Sometimes You Have To Be Flexible: The Story of My BRRRRSTR

[Max Cohen]

Investment Info:

Single-family residence buy & hold investment in Westminster.

Purchase price: $665,000

Contributors:
Ashley Wolkomir

My first BRRRR! A BRRRRSTR! (I'll explain...read on).

When I purchased this house, it was a 4bd/3.5ba 4076sqft single family home in Westminster, CO. This was by far the largest house I had ever purchased. I thought I had a good idea of what I was getting myself into, but little did I know how much work lay ahead of me.

I had my eye on this home for a bit of time towards the end of 2021 as I was in the market for a new primary residence. My beautiful and wonderful girlfriend @ashleywolkomir was just finishing up all her coursework and testing to become a licensed realtor in the state of Colorado. Reach out to her if you’re in need of an investor-friendly agent in Denver! She knows all the ins-and-outs of how to help you live for free and even make some extra cash flow each month.

We were both house hacking at the time. I was living in my 6bd/3ba rent-by-the-room house hack with 5 other tenants, and she was living in her 4bd/2ba house hack with 3 other tenants. We were very ready to have our own space, but, as investors, we still wanted our next purchase to make sense financially.

In October 2021, this house came on the market. Since I was specifically searching for houses with an ADU, I quickly came across this one. I wasn't quite ready to buy at this point since I had just bought my last primary residence in January 2021. But, I kept this property in the back of my mind.

As the weeks wore on, October turned into November, which soon turned into December. Incredibly, this property was still available. Remember, this was late 2021. The market was extremely hot and interest rates were still barely above 3%, so a house sitting on the market for more than 2 weeks was rare.

Come December, I was ready to pull the trigger because Ashley has just acquired her newly minted real estate license and joined the FI Team, and by the time I would close on this property, 12 months would have elapsed since I last purchased a primary residence.

Thanks to Ashley and her expert negotiating skills, despite this being her first deal as an agent, we were able to get this property under contract for $10,000 under asking at $665,000. Again, I must reiterate, this was late 2021. Nobody got properties under contract for less than $20,000 over asking in Denver at the time. We even got credits from the seller for fixing the sewer line and installing a radon mitigation system.

Fortunately, closing went smoothly, and I acquired the property on January 4, 2022. After a 2 week rent back period, I took possession of the property on January 17, 2022.

What I didn't fully realize was that the condition of the property was a little worse than I had anticipated. During the showings and final walkthrough, the sellers still had all their belongings in the house because they were a large family and needed a rent back period to sort out their moving plans. It was clear that the upstairs bathrooms would need to be completely renovated. Both bathrooms had stained blue carpeting in them. Carpet in the bathroom! Speaking of carpet, the majority of the house was covered in this blue carpeting, which was stained in every room it was in. The primary bathroom had a moldy jetted tub. Throughout the house, the wood doors, trim, bathroom vanities, and stair railings were very dinged up from the previous owner who had multiple pets and children. Once all the furniture was out of the house, I quickly realized the renovations I planned on doing would need to be much more extensive. Fortunately, the basement ADU was the one area of the house in good condition. And the majority of the repairs I thought were needed on the property were cosmetic to bring the house from the 80s into the 2020s.

As the list of items that needed to be repaired before I felt I could reasonably rent out the property grew, I soon realized I would be sinking a significant amount of money into the house. After using a 401k loan to cover almost my entire 5% down payment of $32,500, I did not want to have to put another $40,000-$60,000 into the house that I wouldn’t be able to access. Yes, these renovations would increase the value of the property, but it was money I wouldn’t be able to re-access immediately to reinvest into future properties.. This is due to the fact that these initial renovations wouldn’t likely increase the property value enough to be able to refinance it or seek a second mortgage on the property. Or, if they did, it would be a minimal amount that would likely not allow me to recoup the amount of money I put into the property for these renovations.

It soon became clear to me what the best course of action would be for this property: Given that Ashley and I had a very comfortable and relatively recently remodeled basement ADU to live in (circa 2010), I realized we would be able to execute a "luxury" live-in flip.

At this point in our lives, we were ready to move much more towards the comfort side of the comfort vs profit scale. I had heard of stories of people completing live-in flips where they have no kitchen or bathroom for a couple weeks. This was not something that would be feasible for us; and fortunately it wouldn’t have to be something we do.

During that two week rent back period, I wasn’t just sitting on my hands until I could get access to the property. I was actively looking for and interviewing contractors for some work I knew would need to be done on the property before I could rent it out.

After interviewing a number of contractors, I decided to move forward with my contractor of choice (Jerry from Noble Home Improvements in Denver). When Jerry and I initially talked, we discussed just renovating a couple of bathrooms, and redoing a lot of flooring. Jerry was very flexible in terms of making changes as the project moved forward as well as providing his expertise in both design decisions and offering me multiple solutions to any issues that came up.

The project soon expanded into a whole-house remodel. Meaning the plan was to replace everything in the upper two floors besides the cast iron tub in one of the bathrooms. At this point in time, I was a very new investor, having just started one year earlier. I only had one other experience with a contractor beforehand and it did not go as well as I was hoping. So I was certainly a little nervous about how this next experience would go.

What exactly did we end up remodeling? Well, just about everything. The hardwood flooring on the main floor was refinished and new hardwood was added to areas that used to have old tile or carpeting. Almost 2,000 sq ft of LVP was added to the office, sun room, and entire upstairs floor. The entirety of the main and upstairs were freshly painted. New vanities, tile, sink, shower, and light fixtures were added to the bathrooms. 61 can lights were installed in the ceilings throughout the house, which previously had 0 ceiling lights, which made for very dark evenings before the remodel. The upstairs laundry room was converted into a bedroom, which involved moving some walls and building a new closet for that bedroom. An upstairs hall closet was then converted into the laundry area. Two board and batten accent walls were added. The wall between the kitchen and dining room was removed to make for an open concept living area on the main floor. A beam was installed and styled with two other faux beams were added to the living/dining room. The entire staircase and railing as well as the railing all the way around the upper level was redone. New lights were added outside the garage and on the deck and back of the house.

One of the most important things that we updated in the property was changing the railing on the main level of the house that separated that floor from the basement staircase to solid wall. Framing out the wall and adding a door with a lock on it is what makes the basement and top part of the house separable. It is what gives me the flexibility to rent out the entire house as one unit, or rent the top and bottom of the house separately. This flexibility is very important to me because it allows me to adjust my strategy to the market conditions and maximize the utility of the property.

So why did I decide to jump into such a large undertaking given such little experience? Well the one thing I felt I had a pretty good grasp on as a newer investor was running the numbers. I am a software engineer for MLB by day and have always been an analytically thinking guy. So after looking at comparable properties in the area of that size with a feature like a fully built out ADU, I determined the ARV (after repair value) of the property would fall between $900K - $1M. I did understand that this range is pretty wide, but because of the fact that the property was pretty unique, I was comfortable with this spread. Based on the comps, in order to hit that ARV, I would need to do a pretty high end remodel.

The original goal was to have the whole house completed by late May 2022, which I honestly wasn’t very sure was feasible or not given my lack of experience. After all was said and done, the remodel was wrapped up in mid October 2022, meaning the entire project took 9 months. But really the work had begun around October 2021 when I was looking for the property in the first place. If I didn’t know it already, I was beginning to understand that real estate takes some hard work. But the end result was completely worth it.

I had no background at all in construction or remodeling at all. I hadn’t even really watched any of the house flipping shows before. Even though the project took about twice as long as I expected, the experience I gained and the general understandings I learned about organizing remodel projects, working with contractors, designing spaces, purchasing materials, and more was more than worth the lost time.

So the remodel was over! And I am doing a BRRRR, right? Because I plan on making this property a short term rental, I am flipping two of the R's. I am refinancing the property before renting it out. I was able to time up the loan process pretty much perfectly to time the appraisal for just when the remodel was completed. This also gave me a little bit of time during the loan process to furnish the property.

The other way in which my BRRRR was different from a typical one is instead of refinancing, I acquired a home equity loan on the property to pull out the new equity. Why did I decide to do this rather than refinance? Well, the market shifted so intensely and quickly with rates doubling from January 2022 to October 2022, it didn't make sense to give up my 3.25% interest rate on the first mortgage in exchange for a primary residence jumbo loan, probably around 7.5%. It also would have reset my clock on the next time I would be able to buy a primary residence. So, instead, I got a home equity loan at 100% LTV at 6.25% for the new equity.

Alright, let's get into more of the numbers for those who like numbers like me. The original purchase price was $665K. My down payment was $32,500. The total remodel cost was $125K. The final appraisal? $910K.

I really wasn’t entirely sure where the appraisal would end up. Essentially I was just hoping the appraiser wouldn’t put the appraisal in the $800K-$900K range. My $1M upper range would definitely have just been a bonus. I was really anticipating around $925K, so given the shifting market and the difficulty the appraiser had in locating comparable properties, I was content with the $910K number.

So what does that appraisal number mean?

It means my total profit can be calculated as appraised value - purchase price - renovation cost. In this case:

$910K - $665K - $125K = $120K.

I went back and forth when trying to decide if I should include the opportunity cost of the lost time I could have been renting the property if I hadn’t done the remodel over the course of 9 months. I also debated on if I should include the holding cost of paying the mortgage while the remodel was ongoing. In the end, I feel that these costs shouldn’t be considered unless they are excessive, however one would define that. For this project, I would’ve said if it went over 12 months, I would’ve factored it in to some degree. But in my mind, you have to spend money to make money and you have to take time to make money. Any financial endeavor has an aspect of time involved in order to profit, and this remodel was no exception.

With that explanation out of the way, what did I end up pulling out of the property when all was said and done? The total equity in the property can be calculated as appraised value - loan balance.

$910,000 - $624,500 = $285,500

As I mentioned, the credit union I worked with offers a 100% LTV home equity loan product, and they paid me approximately $250 to close on the property (a nice perk I wasn't expecting). So the total amount of money they ended up wiring to my bank account was $285,750.

So that’s pretty cool. I’ve never seen that kind of money in my bank account ever. Not only did I end up with incredible profit, I left $0 of my money in the property. So I essentially ended up with a free house (minus all the time and energy I spent on executing my plan for the property, of course).

So what’s the plan for the money? Well, I’m going to reinvest it of course!

And what about the property? Well, as mentioned I am turning it into a short term rental for now.

But there are so many options for it. While Ashley and I live in the basement for the time being until we can purchase our next primary residence, I will STR the top portion of the house. When we move out, the initial plan is to short term rent the entire house, including the basement. I will see how the property performs, and if I don't think it is performing as well as I'd like, I will short term rent the top and rent the basement out as a mid-term rental. I also have the option to put long term renters in both the top and bottom portions. Or I can use the entire property as a furnished corporate rental, given that the location is convenient to both Boulder and Denver. There are also numerous office buildings and company headquarters in the Westminster/Broomfield area.

And what do the total expenses of property add up to?

The first mortgage PITI is $3,454/mo. I am planning on canceling the PMI on the property now that I forced enough appreciation on it, so that will bring the payment down to about $3,300/mo. The second mortgage is $2,086/mo. Utilities cost about $600/mo to be conservative. And I plan on keeping approximately $600/mo in reserves for capex and maintenance. Normally I would set aside more, but given that the property was just remodeled, I feel comfortable with this number. And because I plan to operate the property as a short term rental, there will be cleaning expenses, right? Well, yes, but I plan on those being covered by the guests when they book, so that cost will cancel out. So the total monthly cost is approximately $6600/mo.

At that cost, does it even make sense for me to keep it? Why wouldn’t I just sell the property at this point? Well, as a short term rental, because the finishes are so luxury, and I am buying all new furniture for the property, I plan on my ADR (average daily rate) being around $500. When I add the basement, I believe it should increase to around $600. If I conservatively estimate 50% occupancy, the total income on the property will be somewhere between $7,500-$9,000/mo. At 70% occupancy, the monthly income falls between $10,500-$12,600/mo. I feel these numbers are fairly conservative for the property as a short term rental given the analysis I’ve done. Meaning my pure cash flow will end up somewhere around $900-$6,000. Which of course is a very large range, but given the seasonality of short term rentals, the average monthly cash flow over the course of a year will likely end up near the middle of that range.

In the most conservative case, if I long term rent the top unit and mid term rent the basement, I would estimate around $4,000/mo for the top unit and $2,200/mo for the basement unit. So the property would have a negative cash flow around of -$400/mo. In that case, I would likely still keep the property because of its great flexibility and newer condition. And given that the value of the property is so high relative to other properties I own, any appreciation (or depreciation) that the market sees, is a bigger chunk of change than a lower value property. As an example, if the market goes up 10%, that will add $91K to my net worth. Of course, if the market drops 10%, my net worth will drop that amount in the other direction. But seeing that I’m a buy and hold investor, I plan on holding this property for a long time, and the history of the real estate market shows that over the long term, real estate always increases in value if you wait out the downturns. Of course, I would always have the option to sell as my last resort exit strategy if I needed to for whatever reason.

I’d love to hear from anyone interested in learning more about my experience, and I’m happy to answer any question and share more about my investing journey. Please feel free to reach out to me on BiggerPockets