3/2 SFR BURRR-ed in Milwaukee with pictures

[Marcus Auerbach]

We have recently completed a 3/2 SFR in Milwaukee that was interesting in many ways and I thought I could share pictures and some of the lessons learned. We rehab properties for our long term rental portfolio - BRRRR as Brandon calls it so elegantly, it must be a rural expression ;-)

So here is the story: the seller responded to a yellow letter in February and was stuck with a house that was not in a condition an agent would list it. The seller was a really nice person and very happy that we did not make comments about the condition of the house and instead were able to relief the burden and make an offer. I usually buy REO's and dealing with a distressed seller in person is definitley a different experience. We bought the property cash for what was owed on the mortgage and some overdue utilities plus closing cost - all in about 73k.

I attempted an inspection (I have done enough of these that I don't bring a licensed inspector anymore) but the house was filled up literally up 4-5 feet with stuff. Most rooms were not accessible at all and I was not able to determine the type of flooring. So the assumption was basically worst case: everything needs replacing. As it turned out later that was actually still a little underestimated...

Most of the stuff filling up the house was actually not garbage, many items were still packaged or had never been used. The kitchen and bathrooms were a different story and a real mouse paradise.

Most items were without real value like tons of Christmas decoration from the 90s still packaged and with the label for $5. But we also found some gems like a vinyl record collection that I ended up selling to a store. It was not a fortune but paid for a pizza dinner out with my wife and a couple friends.

Three fourty yard dumpsters and a few donations to the local church later I was finally able to assess the situation. The foundation was in good shape, which is the most important thing and we found the solid oak floors I was hoping for. The furnace and water heater were in good shape, but the AC was gone and it became clear that we had to do something about the huge fireplace.

It was way too big for the living room and felt completley out of proportion. Also it would literally suck the warm air out of the house and we found issues with the chimney. Generally speaking an open fireplace is always a liability in a rental property, so we decided to remove it. The project turned out to be a money pit, because the mantel and the steel insert were part of the structural support of the chimney and could not be removed. After discussions with the local building inspector about different options we decided to decomission it in place (basically filling it with concrete) and building a second wall in front of the fire box, which caused us to loose about 5 inches of living room space.

We also opened up the tiny kitchen into the living space by removing the load bearing wall in the center of the house and installing a structural LVL beam in the attic to handle the load. Good contractors always clean up after themselves and leave a place every night neat and orderly.

Most of these houses were built in the 60's when people were obviousley happy with 3 bedrooms and one bath for the family. In 2016 quality tenants expect more space and a second bathroom at the minimum. That's why we always try to finish the basement to provide additional living space. In the back you can see the open floor for the sewer line tie in.

The following picture is from a different property, but this is how the new bathroom ties into the main sewer line.

On most properties we replace the entire plumbing system and most of the electrical system. They are usually between 50-60 years old and at the end of their usuelful life. It is relativley easy to do at that stage, because everything is open and accessible. This gives me peace of mind for the next 30-50 years and saves expenses related to water (or my favorite: sewer) damages.

After installation of OSB subfloor and repair of any rotten studs the plumbers and electritions have the stage. We use Pex to replace all galvancied pipes. The copper pipes are newer and can stay.

Next step after passed rough in electrical, plumbing and insulation inspection is drywall. Up to this point we typically have two or three contractors on site at the same time, but for the drywall it is better to clear out the entire house and allow those guys to take care of the new drywall as well as any repairs and patches in kitchen and bathrooms without tripping over other guys and their tools.

One thing we always do is blow additional insulation into the attic. It's easy to do and not very expensive, but makes a huge difference in energy efficiency and living quality in both summer and winder. Especially when installing recessed lighting this step is important to keep the warm air from escaping into the attic. It's not an easy selling feature to tenants, but they will notice during the next (Wisconsin) winter. I believe that there is a long term return on investment on these types of improvements in form of longer tenancy and lower turnover cost.

I love these red oak floors: they are money in the bank and can be sanded and refinished very effectivley. Usually they turn out great just with a clear sealer and no stain. In this home the kitchen had vinyl flooring which we have removed and replaced with oak. A skilled hardwood floor contractor can blend them together almost seamlessly. Here is how the floors look after the first pass with a commercial sander.

The next picture shows the completed floor, as well as the new kitchen cabinets and appliances. Removing the wall allowed us to create an open floor plan that tied kitchen, dining area and living room together.

Here is the new bathroom in the basement:

And the tub / shower combo - we have gone away from ceramic tile and use heavy duty quality shower surrounds, which are not only cheaper, but also get installed much faster and save on holding cost. Tile shower's need to be installed correctly to avoid moisture from getting the walls and the transition to the tub needs to be caulked to seal propperly. Not of that is an issue with a quality interlocking shower surround.

Finsihed basement with rec room, home office, bathroom and laundry area:

While the exterior of the house was in good shape the yard and the driveway needed some attention:

The project was scheduled for 7 weeks to completion and we went two weeks over. The main issue was the structural work that had to be done arround the fire place. We also had a long list of smaller issues that can ad up prettyy quickly: for example one of the steel posts supporting the steel I-beam which spanns across the basement had been moved by a previous owner and needed a concrete footing to be poured under the basement slab. The AC unit is the oldest I have ever seen in my life (I found out after the snow was gone - shame on me) and needed to be replaced.

One of the best rewards is to receive positive feedback from neighbors. Aparently the garage door had not been closed in many years exposing the content and the overgrown landscaping did not help with neighborhood values. One of the neighbors has just listed his home for sale and could not be more happy about the changes.

In total we ended up about 10k over budget pushing now the 50k mark. Because we plan on holding this home for a long time I like to do things right and we typically invest a little more money inside the walls than most flippers could justify. It would have still worked as a flip, but the profit would have been slim. As a rental it will yield a good cash flow and should be low maintenance. The home was rented out for $1450 before it was finished. ARV is about 145k and we will finance the property 75%LTV. On to the next one...