"I'm thinking it'll probably appraise for upper 250's, lower 260's." My heart sank when the appraiser told me this after he had finished a walk through of my house. My wife and I had just finished remodeling the entire house and I knew this was not the number I was hoping to hear in order to recoup the investment we made in our home. It would get us back about 2/3 of our investment, but not all of it, which was my original goal. Like any new and responsible investor, I spent a lot time educating myself by reading BP forums and blogs, listening to the podcasts and absorbing as much knowledge as possible to pull off a successful BRRRR (minus the rent "R") of my own home. So before we go much further on what happened next. Let's go back to the beginning of this whole shindiggity-dig.
Back in 2016, my wife and I bought our first home. I was 23, making a whopping $35,000/year salary + some laughable level commissions, with my wife having the same salary. Our advantage was that we are super frugal when it comes to spending, so it didn't matter that we didn't make a lot, we could afford the payments on a house. We were able to get our house with no money down and purchased for $200,000. We had to do a 5/1 ARM mortgage, where our interest rate was locked in for the first 5 years at a pretty good rate, but would be subject to change in 2021, potentially severely spiking up the rate. Looking back, I'm not sure if we got a good deal, but I know now that we had no business being homeowners, as the maintenance on the house hit us in the face pretty quick.
First, the previous homeowners hid several things throughout the house that the inspector did not or could not catch. I won't go into all of them, but the primary thing was that our kitchen cabinets were basically falling off the wall, the dishwasher stopped working after using it 3 times and the P-trap under the sink was malfunctioning, causing a constant water drip and massive hole under the sink - which they had covered up with a shelf and cleaning supplies. So right off the bat, we had to pay for a full kitchen remodel that we couldn't afford. Our parents helped us pay for it, which for me personally was a hit to my pride because I wanted to feel like I was providing for my wife, not having to rely on mom and dad.
Second, this house just had tons of maintenance items that would come up over the years. Every year the AC or heat would break, the garage door spring and motor broke, water heater cracked on the bottom, etc. Always something - but that's what being a homeowner is. I would get super frustrated because it always felt like whenever we would get a good commission check, bonus, raise, etc. we would get hit with a big maintenance ticket that would set us back to square one.
So fast forward to 2020, our house is a piece of junk. Not like one of the disgusting properties you see come up on foreclosure status and whatnot, but not to the satisfactory of living in a home. I don't know about you, but I prefer to not have my feet turn black when I walk on carpet (and yes, we had it cleaned, we're not savages. Still didn't fix it.) To put it in perspective, we lived here for 4 years and my mom still hasn't seen the house... it was just embarrassing. The good news is that my wife and I are hard and smart workers and really increased our income. She was promoted to a manager level, now making $83,000/year, I've worked my way up into expanded sales roles, breaking six figures for the first time in 2019. Plus, we just bought our first rental in December, cash flowing ~$550/month. On top of all that increase in income, our expenses/standard of living only increased by $200/month over 4 years, mostly just on date nights (which I think investing in your marriage the best possible investment, don't try to convince me otherwise.) and we have zero debt outside of our mortgage. Additionally, we know that we're going to need to refinance into a 30 year fixed loan, because our ARM is going to change rates in 2021.
So I've been listening to BP, reading articles and listening to other podcasts, I decide that we're going to push some money into our home, bring up the value, then do a cash out refinance. I had planned to do this before COVID broke out, so when interest rates dropped even lower, it got us moving even quicker. Looking at comps in the neighborhood, I thought our house could appraise for $275k at the absolute, most high, top end. I set a budget for us based off our $275k ARV and we got to work. New siding, new floors, a busted pipe, water damage and insurance, fresh paint, landscaping, light fixtures, blinds... you name it, it's been done. We basically have a brand new house, and we're proud to call it home now.
Now for the appraisal. I pulled comps for the appraiser, grabbed before pictures of our house and compiled a long list of all the projects we had done on the house. I was even more confident now of a $275k appraisal because of my handy dandy house packet. It probably didn't hurt either that I spent 20 minutes just hanging out with him, talking with him, getting to know his life (side note: he's got a crazy life story), and unshamefully admitting that I was totally shmoozing him up. So I hand him the packet of comps, projects and pictures and asked, "So what do you think it'll appraise for?"
"I'm thinking it'll probably appraise for upper 250's, lower 260's."
And that brings us back to the beginning of this way too long of a forum post. We invested just shy of $30,000 into our house. If that was in fact what our house would appraise for, then I'd be leaving about $10,000 in the house. So I started to cope with the disappointment to reframe my mind, "The good thing is that your mortgage payment will lower by $100/month... You got all this work done for only $10,000... etc." But it wasn't about the money. It was about the accomplishment. The achievement of pulling off a successful investment, which in my mind would be measured by recouping my entire original investment and retaining the equity. I hear all these investors on the podcasts talking about their successful BRRRR's and flips and I just wanted that little piece of success too.
So I'm waiting patiently for the appraisal to come back and I'm talking to my lender about timeline to close on the refinance and when things. I asked her if the appraisal had come in yet and she told me that actually yes it had just come in about an hour ago. Already in my head thinking this was going be somewhere between 258k-262k, she says, "Ok so I'm pulling it up now and looks like it's appraised for $277,000."
"Wait what?! Can you double check that? Did you say Two-Seven-Seven?" She laughed at me and confirmed that I heard her right and sent me the appraisal form. We NAILED it! The house appraised for $277,000, above what we thought we would get, and at the end of the day, we netted about a $4,000 profit on everything. So to summarize, here is the breakdown of everything:
Rehab: $28,990
Loan Pay Off: $186,745
Closing Costs: $3,500
Total Expenses: $219,235
ARV: $277,000
80% LTV: $221,600
Loan Skip + Escrow Balance: $1,546
Total Income: $223,146
Remaining after loan pay off: $32,901
Profit: $3,911 (Remaining - Rehab)
Previous Monthly Payment: $1,242
New Monthly Payment: $1,274
So all in all, my monthly payment is only going up by $32/month (thanks to all-time low rates), I put a butt ton of equity in my home, pulled the equity back out to invest in something else, and got an extra $3,911 in cash. To some investors, $4k profit is not worth the time. But to me, that is an absolute grand slam of a deal, especially for my first one ever. And I can't wait for some nerd in the comments to say, "well your purchase price was X and then maintenance/holding costs/interest you spent over the years was Y and numbers numbers numbers..." Honestly, I don't care, I'm stoked about this. Don't rain on my parade.
My plan moving forward is to take the check for $32,901 and buy more buy and hold rentals, most likely more turn key rentals. I would love to do a BRRRR deal, but Private Lenders don't want to lend money to a someone who is still considered a newbie, especially during COVID.
My intention behind this post was not to brag by any means, although if you can't tell, I'm very proud of what my wife and I pulled off. I just wanted to get this out into the world to really say a huge thank you to BiggerPockets for all the information they put out there, thanks to other forum posters for asking real world day-to-day questions that helped give more more knowledge on how to do this, thanks to the real estate investing community in general, and thank you to everyone else that's been a part of this journey and answered questions along the way.
So all in all... do you think this was successful?
