FIRST BRRR Complete! Details + Pictures!

FIRST BRRR Complete! Details + Pictures!

Real Estate Agent · Redlands, CA · Member since 2017 · 199 posts · 487 votes

Hey Biggerpockets!

My partner and I just completed our first BRRRR and we are so STOKED and THANKFUL for the education we have received from this website. I am writing a summary of this report in the hopes that someone finds value from it and our story inspires them to take the first step towards financial independence.

BACKGROUND:

I began listening to the Biggerpockets podcast 18 months ago. Before BP, I was an active member of the Personal Finance community on Reddit, and was on the journey towards FIRE (Financial Independence // Retire Early). My primary plan for early retirement was shoving money in tax-advantaged mutual funds. As I began to learn more and more about real estate investing, I began to question my strategy. The information I was hearing in the podcast made sense, the numbers were better than the stock market, but I was struck in "analysis paralysis" and couldn't pull the trigger.

Once my wife and I purchased our primary residence in California, we decided to take the leap and dive into real estate investing. The BRRRR method made the most sense mathematically to us, and I consumed as much informational content as I could.

THE JOURNEY:

Step 1: We bought our first home (primary residence). We live in California where homes are expensive and saving up 20% for a downpayment had taken us years. We could have bought more rental properties if we had continued to rent and foregone purchasing our own home (like Grant Cardone and Stephan Graham recommend), however, I can not stress enough how important it is to be on the same page with your significant other. My wife wanted her own home, and we made a promise to each other to get out of our apartment before we began investing in rental properties. Our quality of life improved tenfold going from a 600 sq ft apartment to an 1800 sq ft single family residence. And once we had our own home, we were free to dive into out-of-state rentals.

Step 2: Once we closed on our home, I immediately begin looking for a HELOC to fund our rental purchases. I found a local credit union that would give us a 1.99% introductory rate (18 months), after a 3 month seasoning period. We put the paperwork in motion and as soon as the seasoning period was over we were able to pull out 50k of equity to be used for real estate investing.

Step 3: While we were waiting on the HELOC to fund I took to BP and started looking for where to invest. The information was overwhelming, and it was hard to figure out where to start. After a good deal amount of research, I settled on Huntsville, AL. I started making contacts through the BP forums and talking to people on the phone. I would get up early California time and talk to people in Alabama (+2 hour time difference) just as they were starting their day. I had countless conversations with wholesalers, property managers, contractors, and real estate agents. I then took 3 days off work to fly to Alabama to tour the city. I fell in LOVE with Huntsville. The city was incredible, nothing like what I expected. It reminded me a lot of my hometown in Redlands, CA. Craft beer and coffee everywhere. Downtown revitilizations. Tech jobs and sort of a "hipster" feel to it. And stuff was happening in Huntville. They were building everywhere. Companies were moving to the town. Rents and property values were increasing, but still affordable. This was it.

Step 4: Once the HELOC closed I had 50k burning a hole in my metaphorical-pocket. I had found a partner who knew nothing about real estate, but was just as driven as me to find financial independence. He wanted to quit his day-job and travel the world, and needed monthly cash flow to do it. We found our first deal through a wholesale connection I had made on my trip to Huntsville. The wholesaler had found an off-market deal that they needed to sell QUICKLY. This was the Friday of a 3-day weekend. The property was a 3/2 townhome 1500 sq ft in Madison, AL. The location was good and Madison has some of the best schools in the state. The property was midway through a rehab, the owner had bought the home in foreclosure a few years ago and was slowly fixing it up himself. The wholesaler wanted 68K for the property, and I quickly estimated the home to be worth about 100K fixed up based on comps from similar homes. My partner and I made an offer of 60K for the property based on our rehab estimates, and at the end of the day the wholesaler accepted our offer. We had an inspection Monday and we closed on Tuesday, and just like that, we owned our first rental property.

Step 5: Now began the rehab. The property needed some work, the biggest issue was the backyard. There was an abandoned pool and overgrown landscaping that made the property appear MUCH worse than it actually was. There was no way we were going to have a pool in a rental property (insurance nightmare), so we got a pool remover to break up the pool, fill it in, and cover the backyard with beautiful sod. We then cut the vegetation away and suddenly the backyard was simple and clean. We replaced our side of the shared-townhome roof with 20-year shingles, and we installed a new 6 foot cedar privacy fence. We then turned our attention to the interior. The biggest issues with the interior was the unfinished stairs, partially completed bathrooms, and rotting exterior french doors. We got extremely lucky and found materials for the stairs in one of the closets that the previous owner had purchased. The interior rehab took 4 weeks, and we managed the project completely from out of state. Total cost of rehab: 18k. By the end of the rehab the home was completely restored, stable, and beautiful.

Step 6: Now we needed a renter. There were very little rental comps for a 3/2 townhome in that area, so pricing the rent was tricky. Another disadvantage we were facing is that our rehab completed the week after Thanksigiving, and finding renters in Al is slightly harder during the winter months. We had the nicest townhome on the street, so we marketed the property at $975/month. The highest a home had been rented in that area before was $850 a month, but that was for a 2-bedroom townhome. We didn't get any takers for the home, which was scary, and I was starting to think we had made a big mistake. We decided to drop the rent to $950 the day after Christmas and suddenly we had tons of interest in the property. We had a great qualified renter in the property the first week of January.

Step 7: Now the property was stabilized and rented. It was time to pull our money out. Our 6-month "seasoning" period was to end on March 11th, so at the begining of February I began looking for a bank to perform a cash-out refinance. I was hoping for an 80% LTV, but after calling around 30 banks I was not able to find anything better than 75%. The refinance process was painful (so much paperwork!), but after many hours and email exchanges between the lender, the final hurdle left was the appraisal. I was definetely worried the appraisal was going to come in low, as our property was nicer than any of the (limited) comps, but the appraisal came in at 105K! Here is a quick summary of the numbers:

Purchase Price: 60K

Rehab: 18K

Total Cost: 78K

Appraisal: 105K

Cash out Refinance: 78.5K!

WE DID IT!

These numbers are rounded of course and do not include a few thousand in holding costs and lender fee's, but the monthly rent in the interim period before we refinanced the property paid for those costs. The property is cash flow positive after accounting for maintenance, vacancy, and operating expenses, and we have pulled out our entire starting capital!

I can not thank Biggerpockets enough for the immense information available through their website and podcast. It has literally changed my life. 7 months ago my partner and I had -ZERO- rental properties. Since diving into the BRRRR method we now have -SIX- cash flowing rentals, with a goal of -TEN- by the end of the year.

Here are some pictures of the property before the rehab:

BEFORE PICTURES

AFTER PICTURES

I would love to answer any questions or comments you might have on the BRRRR process. I would not have been able to even GET STARTED in real estate investing if it wasn't for BP, so please if you have a question on the process let me know! My journey wasn't perfect, and there were plenty of things I will do differently moving forward, but for the first BRRRR I am extremely happy with how it went.

THANK YOU BP!

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Most Popular Reply

Member since 2019 · 38 posts · 32 votes
7y

Congratulations! How much did the refinance cost you and how much did your mortgage payment go up by? I feel like this part of the BRRRR strategy is not often talked about and curious to hear how it impacted your monthly cash flow.

See this reply in the discussion

305 Replies

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  • Bloomington MN · Member since 2019 · 2 posts · 1 vote
    7y

    Nice job! I’m hoping to invest out of state as well and have been looking at Huntsville and Columbus OH. Can you share any contact info on your team with me? Anything is appreciated. Thanks!

  • Investor · USA · Member since 2019 · 117 posts · 57 votes
    7y
    Originally posted by @James Gates:
    Originally posted by @Rehaan Khan:

    congratulations! So if you wanted to sell this property. Would it sell for $100K meaning around a $20K profit in cash?

     Hey Rehaan,

    The property would probably sell for just over 100K, which would be around 20K in GROSS profit, but with transaction costs and large taxes on flips/investment properties, we have no plans to sell. Our 5-7 year plan is to rent, collect cash flow, and reinvest cash flow. In the future when the principal has been paid down a little, inflation has eaten away the debt, appreciation (strong neighborhood) has lifted the value near 130K, we will "sell" the property with a tax-deferred 1031 exchange so limit our tax liability. 

     That sounds like a solid plan! What is a tax-deferred 1031 exchange?

  • Residential Real Estate Agent · CA · Member since 2008 · 3 posts · 0 votes
    7y

    @James Gates

    Hi James, would you mind possibly sending me this lenders info as well? I have a property there I am looking to do the same with as well as a few in the Pensacola area (if they even work out of state as well). Would appreciate it!

  • Investor · Missouri City, TX · Member since 2015 · 70 posts · 19 votes
    7y

    Congrats... you completed the hardest part..   it will get easier from this point on. 

  • Real Estate Agent · Oakland, CA · Member since 2016 · 9 posts · 6 votes
    7y

    Great work, @James Gates! About the refi, what income sources did the lender include in your DTI ratio? I know that some (but not all) include rental income from the property. I left my W2 job recently so wondering how hard it will be to refi with only rental income.

  • Rental Property Investor · Chicago, IL · Member since 2019 · 5 posts · 3 votes
    7y

    @James Gates - Thanks for sharing. As someone just starting out, it’s great to hear you were able to manage a cross-country deal on your first try (although I’m sure it wasn’t as easy as it sounded). I’m in Chicago, and while not as bad as Cali, a number of things make it a lot more difficult to break into the market while owning your own residence, so I’m looking to go out of state as well. Any tips on finding a location to start scoping out?

  • Member since 2018 · 1 post · 0 votes
    7y

    Mr. Gates, what an inspirational story / journey.

    I happen to live in the Huntsville, AL area at this time and can confirm that the growth is exponential; opportunities abound, specially in the Madison area. I'm not an active investor, but am delving into the real estate realm (baby steps) as my potential source of income post retirement. I've always been a firm believer in real estate, but instead emphasized my military career first and foremost. This approach of course has resulted on missing out on great opportunities. Nonetheless, after 30 years of service, I still see that real estate remains the best option for achieving financial independence, and your story, and that of many others within the BP forums, proves the point. On another note, I just came from a trip in San Antonio, TX and can attest to the exponential real estate growth, whether residential or commercial, opportunities that abound there as well.

    Congratulations on your success and wish you the best on all future endeavors.

  • Member since 2018 · 2 posts · 0 votes
    7y

    @James Gates

    You mind sharing that lender into with me? My partner and I are about to embark on a similar journey and we're already know the bottleneck will quickly be lenders. Thanks!

  • Rental Property Investor · Triangle, VA · Member since 2019 · 29 posts · 18 votes
    7y
    Originally posted by @James Gates:
    Originally posted by @Ronnie Fielder:
    Originally posted by @James Gates:
    Originally posted by @Justin Dao:

    Hey @James Gates,

    Thank you for sharing your story. As an OOS investor, on which occasions did you feel the need to fly out to Alabama? To meet the team/on closing the property? Any other reason why you may have flown out there?

    Second question, it seems like a silly and simple logistical question, but what do you do with the keys if you close from afar? Do you trust a team member to hold onto them or do you get a combination lock with the keys inside and hang it on the door?

    Hey Justin, I did feel the need to fly out to the area the first time to meet the boots on the ground team face to face, but after that, I did not fly out again until after we had purchased and completed the rehab. I did a post inspection with the contractor, but looking forward I do not feel the need to do that again now that the team is in place.  

    GREAT logistical question. This is where having a good team can save you so much headache on such a simple thing. My Property Management and contractor have been able to pick up keys from escrow on the properties, and place them in a lock-box at the property so that everyone on the team has access to the property.

    James, 

    Do all your team members know each other or do they all work independently?  I'm curious who your primary team member is and how you get the various team members to check on others work.

    The team members did not know each other at the start of the project, but they were in communication with each other throughout the rehab period. My primary team member was the contractor. Accountability is huge. I would have biweekly phone calls with the contractor, and ask for an end of day report via text/pictures to check on how the project was coming along.

    Makes sense James.  I'm always interested in how others do their long distance real estate investing, especially during a renovation.  I have been tied to areas where I have family and/or friends, which I rely upon.  As most can figure out, that comes at a cost of lack of skills, motivation, etc.  As I continue to grow, I'm looking to move on to all professionals on my team(s).

  • Rental Property Investor · Denver, CO · Member since 2018 · 81 posts · 62 votes
    7y

    @James Gates Impressive before and after pictures, thank you for sharing!  I'm glad you decided to pull the trigger, you would've never known what you could accomplish.  With almost everything, the 1st is always the most difficult -it'll get easier. 

  • Union City, CA · Member since 2017 · 50 posts · 12 votes
    7y

    Congrats, James!

    Two questions:

    Are you working with the original wholesalers you received references for? AJ Cole and Lenny Herald?

    -Dave

  • Member since 2018 · 4 posts · 0 votes
    7y

    Did you put the property in an LLC/ S Corp, etc or just in your own personal name?

  • New to Real Estate · San Diego, CA · Member since 2018 · 66 posts · 13 votes
    7y

    Thank you SO much for sharing. This is really encouraging! I am curious about how you come upon Huntsville and decided to land there? Sorry if this has already been asked. With so many cities in the US I’m just so curious about what made you land on this one?

  • Investor · Fontana, CA · Member since 2017 · 95 posts · 59 votes
    7y

    Congrats on the BRRRR, I would love to collaborate with you.

  • Washington, DC · Member since 2019 · 81 posts · 38 votes
    7y

    Congrats man!!! This is totally inspirational. I am saving up for my first investment and reading everything I can in BP right now. Good to see someone doing it! Can’t wait to dive on in!

  • Investor · Member since 2018 · 31 posts · 13 votes
    7y

    @Carl Crump awesome! Congrats! Looking to make first deal. Will be taking notes from this. Thanks for sharing.

  • Phoenix, AZ · Member since 2018 · 2 posts · 0 votes
    7y

    @James Gates

    Wow thank you so much for sharing. I love the pictures! This is my first post on here but I really appreciate you showing us every step.

  • Real Estate Agent · Redlands, CA · Member since 2017 · 199 posts · 487 votes
    7y
    Originally posted by @Payton Pearson:

    @James Gates Yes, I am trying to discern how difficult it is, because there may come a day where I move away from my primary location of real estate acquisitions. That is, people typically see real estate as an anchor, and in some ways it is, but it doesn't have to be.

    So what have been your difficulties, what has been easier than expected, etc...?

    Difficulties: Taking the 1st step, finding a HELOC lender. Paperwork for refinance.

    Easier than Expected: The closing process. Managing a rehab from a phone. Everything after the 1st step. 

  • Real Estate Agent · Redlands, CA · Member since 2017 · 199 posts · 487 votes
    7y
    Originally posted by @Kathy Argento:

    @James Gates Thank you for sharing this! My daughter is just graduating college and is planning to buy her first home in the Fort Worth Texas area because that’s where she was offered a job. With very little money down and using a traditional 3% down conventional loan, She will try to do the same strategy by renting out three of the four bedrooms, having her mortgage paid for her, and at the same time saving up $3,000 a month to buy another (fixer) for cash. then fixing it up and renting it out, then refinancing cash out, Etc, etc...

    Hey Kathy,

     LOVE LOVE LOVE the idea and the hustle from your daughter. Such a smart idea to live like that when you are young and give yourself a financial runaway. I don't think I mentioned this in my post, but my wife and I currently rent two rooms of our home to amazing roommates, which just gives us that much more capital to invest in real estate for the long term. 

  • Real Estate Agent · Redlands, CA · Member since 2017 · 199 posts · 487 votes
    7y
    Originally posted by @Josh Vines:

    Congrats @James Gates! Thank you for outlining your first BRRRR experience, it definitly gives a practical insight into the BRRRR process. Could you explain the "seasoning" process more from your experience? The one aspect of the BRRRR strategy that I don't seem to grasp firmly is how the seasoning period is applied. Could you explain in a little more detail how you first purchased the property and then went to find another lender to refinance? Did you buy completely cash with your liquid capital + HELOC?

    Hey Josh,

    If you are going to get a conventional loan during the refinance (which generally have the best rates and terms) most lenders will require a 6-12 month "seasoning" of the property. What that means is you need to wait a least 6 months before you can do at a cash-out refinance at more than the purchase price. If I would have tried to get a refinance during month 3 for example, the lender would have been forced to use the purchase price (60K) as the value of the house instead of the appraised amount (105K). 

    So basically the property was purchased in cash from a wholesaler, and in 6 months I got a loan on the property to pull my equity out. Because I had purchased under market value and made smart improvements on the property, I was able to get all my initial capital back in my pocket and still have 25% "forced equity" in the value of the home. I bought the property with a partner, he had cash on hand and I had funds from a HELOC.

  • Real Estate Agent · Redlands, CA · Member since 2017 · 199 posts · 487 votes
    7y
    Originally posted by @Rehaan Khan:
    Originally posted by @James Gates:
    Originally posted by @Rehaan Khan:

    congratulations! So if you wanted to sell this property. Would it sell for $100K meaning around a $20K profit in cash?

     Hey Rehaan,

    The property would probably sell for just over 100K, which would be around 20K in GROSS profit, but with transaction costs and large taxes on flips/investment properties, we have no plans to sell. Our 5-7 year plan is to rent, collect cash flow, and reinvest cash flow. In the future when the principal has been paid down a little, inflation has eaten away the debt, appreciation (strong neighborhood) has lifted the value near 130K, we will "sell" the property with a tax-deferred 1031 exchange so limit our tax liability. 

     That sounds like a solid plan! What is a tax-deferred 1031 exchange?

     Hey Rehaan,

    I am not a tax attorney, but basically a 1031 exchange refers to a line in the US tax code that allows you to exchange "like kind" assets and defer taxes on the gain. So in real estate, you can "exchange" (sell) a property and you can roll the profits of that property into another property, and defer taxes on the gain. You can, in fact, defer taxes for your entire life by continuing to take advantage of the 1031 exchange. Eventually the plan is to exchange a large number of single family homes for a multifamily apartment complex without paying any taxes (legally).

  • Real Estate Agent · Redlands, CA · Member since 2017 · 199 posts · 487 votes
    7y
    Originally posted by @Dominic Trujillo:

    @James Gates

    Hi James, would you mind possibly sending me this lenders info as well? I have a property there I am looking to do the same with as well as a few in the Pensacola area (if they even work out of state as well). Would appreciate it!

     Private message me and absolutely I can!

  • Real Estate Agent · Redlands, CA · Member since 2017 · 199 posts · 487 votes
    7y
    Originally posted by @Adam Stiles:

    Great work, @James Gates! About the refi, what income sources did the lender include in your DTI ratio? I know that some (but not all) include rental income from the property. I left my W2 job recently so wondering how hard it will be to refi with only rental income.

    Hey Adam,

    For the refinance, the lender was able to apply some amount of the rent on the property into my monthly income sources (I believe it was 75% of the rent amount). Luckily for me I have a W2 job so proving my income was not as difficult as I know it can be as a contractor.  

  • Real Estate Agent · Redlands, CA · Member since 2017 · 199 posts · 487 votes
    7y
    Originally posted by @Nick Clare:

    @James Gates - Thanks for sharing. As someone just starting out, it’s great to hear you were able to manage a cross-country deal on your first try (although I’m sure it wasn’t as easy as it sounded). I’m in Chicago, and while not as bad as Cali, a number of things make it a lot more difficult to break into the market while owning your own residence, so I’m looking to go out of state as well. Any tips on finding a location to start scoping out?

     Hey Nick,

    My biggest advice that I wish someone had told me when I started was to just pick a market and learn it inside and out. There isn't (in my opinion) that many differences between the top twenty rental markets, so instead of looking for the nooks and crannies between the markets, pick a market and look into the nooks and crannies of that market. Pick one and roll with it. After you get enough properties in that market that you are looking for diversification, pick another market and roll with it. 

  • Real Estate Agent · Redlands, CA · Member since 2017 · 199 posts · 487 votes
    7y
    Originally posted by @Fidel Arvelo:

    Mr. Gates, what an inspirational story / journey.

    I happen to live in the Huntsville, AL area at this time and can confirm that the growth is exponential; opportunities abound, specially in the Madison area. I'm not an active investor, but am delving into the real estate realm (baby steps) as my potential source of income post retirement. I've always been a firm believer in real estate, but instead emphasized my military career first and foremost. This approach of course has resulted on missing out on great opportunities. Nonetheless, after 30 years of service, I still see that real estate remains the best option for achieving financial independence, and your story, and that of many others within the BP forums, proves the point. On another note, I just came from a trip in San Antonio, TX and can attest to the exponential real estate growth, whether residential or commercial, opportunities that abound there as well.

    Congratulations on your success and wish you the best on all future endeavors.

     Thank you Fidel, and thank you for your service.

    I will be in Huntsville in the next two weeks, and I'd love to buy you a drink (beer or coffee) and talk real estate and life. Private message me if you are interested!

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