori's networking efforts were also huge part of this. I'm guessing he went to his friends with money earning 5% on Wall Street, and offered them to double their ROI at 10%. Now that he paid them off, they can put it right back on Wall Street earning 5%, and it's a private bank he can draw on the future. Wall Street cannot guarantee you that if you put your $70k with it for 2 months it will become $71k (& you'd be lucky if it did that well in 2 months), but Ori just did exactly that, and proved to his network that he's a better place to park your money than Wall Street, to the extent that you are fortunate enough that Ori is in need of funds. So from the POV of his friends, this was a huge win to double their ROI for a couple months. 

For Ori, hard money would have wanted 3 or 4 points upfront ($250k * 4% = $10k in the garbage) even though he is an experienced and licensed GC, so this was a huge win for him too. I did a little blog post about how it might look to pitch this to people with money sitting on Wall Street doing nothing for them.

For people that only have access to $15k or $25k in capital saved up, but want to get into Real Estate in the Bay Area, this model is also an opportunity for them. I'm certain that if any of his private investors had wanted to see the property, the plan, the numbers, etc, he'd have shown it to them, and knowledge is money.

See this reply in the discussion

133 Replies

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  • Investor · Calgary, Alberta · Member since 2017 · 6 posts · 1 vote
    9y

    thanks @Ori Skloot !! Been wanting to learn more on th BRRR thing since joining. I have 2 questions,

     I did t u durst and number 6. Cash out refinance at $255k = $1,950 per month (PITI) what is Piti and where did you get 1950?

     Also, you are a GC ( as am I) and a realtor, so neither one has any steady salary. How do you get ra financed? Banks here in Canada are pretty strict, just wanting to know if you have any tricks for that. I've run into issues not having a salary on the re finance. 

  • BOISE, ID · Member since 2014 · 77 posts · 45 votes
    9y

    That shows the power of networking!

  • Alhambra, CA · Member since 2016 · 5 posts · 6 votes
    9y

    All I kept thinking to myself while reading your post was "Man. I need to get better friends." haha

    Great job with the networking there! Congrats

  • Jacksonville, FL · Member since 2017 · 5 posts · 2 votes
    9y

    Impressive!!

    Thank you for the detailed explanation of the process,

    Good luck!

  • Rental Property Investor · Windham, ME · Member since 2017 · 60 posts · 22 votes
    9y
    Originally posted by @Raymond McGill:

    @Benjamin Dutil  You are playing with snakes (BOA). Talk to local banks and credit unions that you can trust.

     Thank you Raymond. Advice received. I've heard that from a buyers agent too. I'm in the process of purchasing a home (to live in) and am using a private mortgage company per my agents advice. 

  • Investor · Colorado Springs, CO · Member since 2016 · 15 posts · 13 votes
    9y
    Wow that's awesome! If I wasn't sold on the BRRRR before, I definitely am now!
  • Real Estate Investor · Kansas City, MO · Member since 2015 · 63 posts · 19 votes
    9y

    I may be the exception, but I have found that with a commercial type loans I can refi 70-75% of the appraised value as long as 1) the rehab is complete, and 2) I have a tenant in place.  This is how I've been able to buy, rehab, and hold multiple rentals each year with no money out of pocket.  I know others who do a similar thing using private money, much like Ori did here.  It's nice because you can skip the refinance a year down the road and put that money back to work immediately. 

    I'm always happy to hear someone's success story, thanks for sharing!

  • Residential Real Estate Broker · Stroudsburg, PA · Member since 2015 · 7 posts · 6 votes
    9y

    Great post!  I have a question about the promissory note and a deed of trust that you provided to your investors.  Since there were four investors, how do you structure the deed of trust so that they are all protected?

    I'm currently looking at a number of properties for both rehabbing and rentals.  Besides my own cash, I have a home with no mortgage so this may work for our company as well.

  • Rental Property Investor · San Rafael, CA · Member since 2016 · 57 posts · 16 votes
    9y

    I'm doing same!

  • Redwood City, CA · Member since 2015 · 19 posts · 3 votes
    9y

    This is a very inspiring deal. Thank you for sharing with us.

    I have similar questions as @Jenifer Levini.  How different do your expenses look if you pay real estate commission and have to hire a general contractor to do the work?   Do you have an estimate of what the rehab costs would be?  

    I'm also echoing Jenifer's curiosity about what, if anything, you had to do to be able to convert the garage.  

    Hope you can entertain our questions!

  • Rental Property Investor · Mount Vernon, NY · Member since 2016 · 89 posts · 125 votes
    9y

    Truly inspiring! I love bullet #5 under "Deal Process". 

  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    9y
    Originally posted by @Will Barnard:
    Originally posted by @Ori Skloot:

    @Osazee Edebiri the private lending - I did that piece myself.  Got a promissory note and deed of trust template. Signed them, got the deeds notarized, filed the deeds with the country, mailed the promissory notes to my friends.  They wired money into escrow.  Voila!

    How many lenders was it? The way I read this, you had to file multiple deeds (one for each lender) against your primary residence and assumanly behind an already existing first mortgage, correct?

    This question did not get answered, can @Ori Skloot or @Chris Mason chime in? 

  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    9y

    Not really my place to answer that one @Will Barnard. :)

    @Ori Skloot

  • Ori SklootPro Member
    OP
    Investor · Berkeley, CA · Member since 2016 · 242 posts · 304 votes
    9y

    @Will Barnard   You are correct.  Filed multiple liens behind my primary and my Heloc.  

  • Real Estate Investor · Dallas, TX · Member since 2009 · 183 posts · 153 votes
    9y

    Obviously this is a great success story.  How is this a repeatable process without tons of cash lying around?  Is there another option of refinancing the total purchase plus rehab costs out so you can legit rinse and repeat this method?

  • Ori SklootPro Member
    OP
    Investor · Berkeley, CA · Member since 2016 · 242 posts · 304 votes
    9y

    @Michael P.  Yes.  I could have waited 6 months and then gotten financing based on the full appraised amount.  At $400k appraisal, if I got a 75% DTE loan I would have taken out $300k which would cover the purchase and rehab.  Why didn't I do that? 

    1. I was eager to see this process work so I wanted to finance as soon as possible. 
    2. I was concerned about interest rates climbing while I waited 6 months.  In the two months it took me to close the loan interest rates had gone up considerably. 
    3. I like to have some cash flow to hedge against the market dipping.  I keep hearing that we are set for a correction of some sort, and I don't want to be leveraged up to my eyeballs.
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    9y
    Originally posted by @Ori Skloot:

    @Will Barnard   You are correct.  Filed multiple liens behind my primary and my Heloc.  

    Thanks for your reply sir. Question as I know many of the rookie investors will want to know, your private investors on that deal must be very close to you and most importantly, trust you very, very much as taking a 4th, 5th, 6th, and so on position on a deed of trust can be quite risky for them. That risk partially depends on the equity above and beyond the current first mortgage and HELOC (2nd lien).

    I think it is important to mention that from the lenders standpoint, one needs to be very careful in who they choose to invest with, particularly if they are in 3rd position or even more. From the borrower's standpoint, if you are new to the game, it may be very difficult or even next to impossible to get a lender to agree to be that far down on the lien chain so you will likely need to find a different means to fund it, perhaps with equity partners, a fractionalized note (multiple lenders on one note and deed of trust), seller financing, or a combination of those options.

  • Will BoedekerPro Member
    Rental Property Investor · Ft.Worth, TX · Member since 2016 · 23 posts · 9 votes
    9y

    This is a fantastic post @Ori Skloot and @Chris Mason. Thanks for sharing. I was immediately interested in the BRRRR strategy the first time I heard Brandon talk about it. Now I like it even more. I appreciate seeing members of the community sharing posts like this and proving that the education and strategies, shared and learned at BP, really do work.

  • Real Estate Professional · San Francisco-East bay, CA · Member since 2013 · 340 posts · 50 votes
    9y

    @Ori Skloot, Congratulations on an awesome deal. Yourself being a GC/ Realtor and surrounded by friends willing to help and work together is points up in the game. Would like to connect and discuss on how you go about finding properties? And structuring the deal for investments from friends based on your primary home. Is it all done through an entity?

    Thanks.

    Naveen

  • Residential Real Estate Broker · San Mateo, CA · Member since 2013 · 585 posts · 264 votes
    9y

    @Ori Skloot awesome job!

  • Investor · Arlington, VA · Member since 2012 · 1k+ posts · 491 votes
    9y

    Congrats on your success and thanks for sharing!  Very compelling!

  • Investor · West Orange, NJ · Member since 2017 · 7 posts · 1 vote
    9y
    Ori Skloot Hey Ori - Congrats and thanks for sharing the details. Quick question and my apologies if this was covered elsewhere in the post: You used the BRRR for this deal to attain your CF with roughly $54k of your money still invested after the refinance. Since $54k is roughly a 22% downpayment, what would be the drawback in using a conventional loan in the first place without having to go through your friends but getting to the same cash flow? Is it that the bank wouldn't lend you the additional funds to renovate? Just trying to zero in on the intrinsic differences between the BRRR and a conventional loan in your particular case here. Thanks in advance.
  • Investor · Bergen County, NJ · Member since 2016 · 4 posts · 2 votes
    9y
    Nicely done!! Brrrr to the tee!!
  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    9y
    Originally posted by @Will Barnard:
    Originally posted by @Ori Skloot:

    @Will Barnard   You are correct.  Filed multiple liens behind my primary and my Heloc.  

    Thanks for your reply sir. Question as I know many of the rookie investors will want to know, your private investors on that deal must be very close to you and most importantly, trust you very, very much as taking a 4th, 5th, 6th, and so on position on a deed of trust can be quite risky for them. That risk partially depends on the equity above and beyond the current first mortgage and HELOC (2nd lien).

    I think it is important to mention that from the lenders standpoint, one needs to be very careful in who they choose to invest with, particularly if they are in 3rd position or even more. From the borrower's standpoint, if you are new to the game, it may be very difficult or even next to impossible to get a lender to agree to be that far down on the lien chain so you will likely need to find a different means to fund it, perhaps with equity partners, a fractionalized note (multiple lenders on one note and deed of trust), seller financing, or a combination of those options.

     Valid points. 

    I would point out that even a 6th position mortgage still has the right to foreclose. Maybe they get something out of it, maybe they don't, but they can still trash the borrower's life. So, while perhaps not a "collateral" scenario, it's still a "hostage" scenario!

  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    9y
    Originally posted by @Sedrick Chin:

    Ori Skloot Hey Ori - Congrats and thanks for sharing the details. Quick question and my apologies if this was covered elsewhere in the post:

    You used the BRRR for this deal to attain your CF with roughly $54k of your money still invested after the refinance. Since $54k is roughly a 22% downpayment, what would be the drawback in using a conventional loan in the first place without having to go through your friends but getting to the same cash flow? Is it that the bank wouldn't lend you the additional funds to renovate?

    Just trying to zero in on the intrinsic differences between the BRRR and a conventional loan in your particular case here.

    Thanks in advance.

    If he spends it all on down payment, where's his renovation budget? 

    Now all he has is a $250k house that he put 20% down on, instead of a $430k house that he put sweat equity down on.

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