How did you find deal / negotiate: Driving to check on one of my rental properties on my lunch break I saw a for sale sign in an empty lot. The seller said $20,000 and I accepted. I did not negotiate because I ran the numbers and this was a good deal.

How did you finance the deal: I paid cash for the lot. I then went to a local bank and got a construction loan for 80% LTC. The bank would let me use the land has part of the down payment and I only had to come up with an additional $10,000. The loan was a 1% origination fee with 5.75% interest only payments funded in draws. The good thing about the loan is it would convert into a 20 year note at 5.75% interest. I knew I wanted to do a cash out refi at the end of the process and I could get a better rate but it's nice to have a safety net.

How did you add value: I live / invest in a college market where rental rate is based on the bedrooms. I could not build a duplex based on zoning but I could build a 4 bedroom house for students to live. I decided to draw the house plans myself to max efficiency and cost. I ended up going with a open concept 4 bedroom / 4 bath house at 1,738 SF. Each room has its own bath and walk in closet. That is a big selling point in my market. I started the build in late December and finished in May. Took about a month longer than expected but the rental season in college towns are tied to the school year. I knew I would have tenants in place in August, anything before that would be a bonus. I managed the construction with a home builder and design. I went with brick exterior as well as high end finishes and am very happy with the costs. I will break down the final cost below

Cash out Refi - I called around to every bank I could find and had two solid options. Option 1: 80% LTV on a 30 year note at 4.5% with closing cost around $7,500. Option 2: 75% LTV on a 30 year note at 3.625% with $5,500 in closing. I decided to go with option 1 and get as much cash out as possible. Then covid happened and the bank for option 1 told me they could no longer do 80% LTV and they would not go down on the interest rate, time to walk away. This happened after the appraisal had already been ordered. Option 2 was still on the table and but I had to start the process over again with bank 2. This added a few weeks into the refi but it meant a great interest rate. At this point I was feeling very anxious about the market uncertainty and worried I would get a bad appraisal but ultimately I was very happy with the results.

What was the outcome: I was unable to get 100% of my investment out of the house because of the 75% LTV loan. But I look at it as if I purchased a brand new cash flowing property for $7,208 out of pocket while also having $61,250 worth equity in the house. This is a huge win especially when you look at the cash flow numbers below.

Lessons Learned / Challenges:

COVID-19! Everything was going along as planned with a few minor headaches in construction but nothing to serious. I even had a group of students about to sign a lease for $300 more a month then I ended up getting before the house was even finished. Then Covid hit and complicated things. Luckily the construction was deemed essential and we were able to keep working and it just prolonged the process by about a month. Not great but not bad. Always have options ready if things don't work out like the refi. At 80% LTV I would have gotten all the money I invested plus $2,100 while still having 20% equity in the house, but I keep working and got it done. The next issue is the university students were sent home, this is my tenant demographic. Lots of stress wondering whether the university would reopen in the fall and this was up in the air for many months. In my market the big players have a lease signed for the next school year 9 months in advance. I was not able to get a lease signed until June for August. Again in my market this is very unusual. However Covid did teach me to that life happens and I always had the exist strategy of selling the house for a profit as a last resort.

The BRRRR numbers:

Purchase Price land: $20,000

Construction Costs: $161,693

Loan Costs: $4,712

Total Cost: $186,405

Cash out Refi Closing costs: $4,553

Apprised Value for Refi: $245,000

New loan value: $183,750 @ 75% LTV.

Cash left in deal: $7,208

Rental Numbers:

Rent: $2,100 / month

PM Fee 9%: $189 / month

Cap Ex 2.5%: $52.50 / month

Vacancy 2.5%: $52.50 / month

Maintenance 1%: $21.00 ( I know this is low but it is a brand new house)

Principle and Interest Payment: $837.99

Taxes & Insurance: $170.39

Total monthly cost: $1,323.38

Monthly Cash Flow: $776.62 / month - $9,319.44 year 1.

Final Result: BRRRR is a awesome. I have a brand new cash flowing property with a 30% ROI for the 1st full year of rent. Not to mention all the equity gained. Plus my monthly cash flow should only increase in the coming years when market rents return to pre-pandemic rates. You don't have to get 100% of your money out of the deal with the cash out refi to get a home run. I am very happy with the way the design of the house, I have a few pics below.

Thank you BP for all the knowledge and the confidence to pull this off. I just purchase a fixer upper and ready to try my first flip, although if the number are great I can also had another buy and hold to my portfolio.