Using coliving to BRRR my way to 24% cash on cash
Hey all,
Wanted to share my story of my 3rd deal. At the close of the refi it was at 23.5% cash on cash and a 9.4% cap rate in a market where comparable multifam is trading closer to ~5.3%.
I'd done two others (maybe for another post):
1) A 3/2 house on a busy road that I converted into a 4/2 with a separate basement studio--that was re-appraised 6 months in for $95K more than I paid for it (!!)
2) A more pedestrian 5/2 that I bought as-is, no work done, and have been renting for $1K+ cashflow per month since the day I bought it
But it was really the 3rd deal I did that helped me understand the power of BRRR.
Context
I'd been working on my coliving concept Willow Communities which provides beautiful, furnished coliving houses serving 40-80% AMI earners (in my market, Portland, people making as low as minimum wage, or ~$22K a year!). It's awesome to see people living affordably together in our communities--a joy immensely greater than trying to make a return.
At the time right before I bought the house, I had just gotten a commitment from a family member to give me a relatively low rate interest-only secured loan (6%) to go find another deal to purchase, since the first two had gone so well.
The House
The Oregonian is a gorgeous modern victorian with knotty pine details that had been neglected for some time. It was an REO auction and I ultimately paid $396K for it. The main was a 3/2.5 with a massive living area, and there was a huge 800 sq. ft. shop in the rear--with a bathroom!
I was shocked the house was sitting on market for so long--over 6 months!! The house had been winterized and very few people wanted to take the risk of buying the house without testing its systems. If I were to go back I probably wouldn't take that risk again, but I knew even if I had to replace the furnace and do a couple thousand dollars extra in plumbing this was a great deal! The roof, crawl space and foundation were in excellent condition as the house was only 15 years old.
The plan was to carve another bedroom out of the main house (making it a 4/2.5) and turn the rear unit into a 2-bedroom, 1-bath accessory dwelling unit (ADU, or backyard cottage).
Rehab
There was almost no work to be done in the main house--some expensive fixes like replacing the furnace and carving out the 4th bedroom from all the space available, but all in all, about $15K with carpeting, paint, trim work, and plumbing fixes.
The ADU was the heavy lift. I was taking a totally unfinished shop and turning it into its own house! A lot of late nights, negotiating with contractors, and hand wringing later, that came out to be about $69K.
Then there were about $19K of appliances, landscaping, and other expenses.
Breathing New Life
I started with a 3/2.5 and now had a 4/2.5 and a 2/1 rear--two houses for the price of one! I had already been doing coliving for some time, so I planned to rent the main house by the room.
Here's the rent roll:
Main house (rented and managed by the room): $2,990
2br cottage: $1,495
Tiny house parking: $495 (oh yeah I forgot to mention--in Portland tiny house parking is decriminalized, so I make sure to spend the time and money to install utilities like sewer, water, and electric and host tiny house owners who want to park their units on my property)
Total rent: $4,980
Costs
Purchase price: $396K
Improvements: $103K
Holding costs: $15K
Mortgage closing costs: $15K (including a points buy-down)
Total costs: $529K ($514K before closing costs)
Financing
The house was appraised at $630K all said and done (on $514K of what I paid before closing costs) @ a 75% LTV for an investment property, yielding $472,500 in financing, or a total of $529K - $472.5K = $56.5K left in the deal. Meaning $56.5K / $529K = 10.7% equity, or 89.3% LTV. I feel pretty good about that!
Because of my points buy-down (which had a 24-month payback and 33% IRR assuming I held the house for just 5 years), my rate came in at 4.875%, for a payment of $2,500 / month.
Total PITI: $3,023.
Expenses
I have an in-house manager who's paid $150 per property, and an on-site resident who's paid $100. I budget another $200 / month for maintenance (though I anticipate given the property is brand-new, not to have significant maintenance for years to come). Given I'm serving an exceptionally high-demand portion of the population, my historical vacancy is ~2% (typically there are 4-5 bedrooms per house, and usually 1 goes vacant for <1 month per year--so my vacancy rate is between 1/60 and 1/48 or 1.7-2.1%), but even assuming 6% (which is even higher than the Portland metro), that's another $300 / month.
Total Opex: $850
NOI and Cashflow
NOI: $4,980 - $850 = $4,130
Cashflow: $4,130 - $3,023 = $1,107
Ratios
Cap rate (return on assets): 9.3%
Cash on cash (return on equity): 22.0%
Learnings and Takeaways
I'd give myself a B- on execution on this deal. It was my first real rehab or renovation, and I made TONS of mistakes--errors with contractors, security, finishes, it goes on and on. I'd estimate I paid at least $15K in tuition to the school of life--how much better would my numbers have been if I hadn't made those mistakes??
But in spite of that, I learned some amazing and inspiring lessons:
- If you have vision and knowledge of a property's value, you can afford to pay a market price--or higher!--and STILL create tons of value, for yourself and your tenants!
- Never underestimate rehabs--they always take longer and are more complicated than you think.
- Be creative--in my market (Portland), we have rules allowing for ADUs and tiny houses--those are extra sources of cashflow you would have to be crazy not to consider.
- Be prepared for your appraisal. I had a detailed binder and list of notes, PLUS a list of comparables to hand to my appraiser. It led to an easy, pain-free process for her, and a great value for me.
- Points buydowns feel like stealing--I'll save this for another post, but where else can you find a 33% IRR investment?? And that's only if you hold for 5 years!
Now that most of my capital is out, it's time to go find another deal and redeploy. Hope you enjoyed reading and best of luck to everyone out there!
Great work, Jon!
@Jon Wu, Well done and thanks for sharing. Your post was clear, succinct and delightfully informative. Your figures were inspiring and the section you included on "Learnings and Takeaways" was helpful and appreciated. The creative thinking that you've put into your website, http://www.willow.house/ , was also a delight. Thank you!
Jon, you might find the next project that I'm working on of interest. I'm designing a new construction co-living building, that will be permitted as a stacked Tri-plex and include an ADU. I intend to operate the Tri-Plex in the manner of a single co-living building. Overall, the project includes 21 bedrooms each with a private bath, plus there will be an additional community bath and a community laundry on each of the three floors. As in the BRRR that you posted above, all calculations for returns appear to be exceptional. Think of what your returns would have been if you had more than tripled your rent-able spaces, for less than double your costs?
I'm in planning with well known regional builder (over 30 years experience). The builder has an exceptional record for speedy project completion, below market costs, and an excellent finished product. This project does require a large lot, likely a half acre minimum (parking for 20+ vehicles). However, this is a building that can be permitted in multiple different zoning's. It includes 8000 sq ft of total living space currently projected to cost $125/ft sq. -approximately $1,000,000. Its still in preliminary planning, but if you are interested, I'd be happy to share the drawings as we complete them. Best wishes. I found your post inspiring.
Nice work, Jon. Talk about maximizing value! Very detailed outline and one of the best success stories I've read on BP. The "rent by the room" model really is a win-win situation for the tenant and the landlord.
I think more high cost cities will follow Portland's lead with the tiny house parking (hoping anyway).
How much did you spend on tiny house utility prep and does it have separate utilities? Will it park in the long driveway and other residents have to park closer to street?
I agree. This sounds like a great idea for a high cost college town.
This is great. I have been living in the Portland Hillsboro area for about 5 years now going through school and getting my career going. I have looked at places and realized that about the only way for properties to make sense would be to rent out individual rooms. I looked into it a little bit but wasn't sure what the rules are regarding that. I have a few questions.
Does the property have to be zoned as a coliving?
What type of upgrades do you actually do to the property to make it more friendly to the tenants.
How do you screen your tenants? Im assuming just like you would for any place but are there special considerations because they will be living so closely?
Really inspirational post thank you for sharing.
What about property taxes?
Cheers! quite a good post.
Daniel,
Taxes were included in his numbers (piti = principal, interest, taxes, insurance).
Mike
Amazing success story!
Thank you for sharing.
But....
(There’s always a but haha)
Posts like these are what makes new guys think it’s impossible to break into real state.
Most people don’t have a family member willing to loan $400k.
Or have $103k in cash sitting around for improvements.
Lol.
Well done. Great way to create an opportunity.
Great job Jon! We are doing a similar project in Oregon City, but more of a complete rehab. Taking a 1 Br/1 Bth and turning it into a 3 Br/2 Bth and putting an RV pad out back and rehab on a cellar for an Air BNB. Lots of fun! Good luck on your next opportunity!!!!! As you are in the Portland Area, if you would like to meet up sometime, let me know.
Awesome job!! and up in Portland, that's amazing
with a rent by room strategy, how do you break down the common costs associated with sharing a house, for example, toilet paper? Here in Ontario we have high electricity rates, if tenants stents paying for hydro separately ( which I don’t think they could in a shared house) I’d be afraid they’re run the dryer during peak hours etc. Any thoughts? I like the idea of renting by the room, not sure how to tackle these issues. Thanks
@Ryan F. You can do this with hard money and the holding costs go up and compress returns slightly, but the deal still works. Instead of $15K holding cost maybe it goes to $30K, and you fund the improvements with a rehab draw. That's totally standard through any hard money lender.