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Updated almost 4 years ago, 02/24/2021
First BRRRR Deal Completed in Memphis, TN
Hey BiggerPockets Community! Writing today excited and inspired as we just recently completed our first project ever in Memphis, TN and I just wanted to share the details with everyone here...while this project ended up being a big time win, it certainly did not come without a couple setbacks and bumps in the road. I wanted to share our experience here in order to help inspire others who have undoubtedly experienced similar issues.
Our first deal was a 3 bed/1.5 bath/1225 sq ft single family home in the 38118 neighborhood of Memphis. Was not a crazy rehab, and the numbers worked really well even with conservative estimates. We also worked with a couple private money investors on this deal (thanks in large part to Matt Faircloth's Raising Private Money book!) so it was a great learning experience all around. Here is a look at some of the numbers to start:
Purchase price: $52,000
Purchase closing costs: $1,250
Rehab costs: $13,650
Rehab cushion = $4,350 (I will explain the idea behind the cushion later)
Total cash due at closing: $71,250
ARV: $95,000
75% cash out target: $71,250
First thing I want to explain about the above numbers is the cushion amount. Normally we would factor in a 10-15% cushion anyways in case of unforeseen expenses during the rehab and to account for some closing costs. However since we knew this project could be completed before the typical 6 month seasoning period, we wanted to take advantage of the delayed financing exception which would allow for a cash out refinance in under 6 months. With the delayed financing exception, one of the caveats is that the cash out amount cannot exceed the lesser amount of the "total initial investment" or 75% LTV. If the numbers above played out exactly to our predictions above without the cushion, total initial investment amount would have been 52,000+13,650+1,250 = $66,900 whereas the 75% loan amount would have still been 95,000*0.75 = $71,250. In this case, the most cash-out we could have received from the refinance was the lesser of these two values, or $66,900. By adding that extra cushion ($4,350 total) to the rehab costs and having them held in escrow at closing, we were able to bring that initial investment amount up to $71,250 as well, and therefore receive more money back at the close of the refinance. I realize this may be confusing, but just trying to explain the general idea behind what looks like a 30% cushion for the rehab costs...
The rehab itself only took about 4 weeks, and we had a tenant in in just over 8 weeks, but some minor bumps in the road with the refinance process caused the additional ~2 month delay before we were finally able to close the cash out refinance last week for a total project timeline of 4 months. We ended up working with two lenders in the process: lender A was able to get everything lined up and ready to go in ~4 weeks since we began working with them immediately upon closing, but a VERY low appraisal (67k) followed by a couple unsuccessful challenges of that appraisal left us very discouraged and kind of at a crossroads. This would have left us with a ~$50k cash out amount, and leaving about 16-17k in the deal which we did not want to do. We then went to lender B for a second opinion, and within another 3-4 weeks we had a much better appraisal (104k!), but when it came down to it they could not figure out how to make sense of the delayed financing exception and include the rehab costs in the cash out amount (even though we knew we 100% set it up correctly). This again would have only allowed us to get a cash out amount of our "total initial investment" amount (just not including the rehab costs), for a cash-out amount of $53,250.
We then went back to lender A since we knew that they had the ability to close the deal, and thankfully we were able to transfer the 104k appraisal from lender B to get the deal finished. The only down side of taking this long was the additional holding costs, but even that did not have a major impact on our bottom line as we still ended up making a small profit on the deal. Here is a look at the final numbers:
Purchase price, purchase closing costs, rehab costs (from above): $66,900
Holding Costs: $3,500
Total Project Cost: $70,400
Target ARV: $95,000
Appraised value: $104,000
75% loan amount: $78,000
Refinance closing costs: $5,000 (rolled into loan)
Total cash out amount: $71,250 (limited by delayed financing exception)
Profit: $850
Once all was said and done, we made ~$850 on this deal and now have a cash flowing rental property! I mentioned that we had some private investors for this deal (totaling about ~$18,000), we were giving them 10% APR and ended up giving them all a 3% flat bonus at the end since we did so well (all included in holding costs). This yielded them a 6.33% cash-on-cash and a 18.99% annualized return respectively, which they were very satisfied with. Here is a look at the rental performance of the property as well:
Monthly rent: $850
PM fee: 9%
Mortgage amount (taxes/insurance escrowed): $554
20% reserve for expenses: $170
Total monthly/annual cash flow: $50/$600
Cash-on-cash/annual ROI: ∞ ($0 remaining in deal)
Overall we were very happy with the results of this deal, and I think it is safe to say we are officially addicted to real estate investing. Looking forward to many more deals to follow (already have the 2nd underway and looking for a 3rd right now!), thanks for reading!
@Chris Boselli thank you for sharing the processes & details on how you went about this, it's good to see the challenges and how you overcame them as well. Had you considered using @Andrew Postell's LLC to personal loan option in place of the delayed financing exemption to recoup purchase + rehab costs? Curious if you'd seen that, I've been planning a similar move & just recently became aware of this 9 page thread in the forums he started years ago on the topic..
@Chris Boselli link to thread is here: https://www.biggerpockets.com/forums/48/topics/460294-how-to-cash-out-1-4-unit-property
@Chris Boselli bravo! Since you are from MA, I have a couple of questions as I am looking to go out of state as well, I'm in NJ. How did you pick your market and how did you find the property? Did you visit the property or buy sight unseen? How did you develop your local (TN) team? Was your refi an FHA loan or something else? Anything else you can shed light on investing long distance is appreciated. Thanks!
@Steve C. I was not aware of this strategy but it is definitely an interesting option, however it seems like he is also not aware of the FNMA delayed financing exception in his description of buying a home with cash (section 2 of the article). It is definitely possibly to roll the rehab costs into the cash-out amount as long as you set it up correctly on the HUD and have the right lender with the knowledge and experience to close the deal.
The only additional costs I can think of with the LLC to personal loan strategy would be setting up the LLC if you do not have one already and the costs of filing the deed with the county, but this would also likely open up the number of lenders you could use as it probably makes more sense than the relatively new delayed financing exception which is still widely misunderstood and/or up for interpretation by each individual underwriter
@John S Lewis Hey John! Thanks for taking the time to read/comment. Funny story, I am from MA originally but I actually just moved to Hudson County NJ last fall for work. As far as choosing the market goes I have been doing some research the last couple years on good rental markets and Memphis continually popped up as a good monthly cash flow market. We bought this property and are currently working on our second project, both sight unseen. I was as skeptical/nervous as anyone would be with this idea at first, but it really depends on who you surround yourself with in terms of your "rockstar team." If you have not already give David Greene's book "Long Distance Real Estate Investing" a read, that book was extremely helpful and definitely quieted some of those uneasy feelings. As far as the refi loan itself goes it was a traditional cash-out refinance loan at 75% LTV, FHA loans require the property you are purchasing to be your primary residence and this project was a long-term rental property
@Chris Boselli yes, i could be wrong, but I believe he's aware of delayed financing in digging though the further thread replies, but believes this to be a better option. I'd been planning on using the delayed financing exemption, even had the luxury of taking Alexander Felice (BP Podcast 301) out to dinner/brain-pick while he was living here in Las Vegas, he's a great dude & very helpful! The benefit I see to using Andrew's method is two fold: first - your second lender would have been able to do a standard refinance immediately upon good appraisal, second- the rate would be slightly better with no hit for "cash-out" refi, just standard rate & term. Also once the LLC is up, your cost per deal goes down, as you could use the same LLC on each one. I think the biggest win is not having a totally legitimate, yet unfamiliar to some lenders, delayed financing option that may limit pool of final mortgagees.
That does bring up my second hesitation about Memphis though. If $50/month is not the real win, but the $26,0000 you've created in equity; does that equity really exist? If one appraiser's valuation is so far from the other's, sure the higher valuation makes the deal work, but what about the final exit when another investor goes to purchase it so you can 1031 a portfolio into something bigger? 🤔 Will they get the lower valuation that evaporates the equity? I've heard this "certain lenders/certain valuations" situation in asking about Memphis where other BRRRR investors ran into the same issue.
@Steve C. I agree, using the LLC to personal loan strategy seems to open up some more options and I will definitely be looking into this for future deals. The more options you have the better!
As far as your other point goes about the low appraisal I think it was a specific situation, this is an up and coming area in Memphis and it seemed like this particular appraiser could not see through the past reputation of 38118. Every real estate professional I talked to thought the 67k valuation was absurd, and even more odd that he dug his heels in when we presented him with 5-6 solid comps all within 1 mile in the 95-105k range.
That being said it is unfortunate that ultimately the whole process can be held up by the opinion of a single individual, but we are more focusing on the fact that we got all our money back and then some, were able to give our investors a great return to keep them happy and build our reputation, and are steadily working to build up a solid portfolio for the long term
@Chris Boselli Hi Chris - I am also an out-of-state investor who recently entered the Memphis market for buy and hold rentals. The idea of buying sight unseen felt risky for me too, but like you said David Greene’s book helped to calm a lot of those fears. What areas did you buy in? Did you decide to go with a PM (a key team member as David suggests :)) or self manage?
@Brianna M. Hi Brianna, the zipcodes we are primarily looking at currently are 38118, 38116, and 38141 but we have also looked into 38128 and 38115. We have a local PM company managing our rentals, I am more than happy to pay the PM fee to avoid tenant calls and the other additional stresses of self-management especially from long-distance
@Chris Boselli Congrats on the successful BRRRR! What were the two lenders that you used? Getting a good appraisal on the refinance is tough.
@Jack Inman we used Security National Mortgage Company and Bank of Springfield
@Chris Boselli Thanks for sharing your BRRRR project in 38118. We are looking to do a similar project in 38116. Totally new at this, learning every day. Some of my questions might be a bit basic, but I'm going to ask them anyway.
A few questions:
When you calculated your rehab costs, did you ask your contractor to do a walk through before purchase to do the rehab estimate? How did you determine which contractor was the right one for your first deal or did you get multiple quotes? What kind of rehab did you do on this property? If you wouldn’t mind sharing your contractor in Memphis, I would appreciate it!
The rehab costs are held in escrow, is that held by the title company or how does that work to pay the contractors?
What PM do you recommend?
What appraiser gave you the low value? Which gave you the more favorable one? If you want you could message me them.
The private investors – did you just set up Joint Venture agreements with them or how did you structure this?
Thank you for your time, and congrats on a great deal!
Hi Chris, congrats on your BRRRR - Truly inspiring.
I have just closed on a property in Memphis and like Natalie who commented above, I am curious about the rehab process? I have the same question, are the funds held by the title company or how does that work to pay the contractors?
If the funds are held by the title company, does that mean the scope of work needs to be finalized and agreed upon prior to closing and the rehab costs are included in the closing?
Also, when did you start looking for lenders, does it matter if you find one before or after purchasing the unit?
Congrats and good luck!
Congrats! Very exciting. Memphis is a great market.
Congrats! Very exciting to read about your REI journey thus far. Cant wait to hear what comes down the pipeline for you !
@Natalie Siedschlag, thanks for reading and thanks for the questions!
As far as the rehab process went yes we had a full rehab bid and itemized scope of work for all necessary rent-ready repairs before even offering on the property. Since 38118 is a relatively cheap market with a lot of investors, turnkey companies, etc. buying in the area many sellers are looking for cash offers on as-is sales with no contingencies, so all due diligence is expected up front to determine your best offer price.
Using the delayed financing exception you also need to know the rehab amount before hand because yes all rehab funds are added to the settlement statement and held in escrow by the title company at closing. The title company then disburses these funds at your discretion to the contractors. We also added a nice cushion to our rehab fund to be held in escrow for 2 main reasons 1) unexpected expenses and 2) As a cushion for the cash out amount from the refinance because the maximum amount of cash out you can receive from the refinance using the delayed financing exception is the lesser amount of total up front investment or 75% LTV.
All of that being said I am currently in the process of refinancing my second deal (rehab just finished this week!) using the LLC to personal loan strategy pointed out to me by @Steve C. earlier in this thread (link: https://www.biggerpockets.com/forums/48/topics/460294-how-to-cash-out-1-4-unit-property).
This should make things a whole lot simpler and open up the amount of lenders that know how to handle this type of refinance since it will basically just be a traditional refi and still allow closing in <6 months from original purchase. Keep an eye out for my summary post on deal #2!
Please feel free to PM me for some help with your other questions so I am not clogging up the feed with 5 paragraph essays!
@Gurshan Bansal hope this ^^ answered your questions too. For lenders yes I did have to make sure I was working with one that knew how to close this type of deal before setting it all up, as I mentioned in my post having to go for a 2nd appraisal with a new lender ended up wasting $500 and ~1month of time since they eventually did not end up knowing how to close this deal (and told me it was not possible to include the rehab costs)
@De Janiera Thomas @Stephanie Jones thank you guys as well!
@Nathan Faucett Check out this post. Really great BRRRR example in Memphis.
@Chris Boselli
I live in Nashville, accidentally Memphis property wound up in my purchase feed and it startled me how low cost things are. Good to hear a success story after some diligence I've been performing. Section 8 a lot of other free money just to fix and fill. I'll be going there soon. Hope to connect with others interested
@Ryan Gerard Memphis is a great market for affordability and cash flow. Not the best appreciation from what I have seen, but cash flow is more important to me personally as I am focusing on buying and holding long term. The forced equity generation from the BRRRR strategy is also a huge plus. My brother and I are planning a trip to go meet our boots on the ground team members probably in mid-late April as well, maybe we can connect if you are around as well
Hey @Chris Boselli! Thanks for sharing. It was great to read about how you figured out it out with the lenders and didn't get too discouraged when things weren't working out initially. Would you mind sharing how you found your first deal?
I am just here for the education and the comments:)
@Pamela Villa thanks for reading! We actually found this property on the good old MLS! We are up to 4 rentals in Memphis and all of our deals came from the MLS, however in the last 6-9 months Memphis has become increasingly competitive and inventory has become even more sparse. We have historically leaned on agents and wholesalers, but recently people are just willing to pay more for properties and leave more in deals as long as it still beats the traditional 20% down method.
Its a tough time to get started with how competitive the market is currently, but bottom line is keep analyzing deals and getting comfortable submitting offers which at the very least will help you learn the markets/neighborhoods and build momentum/confidence. We're due for a correction sooner or later and once the foreclosure moratorium eventually ends and people get more comfortable with the idea of moving again (hopefully this summer) that should open up some inventory and by then you'll be ready
WOW! Huge Congrats. I'm in the process of doing the same thing now!