BRRBNB - A Winning Strategy!

[David Bergmann]

Hey all - just wanted to share my experience with our most recent deal, which is a variant of the BRRR strategy that I'll refer to as BRRBNB (Buy, Rehab, Refinance, BNB). This has been a very good investment to us so far and I just wanted to share our story.

My wife and I bought a 1915 home in a historic neighborhood in Columbia SC for $55,000.  The house was originally a duplex, but the city enforces a rule that a duplex that sits vacant for 12+ months in our zoning district, then it will be a non-conforming use and thus must be converted to single-family.  Yes, even if there are two doors on the front of the house!  Because we found out the home fell into this category (after our offer was accepted), and we were insistent that we wanted 2 income producing units, we began to solution for this issue.  What we decided to do to comply with the city is to convert the home to a single family (removing one of the front doors), but keep the right side as a distinct space with a MIL suite with a small kitchenette and back entry.  The only interior change required was a door between the sides.  This interior change forced us to consider the short term rental market and how it could actually be a desirable feature for this market where a group may be interested in renting both sides like adjoining hotel rooms.

Our total cash into the renovations was extensive ($95,000).  The house had 100+ feet of sill/termite damage, rotting joists under the bathrooms, no recoverable plumbing, no recoverable HVAC systems, no recoverable interior wiring (original knob & tube), and "dead" plaster falling off half of the walls.  However, we noticed a few redeeming features during our inspections that gave us some hope over the 8 month renovation - 11' ceilings (hidden behind drop ceilings), original heart pine floors (protected under laminate flooring), original fireplaces/mantles, and desirable location (5 minutes to downtown Columbia).  We did not hire a contractor for the work, we worked with subs/crews that would come in and help us complete each job.  This method of doing things definitely required more of our time & sweat equity, but we were able to perform what amounted to nearly a gut rehab with high-end finishes for $60 / sf.

We finished the renovation and immediately staged / furnished both units. We probably spent around $10,00 staging both units and several very long weekends getting it ready. We then approached the bank to refinance, and the appraiser (I think partly due to my wife's keen eye for decorating) valued the home at $215,000. At the time we decided to just take out what was necessary to recover our investment in the property, which amounts to a 70% LTV ($150,000). Looking back we kind of are kicking ourselves for this decision, as this cash would have been helpful in leveraging for other investments!

There are a few really positive benefits to this strategy that I wanted to share.  

#1 Federal Historic tax credits will ultimately return somewhere between $15,000 - $18,000 in federal income taxes next year 

#2 Historic homes have character that short term renters value & will pay additional for in their short term rental experience

#3 Completely remodeling a home with high-end finishes will probably not pay off for long term rentals, but does seem to in the short term market.  We can really make these homes nice, and not feel like we are wasting the money.

#4 Property taxes for investors in SC are ridiculously high (6%), and the home is still assessed value at our original purchase price ($55,000).  The refinance does not trigger an increase in assessed value.

#5 Property is cash flowing much higher than my estimates, and in a B+/A- neighborhood (see below)

So for the numbers, I am still refining our pricing strategy, but so far I am seeing ~$4,000 in gross revenue per month on the entire property.  This excludes the cost of cleaning, which I've outsourced and passed the fees directly onto the guests at time of booking.  My expenses are $1100 mortgage, $250 utilities, $100 consumables, $150 miscellaneous expenses.  So on net, we are seeing profits of $2400 / month between both units.

We implemented as much automation as we could (without seeming like robots).  We have automatic door locks, automatic check-in / check-out messaging (AirGMS), automatic pricing tools (Outswitch), and a cleaning staff that is starting to learn how to use our apps to coordinate themselves.  The biggest thing we are still figuring out is how to restock consumables and linens (that are damaged) without personally visiting the property.  Once we figure this out, we'll be nearly 100% automated besides responding to initial inquiries & leaving reviews, which we feel substantiates our personal involvement at this stage.

All-in-all, we are very happy with our first real investment property, and feel like we've found a good niche.  Hoping to hear from others who have completed or are considering a BRRBNB!  Oh and please feel free to check out our listings to see our finished product:

https://www.airbnb.com/rooms/2676857/

https://www.airbnb.com/rooms/27622822/

[David Bergmann]

@Eric A. - Thanks for your feedback, and we will be sure to budget for higher maintenance/capital expenses.  I know we have a roof to replace 3-5 years down the road.  We have researched the permit situation in our city and there is not a defined process for this yet.  Definitely looking for to the next ones!

@Will Gaston -  I couldn't agree more about the difficulty of the city to work with in some of these situations.  We find them especially difficult when the goals & guidance from the Historic Preservation staff and Zoning staff are in conflict.  We found out about the tax credits because my wife, Wendy, works on projects that utilize these credits through her job as an architect here in Columbia.  The Bailey Bill is a definitely a good one, although we did not pursue it as we learned about it too late.  I believe the application & requirements (regarding preservation) are close, if not identical, and would allow you to qualify for both.  The primary requirements are that the property is either individually listed on the historic register or is contributing within a historic district.  Other requirement is it must be "income-producing" (rental properties are qualifying).  I'm not sure what the property is but it is also worth looking into the abandoned building tax credit and state historic tax credits.  

@Mike F.

@Mike F. - Thanks for your notes.  We must have not updated our website, as we aren't using Smart Pricing anymore.  I have been using a program called Outswitch to manage our pricing, but I'll check out Wheelhouse, as we certainly aren't locked in at this stage.  I absolutely need to look into what you are describing around the new tax laws and minimizing tax liabilities in the day job.  This is one of my weak spots, so I know I need to get educated and find an accountant that can help us not leave money on the table.

@Luke Carl - Yes, you are absolutely right that what we did is skirting a zoning law that never could have anticipated this type of use at the time it was conceived in the 80's.  We actually have 3 listings on the property, Entire house, Left Side, Right Side.  The entire house is linked to the two below it (left & right) on our calendars on AirBnB - so if the entire house is booked then both the left and right are blocked as well.  Like I mentioned in the post, there is a door between them so it can really practically operate as either a duplex or a single family depending on the group and their preferences.  My observation so far is that the staff at the city  just want you to check the boxes, and don't really care what your use is.  As a part of our construction, we had several inspections and they signed off that we have complied with all laws required for single family residences  - the extra kitchen does not have an additional heating source (stove), all spaces are connected on the interior, and we have a single electric & water meter.  There are no laws on the books that I am aware of that would allow them to shut us down right now, but I am aware they can certainly create them as they have with other cities. 

You are correct that If it's zoned as a single family, there can be, at a maximum, a single lease on the property here in Columbia.  The way we've structured the ownership, we personally own the property (we have a personal umbrella policy), and lease the entire property to our business for $1500, which then subleases it. 

Definitely understand your concerns and agree with them.  I do feel we have other options if STRs are no longer possible.