Can I BRRR in this scenario?

Question

I am very new to all this, but quickly sponging up all the information I can about real estate investing, especially BRRR.

Our current scenario is already positive. Buying my childhood home at less than half of the appraised value from my mom who is extremely trustworthy in money matters and all parties (seller, purchaser, renters, my attorney) are happy with the current arrangement. She has slowly gifted us the remaining value to avoid gift tax in case any alarms were going off for anyone! I'm paying half of the amount I bring in monthly from our excellent renters in a 0% interest "mortgage." The house is quite livable, but needs work like an eventual new roof, changing the kitchen floor from carpet to tile (Yes, carpet. The bathroom even had carpet, but my husband and I ripped it out as well as the water-damaged flooring, replaced it and put in gorgeous, frugally purchased tile). There are numerous ways I can increase the ARV, like splitting up the massive upstairs bathroom into two, and I'm nervous about when the roof might give out on us... I even have an LLC that is sitting, doing nothing, but I am current on dues and filing reports.

I feel like I should be BRRRing in this scenario. I would love to quicken the rehab process in a financially savvy way and get my mom paid off ASAP for her sake. I’m wondering if it’s even possible since I already have tenants. They are completely fine with the house “as is,” but would also love to see the improvements I would make. I am certain that they would even agree to a new lease and slight rent increase after improvements.

I feel like that would be an excellent route to take, and maybe people reading this think I’m crazy for even having to ask, but I’m missing gaps of info that would affirm my hopes. Any video links and recommendations would be appreciated. If anyone has done something of this sort before, would love to hear about it. Thanks so much and happy investing!

~Audra

Rehan A. · Answer

What would the break-even period be on the improvements cost vs the increased rent that you would receive? If mom can hold out, I would wait until the current tenants decide to leave on their own and improve the property at that time. You will be able to market all the brand new improvements to the next tenant and also be able to ask for higher rents at that time.My guess is that while your current tenants may be willing to pay a little more rent after you upgrade the place, the increased rent amount will not be in line with market rents.

Kenny Dahill · Answer

@Audra Todd, you're not crazy for asking! That's what BiggerPockets is for: questions!If you have the title under your name then I don't think there would be an issue. This would need to be an investors loan though since you do not live there. Although already having a tenant paying will help your underwriting since they appreciate assets that are making money already.I would reach out to a mortgage lender and have them help you. Expect it to be a 70-75% LTV (loan-to-value, i.e. down payment). They will probably take the lower of Appraised Value or Purchase Value.This shouldn't be an issue. Best of luck!

Audra Todd · Answer

@Rehan A. Great point about waiting until the current tenants leave. I was wondering about that exact thing. When I run the numbers on the current tenants' rent, or even raising it $150/month after some improvements that would be financially beneficial to them, it's still too close for comfort. I also don't want to torture them through the process of a rehab. I'm actually WAY undercharging them currently. They happen to be my cousins--extremely trustworthy and financially responsible. I know it seems like I'm surrounded by unicorns to have such a great situation with my Mom and her financial savvy as well as extremely trustworthy family tenants, but it's real and has been excellent for over a year.If I wait to do the improvements, as you suggest, and raise the price $300 to a still very reasonable amount, the second year would see a positive cash flow. I'm also starting to look into more possibilities: The back acre of the property once had a house on it and has electric, well, septic hookups, but would likely need a lot of work, but could be used for a few options. There is also an "apartment" above the garage that could have a bathroom and kitchenette added. A conservative estimate on remodeling costs shows that renting out the apt above the garage as well as renting the house would be much more positive in cash flow and ARV. It would just be interesting/difficult working out common area situations. At least right now my husband and I are essentially getting a free home and providing a great place for our cousins to live while they save up for a home.

Audra Todd · Answer

Scratch that.. FHA loan is not what we'd be wanting. So much to learn!

Audra Todd · Answer

Thanks for the helpful response @Kenny Dahill! I've been weighing out the pros and cons after researching more today. Feeling certain this is the best route for us. Private investor initially, then after the appraisal, potential FHA loan from a local bank as it IS our primary residence--we just happen to be traveling constantly because my husband is a cinematographer. Fortunately, I have an excellent real estate & legal network to tap in the area. Getting excited! Best to you in your endeavors and thanks again.