First time BRRRR into first time 1031 exchange

2 Replies

Good morning BP,

We are in getting the ball rolling on our first 1031 exchange, and super excited about it. Tell us what you think.

Property being sold: Our first successful BRRRR- Bought a REO for 60k in 2017, Rehabbed for 65k, Rented for $2200 gross monthly rent, Refinanced cash out for 174k that put a down payment on our 7 unit, Repeat listing for 239k and leveraging the profits into a 10 unit.

Subject property: "Mom and Pop" run well maintained 10 unit that is fully rented with long term tenants and under market rents. The current owners are "retiring" from the rental property business, selling off their portfolio and moving South. 

Financials are in the link for the Calculator below, property is made up of a five unit building with all all separate utilities, a four unit building with separate electric but landlord pays for oil (2 year old boiler) and a mobile home that tenant pays all utilities. New roofs on both buildings, new well pump last year and new septic system last year. It is in a good location, sits on 7 acres and  there is plenty of parking areas. Some maintenance needs to be done and a few of the units are dated but some have been recently upgraded. We think that the property has great numbers and a lot of potential. We are really excited about starting our first 1031 exchange!

Thanks for reading,


Paul

View report

*This link comes directly from our calculators, based on information input by the member who posted.

@Paul DeSilva , a few notes on your analysis:

  1. 7% for management is probably low. Usually closer to 10%, until you have a sizable portfolio.
  2. $30/month for water/sewer for 10 units is way too low. Probably closer to $400/month. Call the town. They'll give you actuals for the last year.
  3. What does the $150/month electric cover?
  4. Your loan assumptions might be a bit rosy. Talk with some commercial lenders. Figure 25% down, 5-5.5% for 20-25 years.
  5. $10k for initial repairs may be optimistic. I realize you mentioned that the properties are well maintained, but be sure to validate this.

Are the buildings located next to each other? I ask because, I think you'll have a tough time realizing any efficiencies of scale here. Especially, if they aren't contiguous. 

Is there an opportunity to add a shared laundry? This can be a big selling point to tenants and generate a little cash flow.

What about rents? Are they at market or is there room to push?

Even if they are new, septic systems scare the hell out of me. I'd be really cautious.

@jaysen medhurst Thanks for taking a look! Really valid points. just to clarify a few things.

1. We are currently self managing and plan on doing so for a while. That being said I realize that we should plan for the worst case scenario.

2. This property is serviced by well and septic not town water and sewer, so we are budgeting $30 per month just for things like a septic pumping out which is about $300 and doesn't necessarily have to be done every year. Maybe the well pump goes bad (it was replaced a few years ago along with the electric wiring that goes to it.

3. A landlord meter that has power in the basement/boiler room on it and some outdoor lighting.

4. We spoke to 3 different local portfolio lenders and the best offer we have is a 30 year amortization, 80% LTV, 5yr ARM non ballooning, just rate reset and 4.625% for the first five years then prime plus 1%, with a free commercial appraisal and 0.5% origination fees.

5. During the initial walk through we noticed mostly cosmetic fixes for now, several units have been rented over 10 years with the same tenants, these units will need updating but it sounds like the tenants will be there for a while, the units that have had turnovers in the past few years have all been updated, new fixtures, floors and such. The mechanical systems are mostly new in the past few years, the roofs are new in the past few years. That being said we will find out much more with the inspection report and re budget or negotiate down. 

The buildings are all on the same property and consist of a 5 unit wood frame building, a four unit wood frame building and a mobile home. 

We will consider to put in shared laundry at a later date. We say this because there is an old foundation on the property that the current owner said that the town will grandfather in a building that could possibly be more rentals with an attached Laundromat. We have not done our due diligence on this yet and don't know if the systems can support another building/laundry but there seems to be some possible potential there. Also the owner says that there is tons of great top soil in the back of the 7 acres that could possibly have potential (not making a decision because of these items).

There may be some room for bumps in rent but I don't want to scare away any long term tenants and we ran the property both ways, actual and pro forma and it meets our credintials in both scenarios.

Septic systems scare me also but they are a reality where we invest. On another property we just had one back up and overflow because some one was flushing swiffer sheets down the toilet. That was fun!

Thanks again for the response.