BRRRR in the Smokies

[Kevin Luttrell]

Investment Info:

Small multi-family (2-4 units) buy & hold investment.

Purchase price: $1,085,000

Purchased a group of 4 cabins on about 4 acres in Pigeon Forge for $1.085M with the intention to flip a couple and BRRRR a couple. Later decided instead to BRRRR all of them. Spent about $285k in rehab and they appraised for $2.325M. All other expenses (interest, closing costs, etc) during project came out to about $150k.
Refinanced for $1.54M which was enough to cover the rehab and expenses with about $20k left over. About 10 months from purchase to refinance closing. 

Rent is $11,600/mo (with 3% annual rent increases per lease). PITI is $8,956/mo. Setting aside 10% for repairs and capex, cash flow is about $1,484/mo. Infinite CoC ROI.

What made you interested in investing in this type of deal?

Was looking for investment opportunities in the Smokies and recognized this as a great opportunity with lots of upside.

How did you find this deal and how did you negotiate it?

Found on MLS. It was a very poor listing - only a few pictures, low quality, short description, etc. I made an offer same day at list price and sellers accepted.

How did you finance this deal?

Used hard money financing at 10% down with most rehab costs financed. After rehab was completed I started the refi process with a DSCR lender, but the interest rate wasn't locked and went up from 4.25% with 2 points to 5.625% with 4 points during the 2 months we were in process. Cancelled with them and found a local community bank that offered a portfolio commercial loan at 4.75% with 1 point. 30yr am with 15yr maturity.

How did you add value to the deal?

All cabins are identical, except one has a walk-out basement. When we purchased, this basement was in poor condition and just used for storing junk. We hadn't initially planned to do much with it, but ended up deciding to invest an extra $20k to finish it. We went cheap - just sealed the concrete, painted the brick walls, etc. We did add a half-bath and HVAC and drywalled the ceiling. This cabin appraised $165k higher than the others and we're getting $600/mo more in rent for it.

What was the outcome?

Our initial plan was to furnish the properties and STR them ourselves. Instead we ended up leasing them to a company that is using them as STRs. The biggest benefit to this is that the company furnished them, saving us about $100k in anticipated furnishing and design costs. Our contract is for 4 years and at the end of the 4 years, all furnishings become ours.
All utilities, cleaning, and guest-related damages are paid for by company.

All thanks and glory to God for a great investment.

Lessons learned? Challenges?

I have previously completed BRRRRs and fix and flips from out of state without ever visiting the property, and issues have always come up. We flew out and visited these cabins several times during the project and there were many things we had to ask the contractor to fix, redo or touch up. Well worth the travel costs. For future OOS projects I will always visit in person from now on.